UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of March 2022
Commission File Number: 1-32575
Shell plc
(Exact name of registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
Shell Centre
London, SE1 7NA
United Kingdom
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form
40-F.
Form 20-F þ Form 40-F ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Shell plc
(Registrant)
| By: | /s/ Anthony Clarke | ||||
| Name: Anthony Clarke | |||||
| Title: Deputy Company Secretary | |||||
Date: March 10, 2022
Shell plc Annual Report and Accounts for the year ended December 31, 2021 POWERING PROGRESS RO YAL DUTCH SHELL PLC Shell plc A nnual Report and Accounts for the year ended Decem ber 31, 2021
Shell plc Annual Report and Accounts for the year ended December 31, 2021 POWERING PROGRESS CONTENTS Shell Annual Report and Accounts 2021 Design and production: Friend www.friendstudio.com Print: Toppan Merrill INTRODUCTION iii About this Report iv Terms and abbreviations STRATEGIC REPORT 2 Chair's message 4 Chief Executive Officer's review 6 Shell Powering Progress 10 Strategy and outlook 16 Section 172(1) statement 22 Risk factors 34 Summary of results 36 Performance indicators 38 Liquidity and capital resources 42 Market overview 45 Integrated Gas 50 Upstream 57 Oil and gas information 65 Oil Products 71 Chemicals 74 Corporate 75 Climate change and energy transition 99 Environment and society 114 Our people GOVERNANCE 121 The Board of Shell plc 129 Senior Management 131 Introduction from the Chair 134 Statement of compliance with the UK Corporate Governance Code 135 Governance framework 137 Board activities and evaluation 141 Understanding and engaging with our stakeholders 145 Workforce engagement 147 Nomination and Succession Committee 151 Safety, Environment and Sustainability Committee 153 Audit Committee Report 166 Directors' Remuneration Report 171 Annual Report on Remuneration 189 Directors' Remuneration Policy 198 Other regulatory and statutory information FINANCIAL STATEMENTS AND SUPPLEMENTS 208 Independent Auditor's Report related to the Consolidated and Parent Company Financial Statements 228 Consolidated Financial Statements 284 Supplementary information – oil and gas (unaudited) 302 Supplementary information – EU Taxonomy disclosure 305 Parent Company Financial Statements 314 Independent Auditor's Report related to the Royal Dutch Shell Dividend Access Trust Financial Statements 316 Royal Dutch Shell Dividend Access Trust Financial Statements ADDITIONAL INFORMATION 321 Shareholder information 326 Non-GAAP measures reconciliations 331 Appendix 1: significant subsidiaries and other related undertakings (audited) 347 Appendix 2: five-year financial dataset ii
ABOUT THIS REPORT The Shell plc Annual Report (this Report) serves as the Annual Report and Accounts in accordance with UK requirements for the year ended December 31, 2021, for Shell plc (the Company) and its subsidiaries (collectively referred to as Shell). This Report presents the Consolidated Financial Statements of Shell (page 228), the Parent Company Financial Statements of Shell (pages 306-313) and the Financial Statements of the Royal Dutch Shell Dividend Access Trust (pages 317-319). Except for these Financial Statements, the numbers presented throughout this Report may not sum precisely to the totals provided and percentages may not precisely reflect the absolute figures due to rounding. The Financial Statements contained in this Report have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). IFRS as defined above includes interpretations issued by the IFRS Interpretations Committee. Financial reporting terms used in this Report are in accordance with IFRS. This Report contains certain forward-looking non-GAAP measures such as cash capital expenditure and divestments. We are unable to provide a reconciliation of these forward-looking non-GAAP measures to the most comparable GAAP financial measures because certain information needed to reconcile those non-GAAP measures to the most comparable GAAP financial measures is dependent on future events some of which are outside the control of the company, such as oil and gas prices, interest rates and exchange rates. Moreover, estimating such GAAP measures with the required precision necessary to provide a meaningful reconciliation is extremely difficult and could not be accomplished without unreasonable effort. Non-GAAP measures in respect of future periods which cannot be reconciled to the most comparable GAAP financial measure are calculated in a manner which is consistent with the accounting policies applied in Shell plc’s consolidated financial statements. The companies in which Shell plc directly or indirectly owns investments are separate legal entities. In addition to the term “Shell”, in this Report “Shell Group”, “we”, “us” and “our” are also used to refer to the Company and its subsidiaries in general or to those who work for them. These terms are also used where no useful purpose is served by identifying the particular entity or entities. “Subsidiaries” and “Shell subsidiaries” refer to those entities over which the Company has control, either directly or indirectly. Entities and unincorporated arrangements over which Shell has joint control are generally referred to as “joint ventures” and “joint operations”, respectively. “Joint ventures” and “joint operations” are collectively referred to as “joint arrangements”. Entities over which Shell has significant influence but neither control nor joint control are referred to as “associates”. The term “Shell interest” is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in an entity or unincorporated joint arrangement, after exclusion of all third-party interest. Shell subsidiaries’ data include their interests in joint operations. As used in this Report, “Accountable” is intended to mean: required or expected to justify actions or decisions. The Accountable person does not necessarily implement the action or decision (implementation is usually carried out by the person who is Responsible) but must organise the implementation and verify that the action has been carried out as required. This includes obtaining requisite assurance from Shell companies that the framework is operating effectively. “Responsible” is intended to mean: required or expected to implement actions or decisions. Each Shell company and Shell-operated venture is responsible for its operational performance and compliance with the Shell General Business Principles, Code of Conduct, Statement on Risk Management and Risk Manual, and Standards and Manuals. This includes responsibility for the operationalisation and implementation of Shell Group strategies and policies. This Report references Shell’s Sky 1.5 scenarios, specifically within the “Climate change and energy transition” section (pages 242-245). Unlike Shell’s previously published Mountains and Oceans exploratory scenarios, the Sky scenario is based on the assumption that society reaches the Paris Agreement’s goal of holding the rise in global average temperatures this century to well below two degrees Celsius (2°C) above pre-industrial levels. Unlike Shell’s Mountains and Oceans scenarios which unfolded in an open-ended way based upon plausible assumptions and quantifications, the Sky scenario was specifically designed to reach the Paris Agreement’s goal in a technically possible manner. Sky 1.5 scenario starts with data from Shell’s Sky scenario but is more aggressive and challenging in its assumptions about energy transitions as the pace of change is accelerated. As in Sky, this scenario is normative, meaning we assumed that society achieves the 1.5 degrees Celsius stretch goal of the Paris Agreement, and we worked back in designing how this could occur. Of course, there are many possible paths that society could take to achieve this goal. This will be extremely challenging, but as of today, we believe there is still a technically possible path while maintaining a growing global economy. However, we believe the window for success is quickly closing. These scenarios are a part of an ongoing process used in Shell for over 40 years to challenge executives’ perspectives on the future business environment. They are designed to stretch management to consider even events that may only be remotely possible. Scenarios, therefore, are not intended to be predictions of likely future events or outcomes. Shell’s scenarios also are not intended to be projections or forecasts of the future. Shell’s scenarios, including the scenarios referenced in this Report, are not Shell’s strategy or business plan. When developing Shell’s strategy, our scenarios are one of many variables that we consider. Ultimately, whether society meets its goals to decarbonise is not within Shell’s control. While we intend to travel this journey in step with society, only governments can create the framework for success. Shell’s operating plan, outlook and budgets are forecasted for a 10-year period and are updated every year. They reflect the current economic environment and what we can reasonably expect to see over the next ten years. Accordingly, they reflect our Scope 1, Scope 2 and NCF targets over the next 10 years. However, Shell’s operating plans cannot reflect our 2050 net-zero emissions target and 2035 NCF target, as these targets are currently outside our planning period. In the future, as society moves towards net-zero emissions, we expect Shell’s operating plans to reflect this movement. Shell’s “Net Carbon Footprint” or “net carbon intensity” referred to in this Report include Shell’s carbon emissions from the production of our energy products, our suppliers’ carbon emissions in supplying energy for that production, and our customers’ carbon emissions associated with their use of the energy products we sell. Shell only controls its own emissions. The use of the term “Net Carbon Footprint” or “net carbon intensity” is for convenience only and not intended to suggest these emissions are those of Shell or its subsidiaries. Except where indicated, the figures shown in the tables in this Report are in respect of subsidiaries only, without deduction of any non-controlling interest. However, the term “Shell share” is used for convenience to refer to the volumes of hydrocarbons that are produced, processed or sold through subsidiaries, joint ventures and associates. All of a subsidiary’s production, processing or sales volumes (including the share of joint operations) are included in the Shell share, even if Shell owns less than 100% of the subsidiary. In the case of joint ventures and associates, however, Shell-share figures are limited only to Shell’s entitlement. In all cases, royalty payments in kind are deducted from the Shell share. Except where indicated, the figures shown in this Report are stated in US dollars. As used herein all references to “dollars” or “$” are to the US currency. This Report contains forward-looking statements concerning the financial condition, results of operations and businesses of Shell. All statements iii Shell Annual Report and Accounts 2021
other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among other things, statements concerning the potential exposure of Shell to market risks and statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions. These forward-looking statements are identified by their use of terms and phrases such as “aim”, “ambition”, “anticipate”, “believe”, “could”, “estimate”, “expect”, “goals”, “intend”, “may”, “milestones”, “objectives”, “outlook”, “plan”, “probably”, “project”, “risks”, “schedule”, “seek”, “should”, “target”, “will” and similar terms and phrases. There are a number of factors that could affect the future operations of 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 Shell’s products; (c) currency fluctuations; (d) drilling and production results; (e) reserves estimates; (f) loss of market share and industry competition; (g) environmental and physical risks; (h) risks associated with the identification of suitable potential acquisition properties and targets, and successful negotiation and completion of such transactions; (i) the risk of doing business in developing countries and countries subject to international sanctions; (j) legislative, judicial, fiscal and regulatory developments including regulatory measures addressing climate change; (k) economic and financial market conditions in various countries and regions; (l) political risks, including the risks of expropriation and renegotiation of the terms of contracts with governmental entities, delays or advancements in the approval of projects and delays in the reimbursement for shared costs; (m) risks associated with the impact of pandemics, such as the COVID-19 (coronavirus) outbreak; and (n) changes in trading conditions. Also see “Risk factors” on pages 22-33 for additional risks and further discussion. No assurance is provided that future dividend payments will match or exceed previous dividend payments. 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 forward-looking 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. Past performance cannot be relied on as a guide to future performance. This Report contains references to Shell’s website, the Shell Sustainability Report, Tax Contribution Report, Industry Associations Climate Review and our report on Payments to Governments. These references are for the readers’ convenience only. Shell is not incorporating by reference into this Report any information posted on www.shell.com or in the Shell Sustainability Report, Tax Contribution Report, Industry Associations Climate Review or our report on Payments to Governments. The content of any other websites referred to in this Report does not form part of this Report. With effect from January 29, 2022, Shell’s A shares and B shares were assimilated into a single line of ordinary shares. Shell’s A and B American Depositary Shares (ADSs) were assimilated into a single line of ADSs on the same date. This Report continues to refer to A shares, B shares, A ADSs and B ADSs when describing the position prior to January 29, 2022. Shell V-Power and Shell LiveWire are Shell trademarks. DOCUMENTS ON DISPLAY This Report is also available, free of charge, at www.shell.com/ annualreport or at the offices of Shell in London, United Kingdom and The Hague, the Netherlands. Copies of this Report also may be obtained, free of charge, by mail. TERMS AND ABBREVIATIONS Currencies $ US dollar € euro £ sterling Units of measurement acre approximately 0.004 square kilometres b(/d) barrels (per day) boe(/d) barrels of oil equivalent (per day); natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel kboe(/d) thousand barrels of oil equivalent (per day); natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel MMBtu million British thermal units megajoule a unit of energy equal to one million joules mtpa million tonnes per annum per day volumes are converted into a daily basis using a calendar year scf(/d) standard cubic feet (per day) Products GTL gas-to-liquids LNG liquefied natural gas LPG liquefied petroleum gas NGL natural gas liquids Miscellaneous ADS American Depositary Share AGM Annual General Meeting API American Petroleum Institute CCS carbon capture and storage CCS earnings earnings on a current cost of supplies basis CO₂ carbon dioxide EMTN Euro medium-term note EPS earnings per share FCF free cash flow FID final investment decision GAAP generally accepted accounting principles GHG greenhouse gas HSSE health, safety, security and environment IAS International Accounting Standards IEA International Energy Agency IFRS International Financial Reporting Standard(s) IOGP International Association of Oil & Gas Producers IPIECA International Petroleum Industry Environmental Conservation Association LTIP Long-term Incentive Plan OECD Organisation for Economic Co-operation and Development OML oil mining lease OPEC Organization of the Petroleum Exporting Countries OPL oil prospecting licence PSC production-sharing contract PSP Performance Share Plan REMCO Remuneration Committee SEC US Securities and Exchange Commission TRCF total recordable case frequency TSR total shareholder return WTI West Texas Intermediate iv Shell Annual Report and Accounts 2021
STRATEGIC REPORT 2 Chair’s message 4 Chief Executive Officer’s review 6 Shell Powering Progress 10 Strategy and outlook 16 Section 172(1) statement 22 Risk factors 34 Summary of results 36 Performance indicators 38 Liquidity and capital resources 42 Market overview 45 Integrated Gas 50 Upstream 58 Oil and gas information 65 Oil Products 71 Chemicals 74 Corporate 75 Climate change and energy transition 99 Environment and society 114 Our people 1Shell Annual Report and Accounts 2021 Strategic Report
2 CHAIR’S MESSAGE SUCCEEDING WITH OUR CUSTOMERS For more than 100 years, Shell’s people have provided much of what is needed for modern life: the energy to heat and light homes, the fuel for cars, trucks, ships and planes, the means to keep the world moving. In early 2022, when Russia invaded Ukraine, Shell’s people stepped up. In Poland and other neighbouring countries, our employees helped refugees, caring for the victims of a senseless conflict. Shell is also rising to another urgent challenge: the role we must play in helping to tackle climate change, caused for the most part by carbon emissions from the production and use of energy. The COP26 climate summit in Glasgow, Scotland, showed again that the overwhelming majority of countries agree that the world must transition to a low-carbon energy mix. For Shell to play our part will require boldness, ambition and a willingness to transform. I feel honoured to be the Chair of Shell at such a pivotal stage in its history. Our Powering Progress strategy aims to help us generate shareholder value while achieving our net-zero emissions target, powering people’s lives and respecting the natural environment. We can take heart from the fact that Shell has always thrived on its people’s ingenuity, adaptability and determination. We will need those qualities even more in the coming years. With great challenges and changes come great opportunities. The energy transition is both our greatest challenge and our greatest opportunity. Our resilience will stand us in good stead. After the COVID-19 pandemic caused one of the world’s worst economic downturns, Shell took decisive steps to reshape for the future. We had the capital discipline and underlying strength to keep our strategy on track and to emerge with a foundation for future growth. We should be realistic about the scale of the challenges that lie ahead. But we should also be optimistic about our ability to overcome them. WORKING WITH OUR CUSTOMERS The single most important key to our success in the energy transition will be our ability to work with customers. We have a network of 1 million commercial and industrial customers and around 32 million customers a day visit our 46,000 branded retail service stations. By listening to our customers, learning from them and working with them, we can understand what they want and need as the world moves towards a lower-carbon future. We aim to use such insights to profitably provide the low-carbon products and services they will want to buy. This approach will be crucial to Shell’s target of becoming a net-zero emissions energy business by 2050, in step with society’s progress towards achieving the goals of the Paris Agreement. Customers’ use of products accounts for the vast majority of energy-related carbon emissions. We can seize opportunities that help us and our customers. For example, customers in industry and road freight are increasingly working to cut their emissions, to meet society’s expectations and comply with tighter environmental regulations. At one of our projects, we can now provide zero-emissions green hydrogen. As part of the Refhyne European consortium, we have installed an electrolyser at Shell’s Energy and Chemicals Park Rheinland, in Germany. It began operating in July and will use renewable electricity to produce up to 1,300 tonnes of green hydrogen a year. We expect to develop new markets by building low-carbon businesses and forming strategic alliances that can help us and entire sectors get to net zero. In November 2021, for example, we signed a strategic co-operation agreement with electric vehicle company NIO aimed at making charging easier for customers around the world. Shell currently operates almost 90,000 electric vehicle charge points globally. We aim to increase this to more than 500,000 by 2025. To achieve this, we must give customers what they want and need: charging services that are convenient, reliable and easy to use. Sir Andrew Mackenzie Chair Strategic Report
3Shell Annual Report and Accounts 2021 SIMPLIFYING FOR THE ENERGY TRANSITION Many of our customers will also need oil and gas for years to come. If we are to compete in the energy transition and attract investment, we will need to continue to supply their needs too. In August, we took the final investment decision on the Timi gas development project in Malaysia, which will feature the first wellhead platform in the country to be powered by a hybrid solar and wind system. We expect this and other Upstream projects to generate strong cash flows. Thanks to our integrated presence across the global energy system, we can use this cash to reward investors with shareholder distributions and to invest, with discipline, in low-carbon businesses that will help us transform. In October we set a new target to halve the absolute emissions from our operations and the energy we buy to run them by 2030, compared with 2016 levels on a net basis. These are what are known as our Scope 1 and Scope 2 emissions. Such shorter-term objectives will push us to make faster progress towards our target of becoming a net-zero emissions energy business by 2050, in step with society. We have simplified our share structure, and believe this will help us accelerate our progress in the energy transition still further. We should find it quicker and easier to manage our portfolio now we have adopted a single line of shares and moved our tax residence to the UK. POWERING LIVES Energy can help lift people out of poverty. That means something to me. Growing up in Scotland, a short distance from what became the COP26 venue, I sometimes accompanied my father Hugh, a doctor, as he visited patients in deprived areas of Glasgow. Dad saw the patient, while I sat in the car and read comics. I was struck by the importance Dad attached to those home visits. They allowed him to see how his patients’ hardships were affecting their health. Now I am part of an organisation whose business helps customers to heat their homes and travel to a job. In some parts of the world, that access to modern energy can be the difference between struggling and starting on a path towards a better life. Working with our customers to meet their needs, whether industry seeking to cut carbon emissions, the motorist driving an electric car or a family trying to improve their quality of life, makes good business sense for Shell. Today and for decades to come, we will only succeed by helping the customer succeed. SIR ANDREW MACKENZIE Chair Shell: providing what is needed for life in the energy transition (Clockwise from left): energy for cooking; charging for electric vehicles; hydrogen for road freight; and shipments of liquefied natural gas Strategic Report
4 CHIEF EXECUTIVE OFFICER’S REVIEW TAKING ACTION TODAY, BUILDING FOR TOMORROW We also decided to withdraw from involvement in all Russian hydrocarbons, including crude oil, petroleum products, gas and LNG, in a phased manner, in line with government guidance. We will shut our service stations, aviation fuels and lubricants operations in Russia. We will go ahead with these steps, regardless of their financial implications, while doing everything we can to support our staff in Russia. Difficult times bring out the best in people. I was moved by how in Shell, Russian and Ukrainian colleagues worked together to respond to events. Shell staff in neighbouring countries stepped up to the task of helping refugees from war. As a business, Shell too will seek to help in the relief effort. In discussion with governments around the world, we will also work through the detailed business implications, including the importance of secure energy supplies to Europe and other markets, in compliance with relevant sanctions. BUILDING FOR THE FUTURE While so much has happened in recent weeks to increase the challenges our business faces, we must stay on track to ensure continued success. Our Powering Progress strategy and financial framework remain unchanged. In 2021, we continued to build for the future. We moved ahead at pace with the transformation of our refining business into energy and chemicals parks that can meet our customers’ growing demand for low-carbon energy. We made progress in developing our interests in electric vehicle charging, biofuels, and carbon capture and storage (CCS); in hydrogen, wind and solar power. These are businesses of the low-carbon energy future. The world will need them if it is to tackle climate change. They are also businesses of enormous potential. I believe that, as they mature, they could be as profitable for Shell as our oil and gas operations are now. STRONG RESULTS In 2021, we delivered strong financial results. Our income was $20.6 billion in 2021, compared with a loss of $21.5 billion the previous year. Shell’s cash flow from operations went from $34.1 billion in 2020 to $45.1 billion in 2021. Our distributions to shareholders were $9.1 billion in 2021, the same as in 2020. We expect shareholder distributions to increase significantly in 2022. Shell’s net debt reduced from $75.4 billion in 2020 to $52.6 billion at the end of 2021. This brought us below the $65 billion milestone, at which point we increased total shareholder distributions to 20-30% of cash flow from operations. We announced a share buyback programme of $8.5 billion for the first half of 2022. This will include $5.5 billion from the sale of our shales business in the US Permian Basin. We expect to increase our dividend by around 4% to 25 US cents a share for the first quarter of 2022. SAFETY In 2021, sadly, six of our contractor colleagues and a police officer were killed in an appalling attack in Nigeria. In Pakistan, a lorry driver died in a refuelling accident at a dealer-operated retail site. A contractor died in an accident at an Indonesian retail site. I am determined that we learn from these terrible incidents. We must do everything possible to ensure that anyone who works for Shell goes home safe and well. Like many others, I have been appalled by Russia’s invasion of Ukraine, an act of aggression that shocked the world. It has inflicted much suffering, and threatened the security of a continent. Our first priority, as always, was the safety of our people. We employ around 1,500 staff and contractors in Ukraine. We have been doing everything we can to try to ensure their safety and well-being. We also took decisive action in support of global economic measures against Russia. We announced our intention to exit joint ventures with Gazprom, a majority Russian-government-owned business, and related entities. This included the Sakhalin-2 liquefied natural gas (LNG) facility, Salym Petroleum Development and the Gydan energy venture. We also intend to end our involvement in the Nord Stream 2 pipeline project. At the end of 2021, Shell had around $3 billion in non-current assets in these ventures in Russia. We expect our actions will have an impact on the book value of Shell’s Russia assets and lead to impairments. Ben van Beurden Chief Executive Officer Strategic Report
5Shell Annual Report and Accounts 2021 Companies like Shell, with our global scale, financial muscle and technological know-how, are critical to getting things done and helping to make the energy transition a reality. Collaborative action is crucial. For example, in July 2021, we signed an agreement with Deutsche Telekom. Shell will supply renewable energy and Deutsche Telekom engineers will install more than 10,000 electric vehicle chargers in Germany. The transformation of our refineries into energy and chemicals parks opens up many possibilities. We are building an 820,000-tonnes-a-year biofuels facility at the Shell Energy and Chemicals Park Rotterdam, in the Netherlands. And we have started producing hydrogen from renewables at the Energy and Chemicals Park Rheinland, in Germany. SIMPLER, FASTER Our company-wide reorganisation has made us more streamlined. Adopting a single line of shares and moving our tax residence to the UK will make it quicker and easier to manage our portfolio in the energy transition. We can also buy back shares more quickly, speeding up distributions to investors. We will, though, remain a major presence in the Netherlands. We are proud of Shell’s Anglo-Dutch heritage. Shell has the agility, and our integrated business model gives us the financial muscle. Cash flows from our Upstream operations enable us to deliver strong shareholder returns and invest in low-carbon opportunities. Upstream also provides oil and gas that the world will need for years to come. So while we invest for the future, we must continue to invest to meet today’s energy demand. In 2021, we strengthened our Upstream position in core regions. We decided to invest in the Whale development in the US Gulf of Mexico. As part of the Libra consortium, we chose to invest in a fourth floating production, storage and offloading (FPSO) vessel in the Mero field, off the Brazilian coast. If 2021 was a year of historic change for Shell, it was also a year of great progress. One that has set us up for success as we seize the opportunities of the energy transition. BEN VAN BEURDEN Chief Executive Officer RISING TO THE CHALLENGES The rapid recovery of energy demand in 2021 was very welcome, but a lag in supply led to high oil and gas prices and unfortunately, in some parts of the world, a cost-of-living crisis for consumers as energy prices spiked. Growing tensions as Russia prepared to invade Ukraine added to the rise in prices. People and businesses must have affordable energy bills. Shell can help to bolster supplies by delivering LNG to countries experiencing shortages. Shell must also play its part in helping to tackle the world’s biggest challenge: climate change. The COP26 summit in Glasgow, Scotland, made some progress. Agreement on how Article 6 of the 2015 Paris Agreement will work in practice, for example, should stimulate cross- border carbon trading – which could prove important in getting the world to net zero. When we launched our Powering Progress strategy in February 2021, we set short- and medium-term targets to reduce carbon emissions that were ambitious, but realistic. We also reaffirmed our long-term target to become a net-zero emissions energy business by 2050, in step with society’s progress towards meeting the climate goals of the Paris Agreement. In May 2021, the District Court in The Hague ruled that by 2030 Shell must reduce its worldwide net-carbon emissions by 45% by 2030, compared with 2019 levels. We were disappointed by this ruling, but we decided to rise to the challenge by accelerating our strategy to reduce carbon emissions. We set a new target of cutting the absolute emissions from our operations and the energy we buy to run them by 50% by 2030, compared with 2016 levels on a net basis. At the same time, we are appealing against the ruling. It effectively holds Shell, a single company, accountable for a global challenge – reducing consumer demand for carbon-based fuels. What is really needed is action by all: governments, business, customers and wider society. Investing to meet demand today and in the future (Clockwise from above): electrolyser producing hydrogen from renewables at the Energy and Chemicals Park Rheinland; providing electric vehicle charge points; planning the Whale deep-water development; and generating offshore wind power. Strategic Report
6 Shell Annual Report and Accounts 2021 Overview Shell is a global group of energy and petrochemical companies with 82,000 employees and operations in more than 70 countries. We use advanced technologies and take an innovative approach to help build a sustainable energy future. Shell is a customer-focused organisation, serving more than 1 million commercial and industrial customers, and around 32 million customers at 46,000 retail service stations daily. Our strategy is to accelerate the transition of our business to net-zero emissions, purposefully and profitably, in step with society. OUR CONTEXT The rising standard of living of a growing global population is likely to continue to drive demand for energy, including oil and gas, for years to come. At the same time, technological changes and the need to tackle climate change mean there is a transition under way to a lower-carbon, multi-source energy system with increasing customer choice. Our Powering Progress strategy combines our ambitions under four goals: generating shareholder value, achieving net-zero emissions, powering lives and respecting nature. This will help accelerate our progress towards becoming a net-zero emissions energy business by 2050, in step with society. We are building a strong resilient business by putting customers at the centre of our strategy, innovating the products and solutions customers need on their journey to net zero. We aim to deliver value through our integrated assets and supply chains, optimising value and managing risk for Shell and our customers as we produce, buy, trade, transport and sell energy products and solutions across the world. OUR STAKEHOLDERS ■ Our investor community ■ Our customers ■ Our employees/workforce/pensioners ■ Our strategic partners/suppliers ■ Communities ■ NGOs/civil society stakeholders/academia/think-tanks ■ Governments/regulators See Section 172(1) statement”, “Environment and society”, “Our people” and “Governance” OUR PURPOSE We power progress together by providing more and cleaner energy solutions. See “Strategy and outlook” OUR CORE VALUES ■ Honesty ■ Integrity ■ Respect for people See “Our people” WHO WE ARE SHELL POWERING PROGRESS Strategic Report
7Shell Annual Report and Accounts 2021 Underpinned by our core values and our focus on safety POWERING PROGRESS Our strategy to accelerate the transition to net-zero emissions, purposefully and profitably GENER AT ING SHAREHOLDER VALUE Growing value through a dynamic portfolio and disciplined capital allocation POWERING LIVES Powering lives through our products and activities, and supporting an inclusive society ACHIEV ING NET-ZERO EMISSIONS Working with our customers and sectors to accelerate the energy transition to net-zero emissions RESPECTING NATURE Protecting the environment, reducing waste and making a positive contribution to biodiversity To power progress together by providing more and cleaner energy solutions OUR PURPOSE Strategic Report
Energy use Electricity Gas-to-liquidsLiquefied natural gasFuels Chemicals Biofuels Hydrogen Natural gasLubricants Customer sectors Energy solutions Assets and capabilities SUPPORTING THE DELIVERY OF INTEGRATED ENERGY SOLUTIONS CommercialResidential Marine Aviation Agriculture and forestry Commercial road transport IndustrialMobility Technology and operational excellence Energy and chemicals parks GasOil LNG and GTL Renewables Biomass Transport Power Pe op le Ca rb on o ffs et s Value enhanced by trading and optimisation 8 9Shell Annual Report and Accounts 2021Shell Annual Report and Accounts 2021 SHELL POWERING PROGRESS continued HOW WE CREATE VALUE OUR INPUTS [A] Financial capital Equity attributable to Shell plc shareholders ($ billion) [B]: 172 2020: 155 Non-current debt ($ billion) [B]: 81 2020: 91 Net debt ($ billion) [B][C]: 53 2020: 75 Average capital employed ($ billion) [B]: 265 2020: 277 Cash capital expenditure ($ billion) [C]: 20 2020: 18 Operations Refining and chemicals availability: 96% 2020: 96% Oil & gas production available for sale (kboe/d): 3,237 2020: 3,386 LNG liquefaction volumes (million tonnes): 31 2020: 33 Human capital Number of employees (thousands) [B]: 82 2020: 87 Number of training days (thousands): 271 2020: 234 Relationships Customers, joint arrangements, Government relations, suppliers. Operating countries [B] >70 2020: >70 Intellectual capital Research and development expenses ($ million): 815 2020: 907 Number of patents [B]: 8,532 2020: 8,480 Natural resources Proved oil and gas reserves (million boe) [B]: 9,365 2020: 9,124 Energy consumed (million MWh): 223 2020: 241 Cash flow from operating activities ($ billion): 45 2020: 34 Adjusted earnings ($ billion) [C]: 19 2020: 5 Adjusted EBITDA (CCS basis – $ billion) [C]: 55 2020: 37 Shareholder distributions ($ billion) [C]: 9 2020: 9 GENERATING SHAREHOLDER VALUE Absolute emissions (Scope 1 and 2 – million tonnes of CO₂ equivalent): 68 2020: 72 | 2016: 83 Net carbon intensity (Scope 1, 2 and 3 – grams of CO₂ equivalent per megajoule): 77 2020: 75 | 2016: 79 ACHIEVING NET-ZERO EMISSIONS Women in senior leadership positions [B]: 30% 2020: 28% Taxes paid and collected ($ billion): 59 2020: 47 Total spend on goods and services ($ billion): 38 2020: 39 POWERING LIVES Fresh water consumed in our facilities (million m³): 22 2020: 22 | 2018: 25 Waste disposed (million tonnes): 2 2020: 2 RESPECTING NATURE OUR OUTCOMES AND IMPACTS [A] [A] In 2021 unless stated otherwise. [B] At December 31. [C] See “Non-GAAP measures reconciliations” on pages 326-329. We aim to meet the world’s growing need for more and cleaner energy solutions in ways that are economically, environmentally and socially responsible. Our Powering Progress strategy is designed to create value for our shareholders, customers and wider society. Strategic Report Strategic Report
10 Shell Annual Report and Accounts 2021 INTEGRATED GAS, RENEWABLES AND ENERGY SOLUTIONS Integrated Gas manages liquefied natural gas (LNG) activities and the conversion of natural gas into gas-to-liquids (GTL) fuels and other products. It includes natural gas exploration and extraction, and the operation of upstream and midstream infrastructure necessary to deliver gas to market. In Renewables and Energy Solutions (R&ES), we are exploring emerging opportunities and investing in those where we believe sufficient commercial value is available. R&ES includes Shell’s production and marketing of hydrogen, nature and environmental solutions as well as our integrated power activities. UPSTREAM Upstream manages the exploration for and extraction of crude oil, natural gas and natural gas liquids. It also markets and transports oil and gas, and operates infrastructure necessary to deliver them to market. While the Upstream business delivers the energy of today, it is also funding the energy of tomorrow and will play a fundamental role in supporting Shell’s ambitious transformation. DOWNSTREAM Downstream manages different Oil Products and Chemicals activities as part of an integrated value chain that trades and refines crude oil and other feedstocks into a range of products which are moved and marketed around the world for domestic, industrial and transport use. The products we sell include gasoline, diesel, heating oil, aviation fuel, marine fuel, biofuel, lubricants, bitumen and sulphur. We also produce and sell petrochemicals for industrial use worldwide. Our Downstream organisation also manages Oil Sands activities (the extraction of bitumen from mined oil sands and its conversion into synthetic crude oil). PROJECTS & TECHNOLOGY Our Projects & Technology organisation manages the delivery of our major projects and drives research and innovation to develop new technology solutions. It provides technical services and technology capability for our Integrated Gas, Upstream and Downstream activities. It is also responsible for providing functional leadership across Shell in the areas of safety and environment, contracting and procurement, wells activities and greenhouse gas management. Technology and innovation are essential to our efforts to meet the world’s energy needs in a competitive way. If we do not develop the right technology, do not have access to it or do not deploy it effectively, this could have a material adverse effect on the delivery of our strategy and our licence to operate (see “Risk factors” on pages 22-33). Our Chief Technology Officer, who is part of the Projects & Technology organisation, oversees the development and deployment of new and differentiating technologies and innovations across Shell. Our main technology centres are in India, the Netherlands and the USA, with other centres in Brazil, China, Germany, Oman and Qatar. A strong patent portfolio underlies the technology that we employ in our various businesses. Segmental reporting Our reporting segments are Integrated Gas, Upstream, Oil Products, Chemicals and Corporate. Integrated Gas, Upstream, Oil Products and Chemicals include their respective elements of our Projects & Technology organisation. The Corporate segment comprises our holdings and treasury organisation, self-insurance activities, and headquarters and central functions. See Note 5 to the “Consolidated Financial Statements” on pages 245-248. With effect from 2022, our reporting segments will change to Integrated Gas, Upstream, Marketing, Chemicals and Products, Renewables and Energy Solutions and Corporate, reflecting the way Shell reviews and assesses its performance. Delivering our Powering Progress strategy OUR ORGANISATION SHELL POWERING PROGRESS continued Current reporting segments Integrated Gas Upstream Corporate Marketing Corporate Upstream Renewables and Energy Solutions Integrated Gas Chemicals and Products Future reporting segments Oil Products Chemicals Strategic Report
BUILDING ONE OF EUROPE’S BIGGEST BIOFUELS FACILITIES Business customers in the harder-to-abate sectors of road freight and aviation are increasingly keen to cut their carbon emissions. Shell and Deloitte’s Decarbonising Aviation: Cleared for Take-off report, published in September, found that 90% of aviation executives and experts interviewed said cutting emissions was one of their top priorities. The equivalent figure in the January 2021 report Decarbonising Road Freight: Getting into Gear was more than 70%. Shell intends to supply our road freight and aviation customers with the low-carbon biofuels they want and need. An important aim of our Powering Progress strategy is to transform refineries into energy and chemicals parks so that we reduce our global production of traditional fuels by 55% by 2030. At our Energy and Chemicals Park Rotterdam, in the Netherlands, for example, we are building one of Europe’s biggest biofuels facilities. It is expected to start production in 2024, making up to 820,000 tonnes of biofuels a year, which Shell will sell as sustainable aviation fuel and biodiesel. The sales will help Shell make purposeful and profitable progress towards our target of becoming a net-zero emissions energy business by 2050, in step with society. The facility will help us achieve our ambition of producing around 2 million tonnes of sustainable aviation fuel a year by 2025. TRANSFORMING OUR REFINERIES INTO ENERGY AND CHEMICALS PARKS The multinational chemicals corporation Asahi Kasei, a Shell customer, is aiming to become carbon neutral by 2050 and to use more sustainable feedstocks in its supply chain. We believe we can profitably supply Asahi Kasei and other customers with products that they want and need to achieve their carbon neutrality and sustainability aims. This will play an important part in transforming the Bukom manufacturing site into the Shell Energy and Chemicals Park Singapore, with an increasing focus on customers’ low-carbon energy and sustainability needs. In November, we signed an agreement to supply Asahi Kasei with butadiene, a chemical which it will use to make high-performance tyres that can cut vehicle emissions by improving fuel efficiency. We plan to make the butadiene at Bukom, using a new unit that upgrades the quality of pyrolysis oil made from hard-to-recycle plastic waste that would otherwise go into landfill. We expect the pyrolysis oil upgrader to start production in 2023 and be the largest in Asia. The pyrolysis oil it produces can be used to make chemicals that go into hundreds of everyday products, so Shell expects many other companies to become customers, especially those with sustainability goals. This will help Shell profitably achieve its aim of processing 1 million tonnes a year of plastic waste in our global chemicals plants by 2025. The transformation of Bukom and at least four other refining sites into energy and chemicals parks will help us achieve our ambition of reducing our global production of traditional fuels by 55% by 2030. 11Shell Annual Report and Accounts 2021 Powering Progress: How we provide customers with the low-carbon products and services they want and need Strategic Report
12 Shell Annual Report and Accounts 2021 POWERING PROGRESS Powering Progress is our strategy to accelerate the transition of our business to net-zero emissions, in step with society’s progress towards the goal of the Paris Agreement on climate change. Powering Progress generates value for our shareholders, customers and wider society. It has four main goals which integrate sustainability with our business strategy. These goals support Shell’s purpose, to power progress together by providing more and cleaner energy solutions. We expect our employees at all times to maintain our focus on safety and abide by our core values of honesty, integrity and respect for people. Generating shareholder value: We aim to create the conditions for share price appreciation by preparing our business for the future and seizing the opportunities presented by the energy transition. Shell must take a dynamic approach to its portfolio during the energy transition. This means continuing to provide the energy the world needs today, and increasing our investments in lower-carbon energy products and services. We aim to do this while providing sustainable distributions today through our progressive dividend policy. In 2021, we re-based our dividend to $0.24 per share. We announced a share buyback programme of up to $3.5 billion, including $1.5 billion from the sale of our Permian business. The additional shareholder distributions from the Permian sale will eventually total $7 billion, with $5.5 billion distributed in the form of share buybacks in 2022. We aim to maintain a strong balance sheet and a disciplined approach to capital investment, so we remain strong and resilient. In this way, we will achieve our aim of being a compelling investment case for our shareholders. On December 10, 2021, the shareholders of the company supported the resolution to amend Shell’s articles of association to enable the simplification of the Company. The simplification entailed establishing a single line of shares to eliminate the complexity of Shell’s A/B share structure. It also involved aligning Shell’s tax residence with its country of incorporation in the UK by relocating the CEO, the CFO and the venue of Board and Executive Committee meetings to the UK. As a consequence, we changed the Company’s name from Royal Dutch Shell plc to Shell plc. The simplification was designed to strengthen Shell’s competitiveness and accelerate shareholder distributions and the delivery of our strategy to become a net-zero emissions energy business. Achieving net-zero emissions: We have a target to become a net-zero emissions energy business by 2050, in step with society. In 2021, we set a new target to halve the absolute emissions from our operations and the energy we buy to run them by 2030 (our Scope 1 and Scope 2 emissions), compared with 2016 levels on a net basis. We also brought forward our target to eliminate routine gas flaring at our Upstream operated assets from 2030 to 2025. CONTEXT Climate change is one of the biggest challenges the world faces today, and necessitates a rapid transformation of the energy system to net-zero emissions. Shell supports the most ambitious goal of the Paris Agreement, which is to limit the rise in global average temperature this century to 1.5 degrees Celsius above pre-industrial levels. To achieve this, there needs to be urgent action to reduce emissions across power, transport, buildings, and industries like steel and chemicals. Shell must play its part, purposefully and profitably, in helping to make these changes happen. The energy transition will bring risk and involve confronting complex and difficult obstacles, while at the same time acting on other great challenges such as the COVID-19 pandemic, which is continuing to cause unprecedented levels of disruption. But the energy transition will also offer great opportunities. More than 120 countries and over 2,000 companies and organisations have made commitments to get to net-zero emissions by 2050. Shell is taking action, sector by sector. We seek to work with our customers to profitably serve their changing needs, and to help decarbonise the energy system and reach net-zero emissions. Our approach is to start with the customer or sector and ask: what do they want and need – today, and in the future? By listening to our customers and learning from them, we work out how to profitably provide the low-carbon products and services that they want and need – today and throughout their progress to net-zero emissions. There will be no single solution that fits all customers. Instead, there will be variations in what customers want and need, with differing approaches and rates of progress across countries, sectors and markets. Shell aims to provide customers with what works best for them in their particular circumstances. Customers’ use of our energy products accounts for the vast majority of energy-related carbon emissions of our products sold. By helping our customers get to net zero, we will also help ourselves get to net zero. Powering Progress is our strategy to accelerate the transition of our business to net-zero emissions, in step with society. OUR STRATEGY STRATEGY AND OUTLOOK Strategic Report
13Shell Annual Report and Accounts 2021 We are transforming our business and finding new opportunities in selling more low-carbon products and services such as biofuels, hydrogen, electricity generated by solar and wind power, and charging for electric vehicles. In 2021, we announced that we are building an 820,000 tonnes-a-year biofuels facility at the Shell Energy and Chemicals Park Rotterdam, in the Netherlands. In Germany, we opened the Refhyne electrolyser at our Energy and Chemicals Park Rheinland. This electrolyser is the largest of its kind in Europe, producing 1,300 tonnes of green hydrogen per year from renewable energy. We are decarbonising sector by sector, forming alliances and working collaboratively with customers, businesses and governments to make progress in the energy transition and reduce emissions. This includes sectors that are harder to decarbonise, such as aviation, shipping, commercial road freight, power, heating and certain parts of industry. We also support government policies to reduce carbon emissions in the economy, including putting a direct price on carbon emissions. Powering lives: Shell helps to power lives and livelihoods by providing vital energy for homes, businesses and transport. The supply of affordable, reliable and sustainable energy is crucial for addressing global challenges, including those related to poverty and inequality. Our ambition, by 2030, is to provide reliable electricity to 100 million people in Africa and Asia who do not have it yet. We support livelihoods by providing employment and training in the communities where we operate. We are working to become one of the most diverse and inclusive companies in the world, a place where everyone feels valued and respected. We are focusing on four areas: gender, race and ethnicity, lesbian, gay, bisexual and transgender (LGBT+) and disability. We seek to respect human rights in all parts of our business. Respecting nature: We are stepping up our environmental ambitions, and shaping them to reflect the UN Sustainable Development Goals. Our environmental ambitions include protecting and enhancing biodiversity. We are also focusing on using water and other resources more efficiently and reusing as much of them as we can. We are reducing waste from our operations and increasing the recycling of plastics. In 2021, we announced that we will build a new pyrolysis oil upgrader unit at our manufacturing site on Pulau Bukom, Singapore. Scheduled to start production in 2023, the upgrader is designed to improve the quality of pyrolysis oil, a liquid made from hard-to-recycle plastic waste that would otherwise have gone into landfill. We are helping to improve air quality by reducing emissions from our operations and providing cleaner ways to power transport and industry. POWERING LIVES GENERATING SHAREHOLDER VALUE ACHIEVING NET-ZERO EMISSIONS RESPECTING NATURE Strategic Report
14 Shell Annual Report and Accounts 2021 STRATEGY AND OUTLOOK continued BUSINESS PILLARS We maintain business plans that focus on actions and capabilities to create and sustain competitive advantage. We maintain a risk management framework that regularly assesses our response to, and risk appetite for, identified risks. See “Risk factors” on pages 22-33 and “Governance” on page 120. Our Executive Directors’ remuneration is linked to the successful delivery of our strategy, based on performance indicators that are aligned with shareholder interests. Long-term incentives form the majority of the Executive Directors’ remuneration for above-target performance. In 2021, the Long-term Incentive Plan (LTIP) included cash generation, capital discipline, value created for shareholders, and an energy transition condition. See the “Directors’ Remuneration Report” on page 166. For more details on how the strategic pillars are embedded into our businesses, see “Shell Powering Progress” on pages 6-11. DELIVERING THE STRATEGY: OUR VISION FOR THE FUTURE OF ENERGY GROWTH PILLAR: THE FUTURE OF ENERGY /Marketing /Renewables and Energy Solutions MARKETS TRANSITION PILLAR: ENABLING OUR STRATEGY /Integrated Gas /Chemicals and Products ASSETS UPSTREAM PILLAR: FUNDING OUR STRATEGY RESOURCES Enhanced value delivery through trading and optimisation Powering Progress is a strategy that combines our financial strength and discipline with a dynamic approach to our portfolio of assets and products, so we can seize the opportunities of the energy transition. Shell is adapting its portfolio of assets and products to better meet the cleaner energy needs of its customers. We are delivering our strategy through three business pillars: Growth, Transition, and Upstream. Our Growth pillar includes Marketing and Renewables and Energy Solutions businesses, such as Power and Hydrogen. Our Growth businesses increase our returns while helping customers to decarbonise. Our Transition pillar includes our Integrated Gas and Chemicals and Products businesses. These businesses enable us to accelerate our progress towards net-zero emissions and deliver sustainable cash flow. Our Upstream pillar delivers value to shareholders, provides vital oil and gas to society and funds the transformation of our portfolio. Achieving our strategy depends on how we respond to competitive forces. We continually assess the external environment – the markets and the underlying economic, political, social and environmental drivers that shape them – to evaluate changes in competitive forces and business models. We use future scenarios to help inform our strategy. We regularly review the markets where we operate, assessing our competitive position by analysing trends, uncertainties, and the strengths and weaknesses of our traditional and non-traditional competitors. Strategic Report
15Shell Annual Report and Accounts 2021 OUTLOOK FOR 2022 AND BEYOND We support the most ambitious goal of the Paris Agreement, which is to limit the rise in global average temperature this century to 1.5 degrees Celsius above pre-industrial levels. We have a long-term target to become a net-zero emissions energy business by 2050, in step with society. To achieve this target, we will have to be net zero on all emissions from the manufacture of all our products and all our customers’ emissions from the use of the energy products we sell. This means the target covers our Scope 1 emissions, which come directly from our operations, our Scope 2 emissions, from the energy we buy to run our operations, and our Scope 3 emissions, which include the emissions from our customers’ use of the energy products we sell, regardless of whether they are produced by Shell or a third party. We also have targets to reduce the net carbon intensity of the energy products we sell, as measured by Shell’s Net Carbon Footprint, using 2016 as our baseline year. These include short-term targets of a 3-4% reduction by the end of 2022 and 6-8% by 2023. Our medium- and longer-term targets are to reduce by 20% by 2030, by 45% by 2035 and 100% by 2050, in step with society. We achieved our target of a 2-3% reduction by the end of 2021. In October, we set an absolute emissions reduction target of 50% on all Scope 1 and 2 emissions under Shell’s operational control by 2030, compared with 2016 levels on a net basis. We believe that our total carbon emissions from energy sold peaked in 2018 and will stay below 1.7 gigatonnes per annum (Gtpa). Further details are in the “Climate change and energy transition” section on page 75. The statements in this “Strategy and outlook” section, including those related to our growth strategies and our expected or potential future cash flow from operations, organic free cash flow, share buybacks, capital investment, divestments, production and Net Carbon Footprint, are based on management’s current expectations and certain material assumptions and, accordingly, involve risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied herein. See “About this Report” on page iii and “Risk factors” on pages 22-33. On February 28, 2022, we announced our intention to exit our ventures with Gazprom. On March 8, 2022, we announced our intention to withdraw from our involvement in all Russian hydrocarbons in a phased manner. For more information, see Note 32 on page 283. Clear capital allocation framework Base cash capex Ordinary progressive dividend AA credit metrics through the cycle Additional shareholder distributions Additional cash capex Continued balance sheet strengthening 1st PRIORITY 2nd PRIORITY 3rd PRIORITY 4th PRIORITY Putting the framework into operation ■ $19-22 billion cash capex per annum to sustain our strategy – Inorganic capex included in the range ■ ~4% dividend per share growth annually, subject to Board approval ■ Net debt level to target AA credit metrics ■ Total shareholder distributions of 20-30% of CFFO comprise dividend and share buybacks – Amount based on cash generation, macro-outlook and balance sheet trajectory ■ Measured, disciplined cash capex spend to execute our strategy at pace ■ Further reduce net debt to achieve firm long-term AA credit metrics First cash priority also includes interest paid (CFFF). Base cash capex includes spend on asset integrity and to sustain and grow value. Additional cash capex includes further growth. CAPITAL ALLOCATION: TARGET SHAREHOLDER DISTRIBUTIONS OF 20-30% OF CFFO We believe that our integrated business model is key to driving our strategy. Shell has a competitive portfolio and we are leading our peer group on cash generation. We intend to develop our portfolio of assets and the mix of energy that we sell to meet the cleaner energy needs of our customers, while delivering value for our shareholders. Delivering our strategy will require clear and deliberate capital allocation choices. We approach capital allocation at three levels: enterprise, portfolio and project. The enterprise level is about how we make choices between increasing distributions to our shareholders, investing in our business and/or strengthening our balance sheet. The portfolio level is about how we allocate capital between our three business pillars – Growth, Transition and Upstream. The project level is about how we evaluate and prioritise investment opportunities. For cash capital expenditure, the base capex to sustain our strategy is expected to be $19-22 billion per annum. To accelerate our strategy we expect our cash capital expenditure to grow to $23-27 billion per annum, once we have met our priority to distribute 20-30% of cash flow from operations to shareholders. For 2022 we expect our cash capex to be at the lower end of this range. More than half the additional capex (above the base capex) is expected to be spent on our Growth businesses. We remain committed to our progressive dividend policy and focused on targeting AA-equivalent credit metrics through the cycle. Subject to Board approval, we aim to increase the dividend per share by around 4% every year. We target the distribution of 20-30% of cash flow from operations to shareholders, and may choose to return cash to shareholders through a combination of dividends and share buybacks. After reaching this level of shareholder distributions, additional surplus cash is expected to be allocated between further disciplined capital investments to accelerate our strategy and further reduce debt to strengthen the balance sheet. Strategic Report
16 Shell Annual Report and Accounts 2021 SECTION 172(1) STATEMENT The Companies (Miscellaneous Reporting) Regulations 2018 (2018 MRR) require Directors to explain how they considered the interests of key stakeholders and the broader matters set out in Section 172(1) (a) to (f) of the Companies Act 2006 (S172) when performing their duty to promote the success of the Company under S172. This includes considering the interests of other stakeholders which may affect the long-term success of the company. This S172 statement explains how Shell’s Directors: ■ have engaged with employees, suppliers, customers and others; and ■ have considered employee interests, the need to foster business relationships with suppliers, customers and others, and the effects of those considerations, including on the principal decisions taken during the financial year. The S172 statement focuses on matters of strategic importance to Shell, and the level of information disclosed is consistent with the size and the complexity of Shell’s businesses. GENERAL CONFIRMATION OF DIRECTORS’ DUTIES Shell’s Board has a clear framework for determining the matters within its remit and has approved Terms of Reference for the matters delegated to its Committees. Certain financial and strategic thresholds have been set, in order to identify matters requiring Board consideration and approval. The Manual of Authority sets out the delegation and approval process across the broader business. More information on Shell’s controls and procedures can be found in “Other regulatory and statutory information” on page 198. When making decisions, each Director ensures that (s)he acts in the way he or she considers, in good faith, would most likely promote Shell’s success for the benefit of its members as a whole, and in doing so has regard (among other matters) to the issues set out below. S172(1) (a) “THE LIKELY CONSEQUENCES OF ANY DECISION IN THE LONG TERM” The Directors understand the business and the evolving environment in which we operate, including the challenges of navigating through the energy transition. Based on Shell’s purpose to power progress together by providing more and cleaner energy solutions, the strategy set by the Board is intended to accelerate the transition of our business to net-zero emissions, purposefully and profitably, in step with society. We are building a strong, resilient business by putting customers at the centre of our strategy, innovating the products and solutions customers need on their journey to net zero. As outlined in “Our context” in the “Shell Powering Progress” section on pages 6-11, the rising standard of living of a growing global population is likely to continue to drive demand for energy, including oil and gas, for years to come. At the same time, technological changes, and the need to tackle climate change mean there is a transition under way to a lower-carbon, multi-source energy system with increasing customer choice. Our Powering Progress strategy combines our ambitions under four goals: generating shareholder value, achieving net-zero emissions, powering lives and respecting nature. In 2021, we continued to navigate the challenges of the COVID-19 pandemic, which has continued to cause unprecedented levels of disruption. In 2021, the Board announced its move to the next phase of the capital allocation framework, consistent with Shell’s Powering Progress strategy. Shell’s operational and financial delivery and strengthened balance sheet had given it the confidence to increase shareholder distributions by increasing dividends and commence share buybacks, while Shell continues to invest for the future of energy. The key elements of Shell’s strategic direction were highlighted in our 2020 Annual Report and included: ■ setting a target to be a net-zero emissions energy business by 2050, in step with society; ■ growing our leading marketing business, further developing the integrated Power business and commercialising hydrogen and biofuels to support customers’ efforts to achieve net-zero emissions; ■ transforming our refining portfolio from the current 13 sites into five high-value energy and chemicals parks, integrated with Chemicals. Growth in Chemicals would shift to more performance chemicals and recycled feedstocks; ■ extending leadership in liquefied natural gas (LNG) to enable decarbonisation of key markets and sectors; ■ focusing on value over volume by simplifying Upstream to eight significant core positions, which would generate more than 80% of Upstream’s cash flow from operations; and ■ enhancing value delivery through trading and optimisation. The Directors recognise that there are differing societal views about our operations and that some Board decisions taken today may not align with all stakeholder interests. Given the complexity of the evolving energy transition, the Directors have taken the good faith decisions they believe best support Shell’s strategy. S172(1) (b) “THE INTERESTS OF THE COMPANY’S EMPLOYEES” The Directors recognise that Shell employees are fundamental and core to our business and the delivery of our strategic ambitions. The success of our business depends on attracting, retaining, and motivating talented employees. The Directors consider and assess the implications of decisions on employees and the wider workforce, where relevant and feasible. The Directors seek to ensure that Shell remains a responsible employer, including with respect to pay and benefits, health and safety issues, and the workplace environment. In early 2021, in recognition and appreciation of employee resilience during 2020 when bonuses were suspended, the Board supported a one-off award of shares worth $1,000 to employees below the Executive Committee level. The Directors recognise that our pensioners, though no longer employees, also remain important stakeholders. More information on this can be found in “Workforce engagement” on page 145. Strategic Report
17Shell Annual Report and Accounts 2021 S172(1) (c) “THE NEED TO FOSTER THE COMPANY’S BUSINESS RELATIONSHIPS WITH SUPPLIERS, CUSTOMERS AND OTHERS” Delivering our strategy requires strong mutually beneficial relationships with suppliers, customers, governments, national oil companies and joint-venture partners. Shell seeks to promote and apply certain general principles in such relationships. The ability to promote these principles effectively is an important factor in the decision to enter into or remain in such relationships. This standard and others are described in the Shell General Business Principles, which are based upon our core values of honesty, integrity, and respect for people. The Board periodically reviews and approves the Shell General Business Principles. The Directors take account of the General Business Principles and core values when exercising their duties and making Board decisions. When feasible, core value moments are built into Board agendas, so the Board can reflect on the importance of the General Business Principles and core values. The Board also reviews and approves Shell’s approach to suppliers, which is set out in the Shell Supplier Principles. In 2021, relevant Board committees held briefing sessions with the Contracting and Procurement (C&P) team to more deeply engage on Shell’s C&P programme, including its approach, risk management profile and stakeholder engagement. The businesses continually assess the priorities related to customers and those with whom we do business. The Board engages with the businesses on these topics, for example, within the context of business strategy updates and investment proposals. The Directors also receive updates on a variety of topics that indicate how these stakeholders have been engaged. These updates include information provided by the Projects & Technology function on suppliers and joint-venture partners, with respect to items such as project updates and supplier contract management. Businesses also provide information, as relevant, on customers and joint-venture partners in relation to business strategies, projects, and investment or divestment proposals. The CEO provides a comprehensive update to the Board on material business and external developments at each main Board meeting. These include: i) a report on safety performance; ii) significant operational updates relating to each of the business segments, e.g. partnerships, investments, divestments, flagship projects, commercial highlights and achievements; iii) the development of new technologies and innovation via collaborations with partners, suppliers and others; and iv) political or regulatory developments. The CEO also summarises his own external engagements and any changes of senior executive staff. S172(1) (d) “THE IMPACT OF THE COMPANY’S OPERATIONS ON THE COMMUNITY AND THE ENVIRONMENT” This aspect is inherent in our strategic ambitions. The Board receives information on various topics to help it make decisions. The topics can include, for example, the Net Carbon Footprint target, the impact of the continuing COVID-19 pandemic on Shell, country-entry considerations, proposals to invest or divest, and business strategy reviews. The information also goes into Group-level overviews, such as updates on safety and environment performance, reports from the Chief Ethics and Compliance Officer, and reports from the Chief Internal Auditor. In 2021, certain Board committees and Non-executive Directors conducted site visits of various Shell operations and overseas offices and held external stakeholder engagements, where feasible. As in 2020, not all visits could be face-to-face because of continuing restrictions and precautions related to the COVID-19 pandemic. Despite the continued challenges presented by COVID-19, the Board maintained a strong interface with businesses and staff through virtual engagements, making best use of the technology available. More information can be found in “Understanding and engaging with our stakeholders” on page 141, and in the reports of each Board committee. S172(1) (e) “THE DESIRABILITY OF THE COMPANY MAINTAINING A REPUTATION FOR HIGH STANDARDS OF BUSINESS CONDUCT” Shell aims to meet the world’s growing need for more and cleaner energy solutions in economically, environmentally, and socially responsible ways. The Board periodically reviews and approves clear frameworks, such as The Shell General Business Principles, Shell’s Code of Conduct, specific Ethics and Compliance manuals, the Ethical Decision-Making Framework, and its Modern Slavery Statements, to ensure that high standards are maintained in Shell businesses and in Shell’s business relationships. This, complemented by the ways the Board is informed and monitors compliance with relevant governance standards, helps to ensure that Board decisions and the actions of Shell companies promote high standards of business conduct. S172(1) (f) “THE NEED TO ACT FAIRLY AS BETWEEN MEMBERS OF THE COMPANY” After weighing up all relevant factors, the Directors consider which course of action best enables delivery of our strategy through the long term, taking into consideration the effect on stakeholders. In doing so, our Directors act fairly as between the Company’s members but are not required to balance the Company’s interest with those of other stakeholders. This can sometimes mean that certain stakeholder interests may not be fully aligned. CULTURE The Board recognises that it plays an important role in assessing and monitoring that our desired culture is embedded in our values, attitudes and behaviours, including in our activities and stakeholder relationships. The Board has established honesty, integrity and respect for people as Shell’s core values. The General Business Principles, Code of Conduct, and Code of Ethics help everyone at Shell to act in line with these values and comply with relevant laws and regulations. The Shell Commitment and Policy on Health, Safety, Security, Environment & Social Performance applies across Shell and is designed to help protect people and the environment. In 2021, after our refreshed approach to safety in 2020, we transitioned from our Life-Saving Rules and implemented the Industry Life-Saving Rules. By doing this, we aim to simplify and standardise, to adopt a broader risk scope that focuses on potential for harm to people, and to create a greater sense of individual and team responsibility to avoid fatalities and life-changing injuries. The change builds on existing strong foundations, with an increased and deliberate focus on human performance, the way people, culture, equipment, work systems and processes interact as a system. It remains our ambition to achieve Goal Zero, no harm and no leaks across all our operations. In 2021, Shell announced its Powering Progress strategy. This has four goals: generating shareholder value, achieving net-zero emissions, respecting nature and powering lives. At its heart is our target to become a net-zero emissions energy business by 2050, in step with society’s progress towards the goal of the Paris Agreement on climate change. We also have medium- and long-term targets to reduce our net carbon intensity, compared with 2016 levels, by 20% by 2030, 45% by 2035, and 100% by 2050, in step with society. To achieve our strategic goals, we need to adapt our mindset and behaviours as we navigate the increasing complexity in the world around us. At Shell we seek to have a culture that encourages the attitudes and behaviour that we believe will help us succeed. We seek to encourage: Strategic Report
18 Shell Annual Report and Accounts 2021 ■ applying a learner mindset: everyone has the ability to grow, learn from mistakes and successes, and speak up openly in a safe environment. We encourage curiosity, humility, openness, helping each other to make better decisions and create more value; ■ maximising our performance: we collaborate across boundaries and speak up when we see things that can be improved. We enable people to deliver, and we work in an integrated way with discipline, clear focus on priorities, and tangible outcomes in order to reach our full potential; ■ increasing trust in Shell: we aim to be a valued member of the communities in which we operate, and to make a positive contribution to society. We seek to listen carefully and with humility and we have a strong desire to understand, and, where possible, adapt to the changing needs and expectations of society, especially as they relate to the environment. We build strong and trusted relationships with customers and partners which are fundamental to our collective success; ■ living by our values and Goal Zero: we live by our values and do the right things with respect to ethics, safety, and the environment; and ■ inspiring and engaging: we aspire to a situation where everyone feels connected to what we stand for. We build trusting and effective teams where everyone feels ownership and has a voice in how work gets done. We strive to maintain a diverse and inclusive culture. The Board considers the Shell People Survey to be an important tool for measuring employee engagement, motivation, affiliation, and commitment to Shell. It provides insights into employee views and has a consistently high response rate. It also helps the Board understand how the survey’s outcomes are being used to strengthen Shell culture and values. The Board has noted that although staff surveys offer insight, limitations exist. In 2021, a review was launched to enhance Board oversight of culture. Due to the significant developments and challenges affecting Shell in the second half of 2021, that review was paused. The plan is to resume the review in 2022. It is intended that the review will be informed by the results of the Shell People Survey from 2021 and if available 2022, various staff engagements, relevant context from the 2022 external Board evaluation process, and the Board’s 2022 Strategy Days. STAKEHOLDER ENGAGEMENT (INCLUDING EMPLOYEE ENGAGEMENT) The Board recognises the important role Shell has in society and is deeply committed to public collaboration and stakeholder engagement. This commitment is at the heart of Shell’s strategic ambitions. The Board strongly believes that Shell will only succeed by working together with customers, governments, business partners, investors, and other stakeholders. Working together is critical, particularly at a time when society, including businesses, governments, and consumers, faces issues as complex and challenging as climate change. We continue to build on our long track record of working with others, such as investors, industry and trade groups, universities, governments, non-governmental organisations (NGOs) and, in some appropriate instances, our competitors through our joint-venture operations or industry bodies. We believe that working together and sharing knowledge and experience with others offers us greater insight into our business. We also appreciate our long-term relationships with our investors and acknowledge the positive impact of ongoing engagement and dialogue. The guidance on preparing information, proposals or discussion items for the Board asks for these materials to include considerations of the views, interests, and concerns of stakeholders and how management addressed them. This helps to strengthen the Board’s knowledge of how the broader business undertakes significant levels of stakeholder engagement. Board minutes have also reflected key points on stakeholder considerations, where appropriate. The Terms of Reference for our Safety, Environment and Sustainability Committee also include, within the Committee’s remit, the review and consideration of external stakeholder perspectives and how major issues of public concern that could affect Shell’s reputation and licence to operate were or are being addressed. The Board also engaged with certain stakeholders directly, to understand their views. The Board draws upon Shell’s substantial in-house expertise by periodically receiving input from economics and policy experts on key political and economic themes, with some updates being presented to the Board each quarter. More on this engagement is provided in “Understanding and engaging with our stakeholders” on page 141. Information on how the Directors have engaged with employees can be found on page 145 and in the “Our people” section on pages 114-119. The tables below include examples of how Directors have considered the interests of Shell employees and the resulting outcomes. PRINCIPAL DECISIONS In the table below, we outline some of the principal decisions made by the Board over the year. We explain how the Directors have engaged with or in relation to key stakeholder groups and how stakeholder interests were considered in decision-making. To remain concise, we have categorised our key stakeholders into seven groups. Where appropriate, each group is considered to include both current and potential stakeholders. The groups are: investor community; employees/workforce/pensioners; our customers; regulators/governments; NGOs/civil society stakeholders/academia/think-tanks; communities; and suppliers/strategic partners. Principal decisions We define principal decisions taken by the Board as decisions taken in 2021 that are of a strategic nature and significant to any of our key stakeholder groups. As outlined in the UK Financial Reporting Council (FRC) Guidance on the Strategic Report, we include decisions related to capital allocation and dividend policy. How were stakeholders considered We describe how regard was given to the likely long-term consequences of the decision, including how stakeholders were considered during the decision-making process. What was the outcome We describe which accommodations or mitigations were made, if any, and how Directors have considered different interests, and what factors they took into account. SECTION 172(1) STATEMENT continued Strategic Report
19Shell Annual Report and Accounts 2021 Strategic updates What was the outcome Powering Progress Strategy Shell’s Powering Progress strategy was announced in February 2021, and highlighted in our 2020 Annual Report. After the announcement and associated stakeholder engagements by management, the feedback received from investors, the media, climate activists and internal staff was presented to and discussed with the Board. In 2021, the Board considered strategic opportunities, and the integration of strategy, portfolio, environmental and social ambitions under our Powering Progress goals. Additional targets regarding Scope 1 and 2 emissions were also announced. A report was produced with the aim of helping investors and society obtain a better understanding of how Shell is addressing the risks and opportunities of the energy transition. The Board also considered Shell’s capital and portfolio actions and structure. This was to support the delivery of Powering Progress and came after the Reshape reorganisation of Shell. See “Our People” on pages 114-119 for further information on the Reshape initiative. How stakeholders were considered Energy Transition Strategy publication In 2021, the Board approved the Shell Energy Transition Strategy publication and its submission to shareholders for an advisory vote at the 2021 AGM. It was essential to ensure that stakeholders and NGOs had a sound understanding of the Energy Transition Strategy. Board members were involved in extensive advance stakeholder engagement. Among these advance engagements was the Safety, Environment and Sustainability Committee (SESCo)’s consultation with an investor stakeholder group with a focus on climate-related financial disclosures. Company simplification As the Board considered the simplification, it supported a variety of work to better assess the relevant risks and benefits. Accordingly, a project team was assembled and workstreams set up. One such workstream encompassed stakeholder engagement, focusing on shareholders, staff, government and media. The Board also obtained the views of various external advisers. During the many Board sessions that focused on simplification, discussions considered and assessed a range of factors, including potential costs and benefits and stakeholder feedback. Implementation of the simplification was also subject to an extensive consultation with relevant staff councils. In later meetings, the Board considered the views and responses of stakeholders against current external environmental events and circumstances which could affect stakeholders, but which were beyond the Board’s or Shell’s control. The Board also participated in engagement sessions, about which more information can be found in “Understanding and engaging with our stakeholders” on page 141. Staff engagements Virtual staff engagements were held with Directors which enabled them to speak directly with staff on themes including the benefits of working in Upstream. For further information on the engagement with our workforce see “Board activities and evaluation” and “workforce engagement” on page 137 and page 145. Energy transition strategy The Board set out details of how it planned to achieve its target to be a net-zero emissions energy business by 2050, in step with society’s progress towards achieving net zero. The Board announced an additional target to reduce Scope 1 and Scope 2 absolute emissions, under Shell’s operational control, by 50% by 2030 compared with 2016 levels on a net basis. It was announced that this formed part of the Powering Progress strategy, alongside the goals to generate shareholder value, respect nature and power lives. The Board regarded this as an important step as we rise to meet the challenge of the Dutch court’s ruling in the Milieudefensie case against Shell. Feedback from all of the advance stakeholder engagements was taken into account by the Board, SESCo and the Executive Committee. As appropriate, revisions were made to the Energy Transition Strategy report prior to submission at the 2021 AGM. Shell’s Energy Transition Strategy report described our progress towards becoming a net-zero emissions energy business and our emissions targets. Shell was the first energy company to submit an energy transition strategy to shareholders for an advisory vote. Shareholders were informed of the intention to publish an update every three years until 2050. The energy transition strategy received 88.74% shareholder support at the 2021 AGM. Following the AGM, the Chair, CEO and CFO engaged with stakeholders on a number of matters, which included Shell’s energy transition strategy and the Dutch court’s ruling in the Milieudefensie case against Shell. The key areas on which we received feedback from our largest shareholders were communicated to the Board. On October 28, 2021, Shell responded to this feedback and the court ruling by announcing a new target to halve Scope 1 and 2 absolute emissions under Shell’s operational control by 2030, compared with 2016 levels on a net basis. This is another strategic milestone on our path to becoming a net-zero emissions energy business by 2050, in step with society. Company simplification The Board reviewed feedback from stakeholders as well as from the Board’s independent advisers, concluding that the benefits of the simplification outweighed the downsides. Simplification was assessed as a way to increase the Company’s flexibility to implement our Powering Progress strategy at pace, strengthen Shell’s competitiveness, and support the acceleration of Shell’s transition to a net-zero emissions business and create value for shareholders, customers and wider society. Shareholders were asked to approve a change of Shell’s Articles of Association which would facilitate a series of measures leading to simplification. On December 10, 2021, shareholders approved the amendments to the Articles. On December 20, 2021 the Board formally approved the simplification, and on December 31, the Board approved the key steps required to move the Company’s tax residence to the UK. The Company’s name was changed on January 21, 2022, and the Company’s shares were assimilated into a single line of shares on January 29, 2022. This completed the simplification. Strategic Report
20 Shell Annual Report and Accounts 2021 Financial strength, cash allocation including shareholder distributions What was the outcome The Board considered cash flow, the macro environment and business performance in 2021 compared with 2020. The Board also considered management’s view of the outlook for the Group’s performance, and reviewed the Capital Allocation Framework with specific focus on the next phase including shareholder distributions. Directors approved several proposals with the aim of delivering value to shareholders and increasing shareholder distributions through a combination of progressive dividends and share buybacks. How stakeholders were considered A number of considerations underpinned each proposal, with proposals discussed and reviewed at certain points throughout the year. These considerations took account of the macro environment, robust business performance and outlook, the strength of the balance sheet, capital discipline, feedback from advisers and feedback from other stakeholders, and the net debt milestone. The Financial Framework was reviewed as part of the Board’s Strategy Day 2021 meeting. This was at a time when it was being considered whether to move to the next phase of the Capital Allocation Framework and to increase shareholder distributions in the second half of the year. Investor valuation approaches, ongoing pressure for investors to divest from the oil and gas sector and reshaping of the organisation were also considered. So too were planned divestments which were being looked at by the Board. When making decisions regarding the potential use of funds from divestments, and in support of the Capital Allocation Framework, the Board also considered at length the views of debt investors and credit ratings agencies, commitments to pension holders, and broader stakeholder views about whether to use divestment proceeds for shareholder distributions or reinvestment in, for example, energy transition businesses. The Board and management carefully considered various stakeholders, other strategic factors and matters such as Operating Plan 2022-2024 (OP21) before reaching the decision to proceed with the next phase of the Capital Allocation Framework. In July 2021, Shell announced that shareholder distributions would be increased through an increase in the dividend payment (38% increase on the first quarter payment) and launching $2 billion of share buybacks, aiming to complete them by the end of 2021. On September 20, 2021, Shell announced the sale of its Permian business. The Board confirmed that the cash proceeds from this transaction would be used to fund $7 billion in additional shareholder distributions, with the remainder used to further strengthen the balance sheet. The first tranche of this distribution (up to $1.5 billion) was announced on December 1, 2021. In relation to the decisions to increase distributions to shareholders, the Board and Management considered the views of stakeholders, the strength of the Company’s balance sheet and the need to continue to invest for the future of energy. The form and timing for distributing the remaining $5.5 billion was announced in early 2022. These distributions are in addition to our shareholder distributions in the range of 20-30% of cash flow from operations. Approval of Shell’s detailed Operating Plan 2022-2024 (OP21) What was the outcome The approval of OP21 followed an in-depth review by the Board of proposals on capital allocation, capital investment outlook, competitive outlook, operating expenses, return on average capital employed and shareholder distributions. This included reviews in numerous Board meetings leading up to the December 2021 Board meeting in which OP21 was approved. How stakeholders were considered OP21 discussions included a full review against Shell’s Powering Progress strategy, the macroeconomic environment, and the financial strength of the organisation. The Directors and Executive Committee balanced the priorities in the capital allocation framework including capital and operating expenditure commitments towards the energy transition alongside increased shareholder distributions, maintaining balance sheet strength, aspired credit ratings and greenhouse gas target tracking. The plan was discussed extensively and reviewed thoroughly. Responses from investors, and discussions with equity and debt market analysts were also presented to the Board for consideration. The Board sought advice from the Legal Director on the impact of the Dutch Milieudefensie judgment on OP21 and asked questions of management on the flexibility of the Plan to be as agile as feasible in the event of various energy transition scenarios. Following extensive review and discussion, the overall outcome of this decision was an Operating Plan that the Board believes is robust against various scenarios and features strong optionality if needed. In particular, the Board assured itself that, as decisions are taken by the Board over the Plan period, OP21 flexibly demonstrates pathways to enable delivery of Shell’s absolute Greenhouse Gas (GHG) emissions and GHG intensity targets by 2030. While stakeholder opinion differs on Shell’s approach, OP21 is based on society’s demand for products and services. OP21 also supports Shell in maintaining a reputation for high standards on business conduct and health, safety, security, and environment issues. It maintained the approach to employee remuneration and benefits to pensioners. OP21 also seeks to reward our investors with returns and maintain the long-term financial strength of the Company to invest in more and cleaner forms of energy and meet the current and future needs of society. SECTION 172(1) STATEMENT continued Strategic Report
21Shell Annual Report and Accounts 2021 Investing in new business, acquisitions and divestments, and closures What was the outcome Over the course of the year, the Board considered and approved new opportunities and projects and proposed divestments or closures. The Board also considered and approved country entries and exits, more details of which are available in “Board activities and evaluation” on page 137. How stakeholders were considered The Board considered the impact of decisions related to new business opportunities and divesting from existing opportunities in the context of sustainability, supply, regulations, and carbon intensity. Critically, the Board reviewed the various proposals’ alignment with Shell’s strategy. Particular focus was given to potential benefits of certain divestments, including their potential to: create returns for shareholders; further strengthen the balance sheet; de-risk future cash flow; and avoid significant additional capital investment. As part of the discussions, the Board considered the strategic drivers for the intended divestments, including the Scope 1 emissions of each asset, anticipated regulatory changes expected to lead to value erosion, and any value opportunities afforded by the macro environment. As part of each proposal, the respective business unit will undertake effective due diligence on prospective purchasers from a financial, reputational as well as operating philosophy standpoint to ensure future obligations are met or suitable mitigating measures are in place to protect Shell and its people. Within each divestment proposal, the Board considered if the Company was being a responsible seller of its assets and if the purchasers have the capability to manage our assets/people appropriately. Staff matters are explicitly considered during negotiations and the due diligence process for acquisitions and divestments. Comprehensive engagement plans are developed as appropriate in parallel to the negotiations. Permian – shareholder approval for the divestment of Shell Permian assets. Raízen S.A. and Biosev S.A. – shareholder approval for Raízen joint venture to acquire Biosev S.A., a Brazilian ethanol producer. Deer Park Refinery – shareholder approval for the divestment of Deer Park Refining Limited Partnership. Sale of holding in PCK Schwedt Refinery – shareholder approval for the divestment of Shell’s interest in PCK Schwedt Refinery. Purchase of fuel and convenience retail sites in Texas – This acquisition enables Shell to continue its existing, trusted premium product offerings. Pernis Refinery – shareholder approval to take final investment decision to build an 820,000-tonnes-a- year biofuels facility at the Shell Energy and Chemicals Park Rotterdam (formerly Pernis Refinery). Note. References to “shareholder approval” relate to the Shell intercompany approval process. Permian – After reviewing multiple strategies and portfolio options for our Permian assets, the Board determined that the transaction with ConocoPhillips presented a compelling value proposition, as well as disciplined capital stewardship. The Board concluded that Shell’s Upstream business plays a critical role in the Powering Progress strategy through a more focused, competitive, and resilient portfolio that provides energy which the world needs while funding shareholder distributions and investments in the energy transition. The cash proceeds from the transaction were identified for use in providing additional shareholder distributions of $7 billion through share buybacks. Raízen S.A. and Biosev S.A. — While discussing the proposal for the Raízen joint venture to acquire Biosev S.A., the Board considered joint-venture partner aspects, and factors regarding assurance of due diligence on environmental aspects and safety performance. Deer Park Refinery and PCK Schwedt Refinery – This was part of Shell’s strategy to reduce its global refinery footprint to core sites integrated with the company’s trading hubs, chemicals plants and marketing businesses. Purchase of fuel and convenience retail sites in Texas – As one of the largest fuels and convenience retail markets globally, growing in the US gives Shell the opportunity to build on its successful brand presence and benefit from the strength of its ongoing business relationships. Pernis Refinery – In discussing the proposal to build a biofuels facility at the Shell Energy and Chemicals Park Rotterdam, in the Netherlands, the Board considered the project’s potential to increase the production of low-carbon fuels (including for aviation), Scope 1 emissions and associated adaptations, supply and demand aspects, and enhancing the capability of employees in the talent pipeline. Strategic Report
22 Shell Annual Report and Accounts 2021 The risks discussed below could have a material adverse effect separately, or in combination, on our earnings, cash flows and financial condition. Accordingly, investors should carefully consider these risks. STRATEGIC RISKS We are exposed to macroeconomic risks including fluctuating prices of crude oil, natural gas, oil products and chemicals. Further information: See “Market overview” on page 42. Risk description The prices of crude oil, natural gas, oil products and chemicals are affected by supply and demand, both globally and regionally. Macroeconomic, geopolitical and technological uncertainties can also affect production costs and demand for our products. Government actions may also affect the prices of crude oil, natural gas, oil products and chemicals. This could happen, for example, if governments promote the sale of lower-carbon electric vehicles or even prohibit future sales of new diesel or gasoline vehicles, such as the phasing out in the UK that will come into force in 2030. Oil and gas prices can also move independently of each other. Factors that influence supply and demand include operational issues, natural disasters, weather, pandemics such as COVID-19, political instability, conflicts, such as the recent Russian invasion of Ukraine, economic conditions, including inflation, and actions by major oil- and gas-producing countries. In a low oil and gas price environment, we would generate less revenue from our Upstream and Integrated Gas businesses, and parts of those businesses could become less profitable or incur losses. Low oil and gas prices have also resulted and could continue to result in the debooking of proved oil or gas reserves, if they become uneconomic in this type of price environment. Prolonged periods of low oil and gas prices, or rising costs, have resulted and could continue to result in projects being delayed or cancelled. Assets have been impaired in the past, and there could be impairments in the future. Low oil and gas prices have affected and could continue to affect our ability to maintain our long-term capital investment and shareholder distribution programmes. Prolonged periods of low oil and gas prices could adversely affect the financial, fiscal, legal, political and social stability of countries that rely significantly on oil and gas revenue. In a high oil and gas price environment, we could experience sharp increases in costs, and under some production-sharing contracts, our entitlement to proved reserves would be reduced. Higher prices could also reduce demand for our products, which could result in lower profitability, particularly in our Oil Products and Chemicals business. Higher prices can also lead to more capacity being built, potentially resulting in an oversupplied market which would negatively affect our Upstream, Integrated Gas, Oil Products and Chemicals businesses. Accordingly, price fluctuations could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We maintain a diversified portfolio to manage the impact of price volatility. We test the resilience of our projects and other opportunities against a range of prices and costs for crude oil, natural gas, oil products and chemicals. We prepare annual strategic and financial plans that test different scenarios and their impact on prices on our businesses and company as a whole. We also aim to maintain a strong balance sheet to provide resilience against weak market prices. Our ability to deliver competitive returns and pursue commercial opportunities depends in part on the accuracy of our price assumptions. Further information: See “Market overview” on page 43. Risk description We use a range of oil and gas price assumptions, which we review on a periodic basis. These ranges help us to evaluate the robustness of our capital allocation for our evaluation of projects and commercial opportunities. If our assumptions prove to be incorrect, this could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed The range of commodity prices used in our project and portfolio evaluations is subject to a rigorous assessment of short-, medium- and long-term market drivers. These drivers include the extent and pace of the energy transition. Our ability to achieve our strategic objectives depends on how we react to competitive forces. Further information: See “Strategy and outlook” on page 14. Risk description We face competition in all our businesses. We seek to differentiate our services and products, though many of our products are competing in commodity-type markets. Accordingly, failure to manage our costs and our operational performance could result in a material adverse effect on our earnings, cash flows and financial condition. We also compete with state-owned hydrocarbon entities and state- backed utility entities with access to financial resources and local markets. Such entities could be motivated by political or other factors in making their business decisions. Accordingly, when bidding on new leases or projects, we could find ourselves at a competitive disadvantage because these state-owned entities may not require a competitive return. If we are unable to obtain competitive returns when bidding on new leases or projects, this could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We continually assess the external environment – the markets and the underlying economic, political, social and environmental drivers that shape them – to evaluate changes in competitive forces. We define multiple future scenarios and business environments by identifying drivers, uncertainties, enablers and constraints. These scenarios help us to find issues which affect our operating environment and have implications for our strategy. RISK FACTORS Further background on each risk is set out in the relevant sections of this Report, indicated by way of cross references under each risk factor. The Board’s responsibility for identifying, evaluating and managing our significant and emerging risks is discussed in “Other Regulatory and Statutory Information” on pages 198-206. Strategic Report
23Shell Annual Report and Accounts 2021 STRATEGIC RISKS continued Rising concerns about climate change and effects of the energy transition could continue to lead to a fall in demand and potentially lower prices for fossil fuels. Climate change could also have a physical impact on our assets and supply chains. This risk may also lead to additional legal and/or regulatory measures, resulting in project delays or cancellations, potential additional litigation, operational restrictions and additional compliance obligations. Further information: For further explanations of our climate change governance, risk management approach, climate ambition and strategy and our portfolio and performance, please refer to the section “Climate change and energy transition” on pages 76-98. Risk description Societal demand for urgent action has increased, especially since the Intergovernmental Panel on Climate Change (IPCC) Special Report of 2018 on 1.5°C effectively made the aspirational goal of the Paris Agreement to limit the rise in global average temperature this century to 1.5 degrees Celsius the default target. This increasing focus on climate change and drive for an energy transition have created a risk environment that is changing rapidly, resulting in a wide range of stakeholder actions at global, local and business levels. The potential impact and likelihood of the associated exposure for Shell could vary across different time horizons, depending on the specific components of the risk. We expect that a growing share of our GHG emissions will be subject to regulation, resulting in increased compliance costs and operational restrictions. Regulators may seek to limit certain oil and gas projects or make it more difficult to obtain required permits. Additionally, climate activists are challenging the grant of new and existing regulatory permits. We expect that these challenges are likely to continue and could delay or prohibit operations in certain cases. Achieving our target of becoming net zero on all emissions from our operations could result in additional costs. We also expect that actions by customers to reduce their emissions will continue to lower demand and potentially affect prices for fossil fuels, as will GHG emissions regulation through taxes, fees and/or other incentives. This could be a factor contributing to additional provisions for our assets and result in lower earnings, cancelled projects and potential impairment of certain assets. The physical effects of climate change such as, but not limited to, increases in temperature and sea levels and fluctuations in water levels could also adversely affect our operations and supply chains. Certain investors have decided to divest their investments in fossil fuel companies. If this were to continue, it could have a material adverse effect on the price of our securities and our ability to access capital markets. Stakeholder groups are also putting pressure on commercial and investment banks to stop financing fossil fuel companies. According to press reports, some financial institutions have started to limit their exposure to fossil fuel projects. Accordingly, our ability to use financing for these types of future projects may be adversely affected. This could also adversely affect our potential partners’ ability to finance their portion of costs, either through equity or debt. In some countries, governments, regulators, organisations and individuals have filed lawsuits seeking to hold fossil fuel companies liable for costs associated with climate change. While we believe these lawsuits to be without merit, losing could have a material adverse effect on our earnings, cash flows and financial condition. For example, in May 2021, the District Court in The Hague, Netherlands, ruled that, by 2030, Shell must reduce, from its consolidated subsidiaries, its Scope 1 net emissions by 45% from its 2019 levels and use its best efforts to reduce its Scope 2 and Scope 3 net emissions by 45% from its 2019 levels. In 2019, our Scope 1 emissions from our consolidated subsidiaries were 86 million tonnes carbon dioxide equivalent (CO₂e), rounded. We expect to see additional regulatory requirements to provide disclosures related to climate risks and their impact on business performance. In summary, rising climate change concerns and effects of the energy transition have led and could lead to a decrease in demand and potentially affect prices for fossil fuels. If we are unable to find economically viable, publicly acceptable solutions that reduce our GHG emissions and/or GHG intensity for new and existing projects and for the products we sell, we could experience financial penalties or extra costs, delayed or cancelled projects, potential impairments of our assets, additional provisions and/or reduced production and product sales. This could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed Our response to the evolving risk outlook requires transparency and clarity around our plans and actions to achieve our climate target. We have a climate change risk management structure which is supported by standards, policies and controls, as part of our health, safety, security and environment and social performance (HSSE & SP) control framework. Climate change and risks resulting from GHG emissions are reviewed and managed in accordance with other significant risks through the Board and Executive Committee. We have established several dedicated climate change and GHG-related forums at different levels of the organisation. These forums seek to address, monitor and review climate change issues. Our strategy to assess and manage risks and opportunities resulting from climate change includes considering different time horizons and their relevance to risk identification and business planning. Overall, mitigation of the risk is addressed through our strategy to accelerate the transition to net-zero emissions, purposefully and profitably. This approach has three components: ■ reducing the GHG emissions intensity of our operations. We expect to reduce our carbon intensity primarily through altering our product mix as customer (scope 3) emissions represent the largest component of our carbon intensity. Our aim is to achieve this by shifting the focus of our portfolio as we build our power, hydrogen, biofuels, carbon capture and storage and nature-based solutions businesses and activities; ■ demonstrating our resilience by aligning our disclosures to the Task Force on Climate-related Financial Disclosures; and ■ working towards our target to become a net-zero emissions energy business by 2050, in step with society. We are also working with governments on their climate policy to help establish regulatory frameworks that will enable society to reach the goals of the Paris Agreement. The ruling delivered by the District Court in The Hague in May 2021 has provided an additional challenge in this context. We have appealed the ruling but have stated that we want to rise to the challenge and accelerate our Powering Progress strategy to become a net-zero emissions energy business by 2050, in step with society, regardless of whether we win or lose the appeal. Strategic Report
24 Shell Annual Report and Accounts 2021 STRATEGIC RISKS continued If we fail to stay in step with the pace and extent of society’s changing demands for energy as it transitions to a low-carbon future, we could fail in sustaining and developing our business. Further information: See “Strategy and outlook” on page 12 and “Climate change and energy transition” on page 80. Risk description The pace and extent of the energy transition could pose a risk to Shell if our own actions to decarbonise our operations and the energy we sell move at a different speed relative to society. If we are slower than society, customers may prefer a different supplier, which would reduce demand for our products and adversely affect our reputation besides materially affecting our earnings and financial results. If we move much faster than society, we risk investing in technologies, markets or low-carbon products that are unsuccessful because there is limited demand for them. This could also have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We actively monitor societal developments, such as regulation-driven carbon-pricing mechanisms and customer-driven preferences for products. We incorporate these into scenarios which provide insights into how the energy transition may unfold in the medium and long term. These insights and those from various other external scenarios (such as the IPCC Special Report 1.5°C) guide how we set our strategic direction, capital allocation and carbon emission commitments. We have updated our strategy and organisational structure to increase our focus on the sectors where our customers operate, in order to make us better able to compete in the current evolving energy environment. The ruling delivered by the District Court in The Hague in May 2021 has provided an additional challenge. We have appealed against the ruling. But regardless of whether we win or lose the appeal, we want to rise to the challenge, as part of our Powering Progress strategy, of accelerating our transition to a net-zero emissions energy business by 2050, in step with society. We seek to execute divestments in pursuing our strategy. We may be unable to divest these assets successfully in line with our strategy. Further information: See “Strategy and outlook” on page 15. Risk description We may be unable to divest assets at acceptable prices or within the timeline envisaged because of market conditions or credit risk. This would result in increased pressure on our cash position and potential impairments. In some cases, we have also retained certain liabilities following a divestment. Even in cases where we have not expressly retained certain liabilities, we may still be held liable for past acts, failures to act or liabilities that are different from those foreseen. We may also face liabilities if a buyer fails to honour their commitments. Accordingly, if any of the above circumstances arise, this could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We continually monitor market developments to assess potential divestments in pursuing our strategy. We carefully tailor our sales processes to buyers’ perceived expectations so we can deliver the most competitive outcomes. As a general principle, the sales processes are configured so that buyers will acquire the assets including all related liabilities. For some assets, Shell may agree to retain certain liabilities. We monitor these liabilities closely and make appropriate provisions for them. RISK FACTORS continued Strategic Report
25Shell Annual Report and Accounts 2021 STRATEGIC RISKS continued We operate in more than 70 countries that have differing degrees of political, legal and fiscal stability. This exposes us to a wide range of political developments that could result in changes to contractual terms, laws and regulations. We and our joint arrangements and associates also face the risk of litigation and disputes worldwide. Further information: See “Other regulatory and statutory information” on page 201. Risk description Developments in politics, laws and regulations can and do affect our operations. Potential impacts include: forced divestment of assets; expropriation of property; cancellation or forced renegotiation of contract rights; additional taxes including windfall taxes, restrictions on deductions and retroactive tax claims; antitrust claims; changes to trade compliance regulations; price controls; local content requirements; foreign exchange controls; changes to environmental regulations; changes to regulatory interpretations and enforcement; and changes to disclosure requirements. Tensions between nation states, such as Russia’s recent invasion of Ukraine, can also affect our business. Any of these, individually or in aggregate, could have a material adverse effect on our earnings, cash flows and financial condition. Since 2020, many governments have run deficits to deal with the economic impacts of the COVID-19 pandemic. Given the ongoing nature of the pandemic, there will be uncertain long-term fiscal consequences, with possible subsequent effects on government policies that affect Shell’s business interests. From time to time, social and political factors play a role in unprecedented and unanticipated judicial outcomes that could adversely affect Shell. Non-compliance with policies and regulations could result in regulatory investigations, litigation and, ultimately, sanctions. Certain governments and regulatory bodies have, in Shell’s opinion, exceeded their constitutional authority by: attempting unilaterally to amend or cancel existing agreements or arrangements; failing to honour existing contractual commitments; and seeking to adjudicate disputes between private litigants. Certain governments have also adopted laws and regulations that could potentially conflict with other countries’ laws and regulations, potentially subjecting us to criminal and civil sanctions. Such developments and outcomes could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We continually monitor geopolitical developments and societal issues relevant to our interests. Our Legal and Tax functions are organised globally and support our business lines in ensuring compliance with local laws and fiscal regulations. Our Corporate Relations department engages with governments in countries where we operate to understand and influence local policies and to advocate Shell’s position on topics relevant to our industry. We are prepared to exit a country if we believe we can no longer operate there in accordance with our standards and applicable law, and we have done so in the past. OPERATIONAL RISKS Russia’s invasion of Ukraine has affected the safety and security of our people and operations in these and neighbouring countries. The sanctions and export controls and the evolving geopolitical situation have caused wide-ranging challenges to our operations which could continue in the medium to longer-term. Further information: See “Post-Balance Sheet Events” on page 283. Risk description Russia’s recent invasion of Ukraine poses wide-ranging challenges to our operations. The immediate impacts include the safety and security of our people and operations in these and neighbouring countries. The subsequent sanctions and export controls imposed by countries around the world could have a material impact on a number of our activities, including supply, trading and treasury activities. More sanctions and export controls are expected. Given the evolving situation, there are many other unknown factors and events that could materially impact our operations, which may be temporary or more permanent in nature. These risks and future events could impact our supply chain, commodity prices, credit, commodity trading, treasury and legal risks. The tensions also create heightened cyber-security threats to our information technology infrastructure. The geopolitical situation may influence our future investment and financial decisions. Any of these factors, individually or in aggregate, could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed In response to the invasion, a Group Crisis Team has been set up to assess the current situation, consider potential scenarios of how events may further develop and co-ordinate our responses accordingly. Care for our people is Shell’s top priority. Local crisis teams, led by the respective Country Chairs, have been deployed to ensure the health, safety and well-being of our staff, contractors and their families in Ukraine, Russia and neighbouring countries. We are supporting evacuations of Shell employees in Ukraine and their families. We are also working with aid partners and humanitarian organisations to help in the relief effort. We announced our intention to exit our joint ventures with Gazprom and related entities and to end our involvement in the Nord Stream 2 pipeline project. Furthermore, we announced our intention to withdraw from our involvement in all Russian hydrocarbons, including crude oil, petroleum products, gas and LNG in a phased manner, aligned with new government guidance. As an immediate first step, the company will stop all spot purchases of Russian crude oil. We will shut our service stations, aviation fuels and lubricants operations in Russia. We are closely monitoring and responding to the sanctions that have been imposed and are following international guidelines where relevant to our business activities. Strategic Report
26 Shell Annual Report and Accounts 2021 OPERATIONAL RISKS continued The estimation of proved oil and gas reserves involves subjective judgements based on available information and the application of complex rules. This means subsequent downward adjustments are possible. Further information: See “Supplementary information – oil and gas (unaudited)” on page 284. Risk description The estimation of proved oil and gas reserves involves subjective judgements and determinations based on available geological, technical, contractual and economic information. Estimates can change over time because of new information from production or drilling activities, changes in economic factors, such as oil and gas prices, alterations in the regulatory policies of host governments, or other events. Estimates also change to reflect acquisitions, divestments, new discoveries, extensions of existing fields and mines, and improved recovery techniques. Published proved oil and gas reserves estimates could also be subject to correction because of errors in the application of published rules and changes in guidance. Downward adjustments could indicate lower future production volumes and could also lead to impairment of assets. This could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed A central group of reserves experts undertakes the primary assurance of the proved reserves bookings. A multidisciplinary committee reviews and endorses all major proved reserves bookings. Shell’s Audit Committee reviews all proved reserves bookings and Shell’s CEO is responsible for final approval. The Internal Audit function also provides further assurance through audits of the control framework, from which information disclosed in ‘’Supplementary information – oil and gas (unaudited)” is obtained. Our future hydrocarbon production depends on the delivery of large and integrated projects and our ability to replace proved oil and gas reserves. Further information: See “Shell Powering Progress” on page 8. Risk description We face numerous challenges in developing capital projects, especially those which are large and integrated. Challenges include: uncertain geology; frontier conditions; the existence and availability of necessary technology and engineering resources; the availability of skilled labour; the existence of transport infrastructure; project delays; the expiration of licences; delays in obtaining required permits; potential cost overruns; and technical, fiscal, regulatory, political and other conditions. These challenges are particularly relevant in certain developing and emerging-market countries, in frontier areas and in deep-water fields, such as off the coast of Mexico. We may fail to assess or manage these and other risks properly. Such potential obstacles could impair our delivery of these projects, our ability to fulfil the full potential value of the project as assessed when the investment was approved, and our ability to fulfil related contractual commitments. This could lead to impairments and could have a material adverse effect on our earnings, cash flows and financial condition. Future oil and gas production will depend on our access to new proved reserves through exploration, negotiations with governments and other owners of proved reserves and acquisitions, and through developing and applying new technologies and recovery processes to existing fields. Failure to replace proved reserves could result in an accelerated decrease of future production, potentially having a material adverse effect on our earnings, cash flows and financial condition. Oil and gas production available for sale Million boe [A] 2021 2020 2019 Shell subsidiaries 1,047 1,104 1,182 Shell share of joint ventures and associates 134 135 156 Total 1,181 1,239 1,338 [A] Natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel. Proved developed and undeveloped oil and gas reserves [A] [B] (at December 31) Million boe [C] Dec 31, 2021 Dec 31, 2020 Dec 31, 2019 Shell subsidiaries 8,456 8,222 9,980 Shell share of joint ventures and associates 909 902 1,116 Total 9,365 9,124 11,096 Attributable to non-controlling interest of Shell subsidiaries 267 322 304 [A] We manage our total proved reserves base without distinguishing between proved reserves from subsidiaries and those from joint ventures and associates. [B] Includes proved reserves associated with future production that will be consumed in operations. [C] Natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel. How this risk is managed We continue to explore for and mature hydrocarbons across our Upstream and Integrated Gas businesses. We use our subsurface, project and technical expertise, and actively manage non-technical risks across a diversified portfolio of opportunities and projects. This involves adopting an integrated approach for all stages, from basin choice to development. We use competitive techniques and benchmark our approach internally and externally. RISK FACTORS continued Strategic Report
27Shell Annual Report and Accounts 2021 OPERATIONAL RISKS continued The nature of our operations exposes us, and the communities in which we work, to a wide range of health, safety, security and environment risks. Further information: See “Environment and society” on page 100. Risk description The health, safety, security and environment (HSSE) risks to which we and the communities in which we work are potentially exposed cover a wide spectrum, given the geographical range, operational diversity and technical complexity of our operations. These risks include the effects of natural disasters (including weather events), earthquakes, social unrest, pandemic diseases, criminal actions by external parties, and safety lapses. If a major risk materialises, such as an explosion or hydrocarbon leak or spill, this could result in injuries, loss of life, environmental harm, disruption of business activities, loss or suspension of permits, loss of our licence to operate and loss of our ability to bid on mineral rights. Accordingly, this could have a material adverse effect on our earnings, cash flows and financial condition. Our operations are subject to extensive HSSE regulatory requirements that often change and are likely to become more stringent over time. Governments could require operators to adjust their future production plans, as has occurred in the Netherlands, affecting production and costs. We could incur significant extra costs in the future because of the need to comply with such requirements. We could also incur significant extra costs due to violations of or liabilities under laws and regulations that involve elements such as fines, penalties, clean-up costs and third-party claims. If HSSE risks materialise, they could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We have standards and a clear governance structure to help manage HSSE risks and avoid potential adverse effects. The standards and governance structure also help us to develop mitigation strategies aimed at ensuring that if an HSSE risk materialises, we avoid catastrophic consequences and have ways of trying to remediate any environmental damage. Our standards and governance structure are defined in our Health, Safety, Security, Environment and Social Performance (HSSE & SP) Control Framework and supporting guidance documents. These describe how key controls should be operated, for example to ensure safe production and implementation of maintenance activities. Shell Internal Audit provides assurance on the effectiveness of HSSE & SP controls to the Board. We routinely practise implementing our emergency response plans to significant risks (such as a spill, toxic substances, fire or explosion). We assessed the impact of COVID-19 on our activities and implemented measures to minimise the adverse effect of the pandemic on our operations. These measures include monitoring and additional protection to prevent infections, promote safety and protect the well-being of all staff, especially critical staff who continue to operate our assets. We also seek to minimise the pandemic’s impact on our operations through scenario planning, implementing continuity plans and ensuring our sites and offices are COVID safe. A further erosion of the business and operating environment in Nigeria could have a material adverse effect on us. Further information: See “Upstream” on page 54. Risk description In our Nigerian operations, we face various risks and adverse conditions. These include: security issues affecting the safety of our people, host communities and operations; sabotage and theft; issues affecting our ability to enforce existing contractual rights; litigation; limited infrastructure; potential legislation that could increase our taxes or operating costs; the challenges presented by limited government and state oil company budgets; and regional instability created by militant activities. Some of these risks and adverse conditions, such as security issues affecting the safety of our people and sabotage and theft have occurred in the past and are likely to continue in the future. These risks or adverse conditions could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We test the economic and operational resilience of our Nigerian projects against a wide range of assumptions and scenarios. We seek to proportionally share risks and funding commitments with joint-venture partners. When we participate in joint ventures in Nigeria, we require that they operate in accordance with good industry practice. We monitor the security situation, and liaise with host communities, governmental and non-governmental organisations to help promote peaceful and safe operations. Strategic Report
28 Shell Annual Report and Accounts 2021 OPERATIONAL RISKS continued An erosion of our business reputation could have a material adverse effect on our brand, our ability to secure new resources or access capital markets, and on our licence to operate. Further information: See “Other Regulatory and Statutory Information” on page 201 and “Our people” on page 118. Risk description Our reputation is an important asset. The Shell General Business Principles (Principles) govern how Shell and its individual companies conduct their affairs, and the Shell Code of Conduct tells employees and contract staff how to behave in line with the Principles. Our challenge is to ensure that all employees and contract staff comply with the Principles and the Code of Conduct. Real or perceived failures of governance or regulatory compliance or a perceived lack of understanding of how our operations affect surrounding communities could harm our reputation. Societal expectations of businesses are increasing, with a focus on business ethics, quality of products, contribution to society, safety and minimising damage to the environment. There is increasing focus on the role of oil and gas in the context of climate change and energy transition. This could negatively affect our brand, reputation and licence to operate, which could limit our ability to deliver our strategy, reduce consumer demand for our branded and non-branded products, harm our ability to secure new resources and contracts, and restrict our ability to access capital markets or attract staff. Many other factors, including the materialisation of other risks discussed in this section, could negatively affect our reputation and could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We continually assess and monitor the external environment for potential risks to our reputation. We engage in ongoing dialogue with our key stakeholders such as investors, industry and trade groups, universities, governments and non-governmental organisations (NGOs) to gain greater insights into societal expectations of our business. We have mitigation plans for identified brand and reputation risks at the Group, country and line of business level. Our country chairs are responsible for implementing country reputation plans which are updated annually. We continually develop and defend our brand in line with Shell’s purpose and promises, and target our investments to drive brand differentiation, relevance and preference. We rely heavily on information technology systems in our operations. Further information: See “Corporate” on page 74. Risk description The operation of many of our business processes depends on reliable information technology (IT) systems. Our IT systems are evolving because of changing business models, our increasing focus on customers, ongoing digitalisation of business processes and migration to the cloud. Our IT systems are increasingly dependent on contractors supporting the delivery of IT services. The COVID-19 pandemic and geopolitical tensions altered the nature of the IT threat, increasing the frequency and ingenuity of malware attacks and increasing the temptation to attack targets for financial gain. In 2021, Shell was impacted by data security breaches, including one involving a third-party supplier who gained unauthorised access to various files during a limited window of time, some of which contained personal data. Shell contacted the impacted individuals and stakeholders and worked with them to address possible risks. We also informed relevant regulators and authorities. The factors described above continue to contribute to potential breaches and disruptions of critical IT services. If breaches are not detected early and responded to effectively, they could harm our reputation and have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We continually measure and improve our cyber-security capabilities. To reduce the likelihood of successful cyber attacks, our cyber-security capabilities are embedded into our IT systems. Our IT is protected by detective and protective technologies. Identification and assessment capabilities are built into our IT support processes and adhere to industry best practices. When external companies provide us with IT services, the security of those services is managed through contractual clauses and supplier assurance reports. Shell continually invests in efforts to embed and improve our controls and monitoring. For example, we improved our global web content filtering capability in response to the challenge of increased remote working. If breaches occur, all entities, including those that have yet to be fully integrated into Shell’s systems and processes, are required to report the incident and use Shell’s information security capabilities. In relation to the 2021 breach, the root cause of the incident was addressed, and the investigation showed no evidence of any impact on Shell’s core IT systems. The incident was handled in line with regulations and in co-operation with the authorities. Our business exposes us to risks of social instability, criminality, civil unrest, terrorism, piracy, cyber disruption and acts of war that could have a material adverse effect on our operations. Further information: See “Environment and society” on page 111. Risk description As seen in recent years, these risks can manifest themselves in the countries where we operate and elsewhere. These risks affect people and assets. Potential risks include: acts of terrorism; acts of criminality including maritime piracy; cyber espionage or disruptive cyber attacks; conflicts including war – such as Russia’s recent invasion of Ukraine – malicious acts carried out by individuals within Shell, civil unrest and environmental and climate activism (including disruptions by non-governmental and political organisations). The above risks can threaten the safe operation of our facilities and the transport of our products. They can harm the well-being of our people, inflict loss of life and injuries, damage the environment and disrupt our operational activities. These risks could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We seek to obtain the best possible information to enable us to assess threats and risks. We conduct detailed assessments for all our sites and activities, and implement appropriate measures to deter, detect and respond to security risks. Further mitigations include strengthening the security of sites, reducing our exposure as appropriate, journey management, information risk management, crisis management and business continuity measures. We conduct training and awareness campaigns for staff and provide them with travel and health advice and access to 24/7 assistance while travelling. We learn from incidents, in order to continually improve our security risk management in Shell. RISK FACTORS continued Strategic Report
29Shell Annual Report and Accounts 2021 OPERATIONAL RISKS continued Production from the Groningen field in the Netherlands causes earthquakes that affect local communities. Further information: See “Upstream” on page 52. Risk description Shell and ExxonMobil are 50:50 shareholders in Nederlandse Aardolie Maatschappij B.V. (NAM). An important part of NAM’s gas production comes from the onshore Groningen gas field, in which EBN, a Dutch government entity, has a 40% interest and NAM a 60% interest. The gas field is in the process of being closed down owing to earthquakes induced by gas production. Some of these earthquakes have damaged houses and other structures in the region, resulting in complaints and lawsuits from the local community. The government has announced it intends to accelerate the close-down, bringing the end of production forward from 2030 to possibly mid-2022. The exact close-down date depends on security of supply considerations and is still to be decided. While we expect the earlier close-down of the Groningen gas field to further reduce the number and strength of earthquakes in the region, any additional earthquakes could have further adverse effects on our earnings, cash flows and financial condition. How this risk is managed NAM is working with the Dutch government and other stakeholders to fulfil its obligations to residents of the area. These include compensating for damage caused by the earthquakes and paying to strengthen houses where this is required for safety considerations. Negotiations with the state are being conducted to determine how to manage the accelerated close-down. Specific remediations within the agreed scope of responsibilities are planned. NAM’s joint-venture partners will review its financial robustness against different scenarios for Groningen’s liabilities and costs, with the aim of the venture being able to self-fund any additional expenses and claims. We are exposed to treasury and trading risks, including liquidity risk, interest rate risk, foreign exchange risk and credit risk. We are affected by the global macroeconomic environment and the conditions of financial and commodity markets. Further information: See “Liquidity and capital resources” on page 38 and Note 20 to the “Consolidated Financial Statements” on pages 270-273. Risk description Our subsidiaries, joint arrangements and associates are subject to differing economic and financial market conditions around the world. Political or economic instability affects such markets. We use debt instruments, such as bonds and commercial paper, to raise significant amounts of capital. Should our access to debt markets become more difficult, the potential impact on our liquidity could have a material adverse effect on our operations. Our financing costs could also be affected by interest rate fluctuations or any credit rating deterioration. We are exposed to changes in currency values and to exchange controls as a result of our substantial international operations. Our reporting currency is the US dollar, although, to a material extent, we also hold assets and are exposed to liabilities in other currencies. While we undertake some foreign exchange hedging, we do not do so for all our activities. Even where hedging is in place, it may not function as expected. Commodity trading is an important component of our Upstream, Integrated Gas, Oil Products and Chemicals businesses. Processing, managing and monitoring many trading transactions across the world, some of them complex, exposes us to operational and market risks, including commodity price risks. We use derivative instruments such as futures and contracts for difference to hedge market risks. We do not hedge all our activities and even where hedging is in place, it may not function as expected. We are exposed to credit risk; our counterparties could fail or be unable to meet their payment and/or performance obligations under contractual arrangements. Although we do not have significant direct exposure to sovereign debt, it is possible that our partners and customers may have exposure which could impair their ability to meet their obligations. Our pension plans invest in government bonds, so they could be affected by a sovereign debt downgrade or other default. If any of the above risks materialise, they could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We use various financial instruments for managing exposure to foreign exchange and interest rate movements. Our treasury operations are highly centralised and seek to manage credit exposures associated with our substantial cash, foreign exchange and interest rate positions. Our portfolio of cash investments is diversified to avoid concentrating risk in any one instrument, country or counterparty. Other than in exceptional cases, the use of external derivative instruments is confined to specialist trading and central treasury organisations that have the appropriate skills, experience, supervision, control and reporting systems. We have credit risk policies in place which seek to ensure that products are sold to customers with appropriate creditworthiness. These policies include detailed credit analysis and monitoring of customers against counterparty credit limits. Where appropriate, netting arrangements, credit insurance, prepayments and collateral are used to manage credit risk. We maintain committed credit facilities. Management believes it has access to sufficient debt funding sources (capital markets) and to undrawn committed borrowing facilities to meet foreseeable requirements. In affecting commodity trades and derivative contracts, we operate within procedures and policies designed to ensure that market risks are managed within authorised limits and trading can only be performed by staff with the appropriate skills and experience. Senior Management regularly reviews mandated trading limits. A department that is independent from our traders monitors our market risk exposures daily, using value-at-risk techniques alongside other risk metrics as appropriate. Strategic Report
30 Shell Annual Report and Accounts 2021 OPERATIONAL RISKS continued Our future performance depends on the successful development and deployment of new technologies and new products. Further information: See “Shell Powering Progress” on page 10. Risk description Technology and innovation are essential to our efforts to help meet the world’s energy demands competitively. If we fail to effectively develop or deploy new technology and products and services, or fail to make full, effective use of our data in a timely and cost-effective manner, there could be a material adverse effect on the delivery of our strategy and our licence to operate. We operate in environments where advanced technologies are used. In developing new technologies and new products, unknown or unforeseeable technological failures or environmental and health effects could harm our reputation and licence to operate or expose us to litigation or sanctions. The associated costs of new technology are sometimes underestimated. Sometimes the development of new technology is subject to delays. If we are unable to develop the right technology and products in a timely and cost-effective manner, or if we develop technologies and products that harm the environment or people’s health, there could be a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed Shell’s technology organisation and the relevant business lines work together to determine the content, scope and budget for developing new technology that supports our activities. The new technology is developed to ensure portfolio alignment with Shell’s strategic ambitions and deployment commitments. A significant proportion of Shell’s technology contributes to our Renewables and Energy Solutions portfolio and our emissions reduction targets. We benefit from key relationships with leading academic research institutes and universities, and from working with start-ups. In our Shell GameChanger programme, we help companies to mature early-stage technologies. In our Shell Ventures scheme, we invest in and partner with start-ups and small and medium-sized enterprises that are in the early stages of developing new technologies. We have substantial pension commitments, the funding of which is subject to capital market risks and other factors. Further information: See “Liquidity and capital resources” on page 38. Risk description Liabilities associated with defined benefit pension plans are significant, and the cash funding requirement of such plans can also involve significant liabilities. They both depend on various assumptions. Volatility in capital markets or government policies could affect investment performance and interest rates, causing significant changes to the funding level of future liabilities. Changes in assumptions for mortality, retirement age or pensionable remuneration at retirement could also cause significant changes to the funding level of future liabilities. We operate a number of defined benefit pension plans and, in case of a shortfall, we could be required to make substantial cash contributions (depending on the applicable local regulations). This could result in a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed A pensions forum chaired by the Chief Financial Officer oversees Shell’s input to pension strategy, policy and operation. A risk committee supports the forum in reviewing the results of assurance processes with respect to pension risks. Local trustees manage the funded defined benefit pension plans, and the contributions paid are based on independent actuarial valuations that align with local regulations. We mainly self-insure our hazard risk exposures. Consequently, we could incur significant financial losses from different types of risks that are not insured with third-party insurers. Further information: See “Corporate” on page 74. Risk description Our Group insurance companies (wholly owned subsidiaries) provide insurance coverage to Shell subsidiaries and entities in which Shell has an interest. These subsidiaries and entities may also insure a portion of their risk exposures with third parties, but such external insurance would not provide any material coverage in the event of a large-scale safety or environmental incident. Accordingly, in the event of a material incident, we would have to meet our obligations without access to material proceeds from third-party insurers. We have incurred adverse impacts from events, such as Hurricane Ida in 2021. We may, in the future, incur significant losses from different types of hazard risks that are not insured with third-party insurers, potentially resulting in a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We continually assess the safety performance of our operations and make risk mitigation recommendations, where relevant, to keep the risk of an accident as low as possible. Our insurance subsidiaries are adequately capitalised and they may transfer risks to third-party insurers where economical, effective and relevant. Many of our major projects and operations are conducted in joint arrangements or with associates. This could reduce our degree of control and our ability to identify and manage risks. Further information: See “Other Regulatory and Statutory Information” on page 203. Risk description When we are not the operator, we have less influence and control over the behaviour, performance and operating costs of joint arrangements or associates. Despite having less control, we could still be exposed to the risks associated with these operations, including reputational, litigation (where joint and several liability could apply) and government sanction risks. For example, our partners or members of a joint arrangement or an associate, (particularly local partners in developing countries), may be unable to meet their financial or other obligations to projects, threatening the viability of a given project. Where we are the operator of a joint arrangement, the other partner(s) could still be able to veto or block certain decisions, which could be to our overall detriment. Accordingly, where we have limited influence, we are exposed to operational risks that could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed For every major project where we share control, Shell appoints a Joint Venture Asset Manager, whose responsibility is to manage performance and create and protect value for Shell. The Joint Venture Asset Manager seeks to influence operators and other partners to adapt their practices in order to drive value appropriately and to mitigate identified risks. An annual assurance review assesses how the joint venture’s standards and processes align with those of Shell. The Joint Venture Asset Manager follows up on any gaps identified. RISK FACTORS continued Strategic Report
31Shell Annual Report and Accounts 2021 CONDUCT AND CULTURE RISKS We are exposed to conduct risk in our trading operations. Further information: See “Other Regulatory and Statutory Information” on page 202 and Note 20 to the “Consolidated Financial Statements” on pages 270-273. Risk description Commodity trading is an important component of our Upstream, Integrated Gas, Renewables & Energy Solutions, Oil Products and Chemicals businesses. Our commodity trading entities are subject to many regulations including requirements for standards of conduct. The risk of ineffective controls, poor oversight of trading activities, and the risk that traders could deliberately operate outside compliance limits and controls, either individually or as a group, has occurred. This has resulted in losses in the past and may result in further losses in the future. This could have material adverse effects on our earnings, cash flows and financial condition. How this risk is managed We maintain a trading compliance function managed by a regulated Chief Compliance Officer with adequate resources, a comprehensive governance structure, including mitigating controls (both automated and non-automated), and established reporting lines. Staff receive clear guidance through the organisation’s Trading Compliance Manual, a specific compliance website, training modules where completion is monitored, and additional quarterly training sessions. Shell leaders frequently reinforce the importance of managing compliance and conduct risk in the trading organisation. In response to the COVID-19 pandemic, we issued guidance on maintaining compliance and conduct standards and upgraded our trader monitoring tools. Violations of antitrust and competition laws carry fines and expose us and/or our employees to criminal sanctions and civil suits. Further information: See “Other Regulatory and Statutory Information” on page 202. Risk description Antitrust and competition laws apply to Shell and its joint arrangements and associates in the vast majority of countries where we do business. Shell and its joint arrangements and associates have been fined for violations of antitrust and competition laws in the past. This includes a number of fines by the European Commission Directorate-General for Competition (DG COMP). Because of DG COMP’s fining guidelines, any future conviction of Shell or any of its joint arrangements or associates for violation of EU competition law could potentially result in significantly larger fines and have a material adverse effect on us. Violation of antitrust laws is a criminal offence in many countries, and individuals can be imprisoned or fined. In certain circumstances, directors may receive director disqualification orders. It is also now common for persons or corporations allegedly injured by antitrust violations to sue for damages. Any violation of these laws can harm our reputation and could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We maintain an antitrust programme with adequate resources, a comprehensive governance structure and established reporting lines. Staff receive clear guidance that includes requirements in Shell’s Ethics and Compliance Manual, an antitrust-specific website, training modules where completion is monitored and regular messages from Shell leaders on the importance of managing antitrust risks. Staff must understand and comply with the Protect Shell Policy, which explains Shell’s position on managing antitrust risks in engagements with parties external to Shell. In response to the COVID-19 pandemic, we issued guidance to address antitrust risks arising from the disruption to supply chains, including procurement guidance which outlines the risks associated with exchanging information and collaborating with Shell’s procurement competitors. Violations of anti-bribery, tax-evasion and anti-money laundering laws carry fines and expose us and/or our employees to criminal sanctions and civil suits. Further information: See “Our people” on page 118, “Other Regulatory and Statutory Information” on page 202 and Note 26 to the “Consolidated Financial Statements” on pages 278-279. Risk description Anti-bribery, tax-evasion and anti-money laundering laws apply to Shell, its joint arrangements and associates in all countries where we do business. Shell and its joint arrangements and associates have in the past settled with the US Securities and Exchange Commission regarding violations of the US Foreign Corrupt Practices Act. Any violation of anti-bribery, tax-evasion or anti-money laundering laws, including potential violations associated with Shell Nigeria Exploration and Production Company Limited’s investment in Nigerian oil block OPL 245 and the 2011 settlement of litigation pertaining to that block, could harm our reputation or have a material adverse effect on our earnings, cash flows and financial condition. Violations of such laws also could expose us and/or our employees to criminal sanctions, civil suits and other consequences, such as debarment and the revocation of licences. How this risk is managed We maintain an anti-bribery, anti-tax evasion and anti-money laundering (ABC/AML) programme with adequate resources, a comprehensive governance structure and established reporting lines. Staff receive clear guidance, which includes requirements in Shell’s Ethics and Compliance Manual, an ABC/AML-specific website, training modules where completion is monitored and regular messages from Shell leaders on the importance of managing ABC/AML risks. As regards OPL 245, we have always maintained that the 2011 settlement was fully legal and on March 17, 2021, the court in Milan, Italy, acquitted Shell and its former employees of all charges on the grounds that there was no case to answer. In response to the COVID-19 pandemic, we set up fast-track processes to deal with relief donation requests. These processes include counterparty due diligence and are supported by Shell’s Ethics and Compliance Office. Strategic Report
32 Shell Annual Report and Accounts 2021 CONDUCT AND CULTURE RISKS continued Violations of data protection laws carry fines and expose us and/or our employees to criminal sanctions and civil suits. Further information: See “Other Regulatory and Statutory Information” on page 202. Risk description Data protection laws apply to Shell and its joint arrangements and associates in the vast majority of countries where we do business. Since many countries in which we operate have data protection laws and regulations, Shell has adopted Binding Corporate Rules. This means we apply one consistent standard to data protection, across the Group and globally. The EU General Data Protection Regulation (GDPR) forms the basis of our Binding Corporate Rules. With data privacy legislation now in force in the USA, the risk of class actions is increased. Class actions after large-scale data breaches are increasingly common. Shell companies are increasingly processing large volumes of personal data as we continue to acquire small companies with relatively large amounts of customer data during the energy transition. The COVID-19 pandemic has increased the level of processing of sensitive personal data, for example to confirm the health or vaccination status of our employees and visitors. Some governments require immediate disclosure of information, including sensitive personal data. We must be able to update our guidance to employees quickly, so it includes the relevant points of country legislation on COVID-19. In some countries that are key to Shell’s business operations, such as China, relevant legislation continues to be amended or introduced. Shell must be able to adapt dynamically to such legislative changes and be capable of updating our internal programmes if necessary. Many countries require mandatory notification of data breaches in certain situations. In these circumstances we might be required to report to affected individuals and regulators in the relevant countries. Non-compliance with data protection laws could harm individuals and expose us to regulatory investigations. This could result in: fines, which could be up to 4% of global annual turnover if under GDPR; orders to stop processing certain data; harm to our reputation; and loss of the trust of existing and potential customers, stakeholders, governments, and employees. With regard to data breaches, we notified a number of data privacy regulators in 2021 of personal data breaches, and some investigations are still ongoing. To date, no material fines have been imposed, but no assurance can be provided that future breaches would have similar outcomes. In addition to imposing fines, regulators may also issue orders to stop processing personal data, which could disrupt operations. We could also be subject to litigation from persons or entities allegedly affected by data protection violations. Violation of data protection laws is a criminal offence in some countries, and individuals can be imprisoned or fined. Any violation of these laws or harm to our reputation could have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We maintain a Group-wide data privacy programme, a comprehensive governance structure and established reporting lines. Shell has had Binding Corporate Rules in place for the last 10 years to ensure consistent levels of data protection across the Group. Staff receive clear guidance which includes requirements in Shell’s Ethics and Compliance Manual, a website focusing on data privacy, training modules where completion is monitored, and regular messages from Shell leaders on the importance of managing data privacy risks. We monitor new and imminent data privacy legislation and ensure we have a robust impact assessment process aligned with the relevant businesses. We design operations and processes with privacy requirements and build controls into our processes and practices which involve the handling of personal data. Recognising legal developments, not only in data privacy but also in electronic communications and advertising, we have developed pragmatic guidance on direct and indirect marketing. We have and continue to update a Group-wide incident management process designed to immediately identify and remediate data breaches. The process also helps us to comply with country-level requirements for reporting breaches. We continue to address challenges with compliance in data-heavy companies controlled by Shell but not yet fully integrated into our systems. There is a requirement for newly acquired companies to become compliant with our Binding Corporate Rules within three years of acquisition and there is currently a multi-year programme under way to achieve compliance. IT remediation work remains a priority in such companies, as does the strengthening of programmes to support data privacy compliance. To respond to the increased risk resulting from the pandemic, we updated our guidance on privacy best practices for COVID-19. RISK FACTORS continued Strategic Report
33Shell Annual Report and Accounts 2021 Investors should also consider the following, which could limit shareholder remedies. CONDUCT AND CULTURE RISKS continued Violations of trade compliance laws and regulations, including sanctions, carry fines and expose us and our employees to criminal proceedings and civil suits. Further information: See “Other Regulatory and Statutory Information” on page 202. Risk description We use “trade compliance” as an umbrella term for various national and international laws designed to regulate the movement of items across national boundaries and restrict or prohibit trade and other dealings with certain parties. For example, the EU and the USA continue to impose comprehensive sanctions on countries and territories such as Syria, North Korea and Crimea, and continue to adopt targeted restrictions and prohibitions on certain transactions in countries such as Venezuela and Russia. The USA continues to have comprehensive sanctions against Iran and Cuba. The EU and some nations continue to maintain targeted sanctions against Iran. The EU and the USA introduced sectoral sanctions against Venezuela in 2017, which the USA expanded in 2018 and 2019. The US sanctions primarily target the government of Venezuela and the oil industry. In 2014, the EU and the USA imposed additional restrictions and controls directed at defined oil and gas activities in Russia. These remain in force. The USA introduced further restrictions regarding Russia in 2017, expanding them in 2018. In February 2022, countries around the world began imposing additional sanctions and export controls against Russia over its invasion of Ukraine including, regional trade bans, designations of entities (including Russian banks and state-owned entities) and individuals as Specially Designated Nationals and Blocked Parties (SDNs), and restrictions on access by Russia to financial systems. Export controls have also been introduced targeting Russian defence, aerospace, and maritime sectors. More sanctions and export controls are expected. A number of countries have also implemented new sanctions against Belarus for its role in the Russian invasion. Many other nations are also adopting trade compliance programmes similar to those administered by the EU and the USA. Since January 2021, the UK has maintained a legal framework for trade compliance that is separate and distinct from those of the EU and USA. Abiding by all the laws and regulations on trade compliance and sanctions can sometimes be complex and challenging because of factors such as: the expansion of sanctions; the frequent addition of prohibited parties; the number of markets in which we operate; the risk of differences in how jurisdictions apply sanctions; and the large number of transactions we process. Shell has voluntarily self-disclosed potential violations of sanctions in the past. The COVID-19 pandemic has increased trade compliance risks, because of factors such as growing state involvement in business dealings, the need to maintain and develop business opportunities and cross-border movement of goods and technologies, and the increasing likelihood that counterparties will change ownership as the economic crisis continues. Any violation of sanctions could lead to loss of import or export privileges and significant penalties on or prosecution of Shell or its employees. This could harm our reputation and have a material adverse effect on our earnings, cash flows and financial condition. How this risk is managed We continue to develop and maintain a trade compliance programme with adequate resources, robust screening protocols, a comprehensive governance structure and established reporting lines. Staff receive clear guidance, which includes requirements in Shell’s Ethics and Compliance Manual, a specific website for trade compliance, training modules where completion is monitored and regular messages from Shell leaders on the importance of managing trade compliance risks. The effectiveness of the trade compliance programme is assessed annually (or more frequently if necessary) and we are continually seeking ways to improve. In response to the COVID-19 pandemic, we promote an increased focus on compliance and assurance. For example, in Trading and Supply we promote a particular focus on compliance with trade controls in high-risk areas such as port agency, inspections and terminal operations. OTHER (generally applicable to an investment in securities) The Company’s Articles of Association determine the jurisdiction for shareholder disputes. This could limit shareholder remedies. Risk description Our Articles of Association generally require that all disputes between our shareholders in such capacity and the Company or our subsidiaries (or our Directors or former Directors), or between the Company and our Directors or former Directors, be exclusively resolved by arbitration in The Hague, the Netherlands, under the Rules of Arbitration of the International Chamber of Commerce. Our Articles of Association also provide that, if this provision is to be determined invalid or unenforceable for any reason, the dispute could only be brought before the courts of England and Wales. Accordingly, the ability of shareholders to obtain monetary or other relief, including in respect of securities law claims, could be determined in accordance with these provisions. Strategic Report
34 Shell Annual Report and Accounts 2021 SUMMARY OF RESULTS Key statistics $ million, except where indicated 2021 2020 2019 Income/(loss) attributable to Shell plc shareholders 20,101 (21,680) 15,842 Income attributable to non-controlling interest 529 146 590 Income/(loss) for the period 20,630 (21,534) 16,432 Current cost of supplies adjustment (3,148) 1,833 (605) Total segment earnings [A][B], of which: 17,482 (19,701) 15,827 Integrated Gas 6,340 (6,278) 8,628 Upstream 9,694 (10,785) 3,855 Oil Products 2,664 (494) 6,139 Chemicals 1,390 808 478 Corporate (2,606) (2,952) (3,273) Identified Items [B] (2,216) (24,767) (1,192) Adjusted Earnings [B] 19,289 4,846 16,462 Adjusted EBITDA (CCS basis) [B] 55,004 36,533 56,644 Capital expenditure 19,000 16,585 22,971 Cash capital expenditure [B] 19,698 17,827 23,919 Operating expenses [B] 35,964 34,789 37,893 Underlying operating expenses [B] 35,309 32,502 37,000 Return on average capital employed [B] 8.8% (6.8)% 6.7% Net Debt at December 31 [C] 52,556 75,386 79,093 Gearing at December 31 [C] 23.1% 32.2% 29.3% Oil and gas production (thousand boe/d) 3,237 3,386 3,665 Proved oil and gas reserves at December 31 (million boe) 9,365 9,124 11,096 [A] Segment earnings are presented on a current cost of supplies basis. See Note 5 to the “Consolidated Financial Statements” on pages 245-248. [B] See “Non-GAAP measures reconciliations” on pages 326-329. [C] See Note 15 “Debt and lease arrangements” on page 257 and “Non-GAAP measures reconciliations” on pages 326-329. EARNINGS 2021-2020 Income attributable to Shell plc shareholders in 2021 was $20,101 million, compared with a loss of $21,680 million in 2020. With non-controlling interest included, income/(loss) in 2021 was $20,630 million, compared with a loss of $21,534 million in 2020. After current cost of supplies adjustment, total segment earnings in 2021 were $17,482 million, compared with a loss of $19,701 million in 2020. Earnings on a current cost of supplies basis (CCS earnings) exclude the effect of changes in the oil price on inventory carrying amounts, after making allowance for the tax effect. The purchase price of volumes sold in the period is based on the current cost of supplies during the same period, rather than on the historic cost calculated on a first-in, first-out (FIFO) basis. When oil prices are decreasing, CCS earnings are likely to be higher than earnings calculated on a FIFO basis and, when prices are increasing, CCS earnings are likely to be lower than earnings calculated on a FIFO basis. Integrated Gas earnings in 2021 were $6,340 million, compared with a loss of $6,278 million in 2020. The increase was mainly driven by lower impairment charges, higher realised prices for oil, LNG and gas, higher gains on sale of assets and favourable tax movements. This was partly offset by higher losses due to the fair value accounting of commodity derivatives and higher operating expenditure. See “Integrated Gas” on pages 45-49. Upstream earnings in 2021 were $9,694 million, compared with a loss of $10,785 million in 2020. The increase was mainly driven by higher realised oil and gas prices, lower impairment charges and favourable tax movements. This was partly offset by higher losses related to fair value accounting of commodity derivatives. See “Upstream” on pages 50-56. Oil Products earnings in 2021 were $2,664 million, compared with a loss of $494 million in 2020. The increase was mainly driven by lower impairment charges and higher marketing volumes and oil sands margins. This was partly offset by lower contributions from trading and optimisation, higher operating expenditure and unfavourable tax movements. See “Oil Products” on pages 65-70. Chemicals earnings in 2021 were $1,390 million, compared with $808 million in 2020. The increase was mainly driven by higher margins in base chemicals and intermediates as well as favourable tax movements. This was partly offset by higher impairment charges and operating expenditure. See “Chemicals” on pages 71-73. Corporate segment earnings in 2021 were an expense of $2,606 million, compared with $2,952 million in 2020. The lower expense was mainly driven by lower net interest expenses and favourable foreign exchange movements. See “Corporate” on page 74. Strategic Report
35Shell Annual Report and Accounts 2021 PRIOR YEAR EARNINGS SUMMARY Our earnings summary for the financial year ended December 31, 2020, compared with the financial year ended December 31, 2019, can be found in the Annual Report and Accounts (page 41) and Form 20-F (page 26) for the year ended December 31, 2020, as filed with the Registrar of Companies for England and Wales and the US Securities and Exchange Commission, respectively. PRODUCTION AVAILABLE FOR SALE Oil and gas production available for sale in 2021 was 3,237 thousand boe per day (boe/d), compared with 3,386 thousand boe/d in 2020. This net reduction was mainly driven by divestments, higher maintenance activities, net field declines and production-sharing contract effects. Oil and gas production available for sale [A] Thousand boe/d 2021 2020 2019 Crude oil and natural gas liquids 1,685 1,752 1,823 Synthetic crude oil 54 51 52 Natural gas [B] 1,498 1,583 1,790 Total 3,237 3,386 3,665 Of which: Integrated Gas 942 911 922 Upstream 2,240 2,424 2,691 Oil sands (part of Oil Products) 54 51 52 [A] See “Oil and gas information” on pages 57-64. [B] Natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel. PROVED RESERVES The proved oil and gas reserves of Shell subsidiaries and the Shell share of the proved oil and gas reserves of joint ventures and associates are summarised in “Oil and gas information” on pages 57-64 and set out in more detail in “Supplementary information – oil and gas (unaudited)” on pages 284-301. Before taking production into account, our proved reserves increased by 1,470 million boe in 2021. Total oil and gas production was 1,229 million boe. Accordingly, after taking production into account, our proved reserves increased by 241 million boe in 2021, to 9,365 million boe at December 31, 2021. CASH CAPITAL EXPENDITURE AND OTHER INFORMATION Cash capital expenditure was $19,698 million in 2021, compared with $17,827 million in 2020. Operating expenses were $35,964 million in 2021, compared with $34,789 million in 2020. Underlying operating expenses were $35,309 million compared with $32,502 million in 2020. Our return on average capital employed (ROACE) increased to 8.8%, compared with (6.8)% in 2020, mainly driven by higher earnings. Net debt was $52,556 million at the end of 2021, compared with $75,386 million at the end of 2020, mainly driven by cash flow generation. Gearing was 23.1% at the end of 2021, compared with 32.2% at the end of 2020, mainly driven by net debt reduction and higher earnings. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS See Note 2 to the “Consolidated Financial Statements” on pages 233-241. LEGAL PROCEEDINGS See Note 26 to the “Consolidated Financial Statements” on pages 277-279. Strategic Report
36 Shell Annual Report and Accounts 2021 PERFORMANCE INDICATORS These indicators enable management to evaluate Shell’s performance against our strategy and operating plans during the year. These are also used as part of the determination of Executive Directors’ remuneration. See “Directors’ Remuneration Report” on pages 166-170. Cash flow from operating activities ($ million) 45,104 2020: 34,105 Cash flow from operating activities is the total of all the 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”. This indicator reflects our ability to generate cash to service and reduce our debt and for distributions to shareholders and for investments. See “Liquidity and capital resources” on pages 38-41. Free cash flow ($ million) 40,343 2020: 20,828 Free cash flow is the sum of “Cash flow from operating activities” and “Cash flow from investing activities”, which are disclosed in the “Consolidated Statement of Cash Flows”. This indicator is used to evaluate the cash available for financing activities, including shareholder distributions and debt servicing, after investment in maintaining and growing our business. See “Non-GAAP measures reconciliations” on pages 326-329. Return on average capital employed (%) 8.8 2020: (6.8) ROACE is defined as income for the period, adjusted for after-tax interest expense, as a percentage of the average capital employed during the year. Capital employed is the sum of total equity and total debt. ROACE measures the efficiency of our utilisation of the capital that we employ and is a common measure of business performance. See “Summary of results” on pages 34-35 and “Non-GAAP measures reconciliations” on pages 326-329. Total shareholder return (%) 33.1 2020: (32.7) Total shareholder return (TSR) is the difference between the share price at the beginning of the year and the share price at the end of the year (each averaged over 90 days), plus gross dividends delivered during the calendar year (reinvested quarterly), expressed as a percentage of the share price at the beginning of the year (averaged over 90 days). The data used are a weighted average in dollars for A and B shares. The TSRs of major publicly traded oil and gas companies can be compared directly, providing a way to determine how we are performing relative to our industry peers. FINANCIAL DELIVERY OPERATIONAL EXCELLENCE Upstream controllable availability (%) 87.8 2020: 89.2 Upstream controllable availability performance reflects our ability to optimally run our Upstream assets. Reliability issues, turnarounds and maintenance at own-operated or third-party facilities all impact controllable availability, but it excludes the impact of extreme unexpected events that are outside our control such as government restrictions and hurricanes. Midstream availability (%) 87.3 2020: 92.3 Midstream availability shows to what extent liquefied natural gas (LNG) assets are ready to process product as a comparison with capacity, considering the impact of planned and unplanned maintenance. Refinery and chemical plant availability (%) 95.6 2020: 95.5 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, adjusted for cash and non-current liabilities. This indicator is a measure of the operational excellence of our refinery and chemical plant facilities. Project delivery on schedule (%) 87.0 2020: 48.0 Project delivery on budget (%) 104.0 2020: 103.9 Project delivery reflects our capability to complete major projects on time and within budget on the basis of the targets set in our annual business plan. Project delivery on schedule measures the percentage of projects delivered on schedule. Project delivery on budget reflects the aggregate cost against the aggregate budget for those projects, where a figure greater than 100% means over budget. Strategic Report
37Shell Annual Report and Accounts 2021 Upstream and Integrated Gas greenhouse gas (GHG) intensity (tonnes of CO₂ equivalent/tonne of hydrocarbon production available for sale) 0.172 2020: 0.16 Upstream/midstream GHG intensity is a measure of GHG emissions (direct and indirect GHG emissions associated with imported energy, excluding emissions from exported energy), expressed in metric tonnes of CO₂ equivalent emitted into the atmosphere per metric tonne of hydrocarbon production available for sale. See “Climate change and energy transition” on pages 75-98. Refining GHG intensity (tonnes of CO₂ equivalent/UEDC™) 1.05 2020: 1.05 Refining GHG intensity is a measure of GHG emissions (direct and indirect GHG emissions associated with imported energy, excluding emissions from exported energy), expressed in metric tonnes of CO₂ equivalent emitted into the atmosphere per unit of Utilised Equivalent Distillation Capacity (UEDC™). UEDC™ is a proprietary metric of Solomon Associates. It is a complexity- weighted normalisation parameter that reflects the operating cost intensity of a refinery based on the size and configuration of its particular mix of process and non-process facilities. See “Climate change and energy transition” on pages 75-98. Chemicals GHG intensity (tonnes of CO₂ equivalent/ tonne petrochemicals produced) 0.95 2020: 0.98 Chemicals GHG intensity is a measure of GHG emissions (direct and indirect GHG emissions associated with imported energy, excluding emissions from exported energy), expressed in metric tonnes of CO₂ equivalent emitted into the atmosphere per metric tonne of steam cracker, high-value petrochemicals production. See “Climate change and energy transition” on pages 75-98. GHG abatements (thousand tonnes of CO₂ equivalent) 279 2020: N/A This is the total mass of GHG emissions reduced by interventions that lead to sustained drops in emissions. By sustained drops, we mean that each intervention ensured emissions were lower for the given year, and there was a reasonable expectation that emissions would continue to be lower because of the intervention, all things being equal. This is a new metric for 2021. See “Climate change and energy transition” on pages 75-98. PROGRESS IN ENERGY TRANSITION SAFETY Serious injury and fatality frequency (cases per 100 million working hours) 6.9 2020: 6.0 Serious Injury and Fatality (SIF) is defined as a serious work-related injury or illness that resulted in fatality or a life-altering event, which is defined as a long-term or permanent injury or illness with significant impact on daily activities. See “Environment and society” on pages 99-113. Number of operational Tier 1 and 2 process safety events 102 2020: 103 A Tier 1 process safety event is an unplanned or uncontrolled release of any material, including non-toxic and non-flammable materials, from a process with the greatest actual consequence resulting in harm to employees, contract staff, or a neighbouring community, damage to equipment, or exceeding a threshold quantity, as defined by the API Recommended Practice 754 and IOGP Standard 456. A Tier 2 process safety event is a release of lesser consequence. See “Environment and society” on pages 99-113. Strategic Report
38 Shell Annual Report and Accounts 2021 LIQUIDITY AND CAPITAL RESOURCES We manage our businesses to deliver strong cash flows to fund investment for profitable growth. Management’s priorities for applying Shell’s cash are base capital expenditure to sustain our strategy, progressive dividend growth of around 4% annually, AA credit metrics through the cycle, and additional shareholder distributions (20-30% of cash flow from operations). The fourth priority is disciplined and measured capital expenditure growth and continued balance sheet strengthening. FINANCIAL CONDITION AND LIQUIDITY Shell generated cash flow from operations of $45.1 billion, including a negative impact from working capital of $10.4 billion, and free cash flow of $40.3 billion in 2021, aided by the improving global macro environment and divestments. (For more information on free cash flow see “Non-GAAP measures reconciliations” on pages 326-329.) Net debt decreased to $52.6 billion at December 31, 2021, (December 31, 2020: $75.4 billion). Gearing fell to 23.1% at December 31, 2021, compared with 32.2% at December 31, 2020, as increases in equity and cash flow generation reduced net debt. Note 15 to the “Consolidated Financial Statements” on page 257 provides information on our debt arrangements, including net debt and gearing definitions. LIQUIDITY We satisfy our funding and working capital requirements from the cash generated from our operations, the issuance of debt and divestments. In 2021, access to the international debt capital markets remained strong, with our debt principally financed from these markets through central debt programmes consisting of: ■ a $10 billion global commercial paper (CP) programme, with maturities not exceeding 270 days; ■ a $10 billion US CP programme, with maturities not exceeding 397 days; ■ an unlimited Euro medium-term note (EMTN) programme (also referred to as the Multi-Currency Debt Securities Programme); and ■ an unlimited US universal shelf (US shelf) registration. All these CP, EMTN and US shelf issuances are issued by Shell International Finance B.V., the issuance company for Shell, with its debt being guaranteed by Shell plc (the Company). We also maintain committed credit facilities. The core facilities were extended in December 2021. Of the $10 billion total facility, $0.08 billion matured in 2021, $1.92 billion matures in 2022, $0.32 billion in 2025 and $7.68 billion in 2026. This remained fully undrawn at December 31, 2021. These core facilities and internally available liquidity provide back-up coverage for our CP programmes. In April 2020, to increase liquidity amid COVID-19-related uncertainties, Shell entered into a dual-currency $7.2 billion and €4.4 billion one-year revolving credit facility, with two six-month extension options at our discretion. This facility remained undrawn and expired at the end of the first year in April 2021. Other than certain borrowing by local subsidiaries, we do not have any other committed credit facilities. Our total debt decreased by $18.9 billion to $89.1 billion at December 31, 2021. The total debt excluding leases matures as follows: 7% in 2022; 6% in 2023; 7% in 2024; 10% in 2025; and 69% in 2026 and beyond. The portion of debt maturing in 2022 is expected to be repaid from a combination of cash balances, cash generated from operations, divestments and the issuance of new debt. In 2021, we issued $1.5 billion of bonds under our US shelf registration. All CP outstanding was repaid within the year with no additional issuance. Additionally in 2021, we redeemed $4.5 billion of USD bonds, bringing forward maturities of certain bonds maturing before the end of 2025. We believe our working capital is sufficient for current requirements. While our subsidiaries are subject to restrictions, such as foreign withholding taxes on the transfer of funds in the form of cash dividends, loans or advances, such restrictions are not expected to have a material impact on our ability to meet our cash obligations. MARKET RISK AND CREDIT RISK We are affected by the global macroeconomic environment as well as financial and commodity market conditions. This exposes us to treasury and trading risks, including liquidity risk, market risk (interest rate risk, foreign exchange risk and commodity price risk) and credit risk. See “Risk factors” on pages 29 and Note 20 to the “Consolidated Financial Statements” on pages 268-273. The size and scope of our businesses require a robust financial control framework and effective management of our various risk exposures. We use various financial instruments for managing exposure to commodity price, foreign exchange and interest rate movements. Our treasury and trading operations are highly centralised and seek to manage credit exposures associated with our substantial cash, commodity, foreign exchange and interest rate positions. Our portfolio of cash investments is diversified to avoid concentrating risk in any one instrument, country or counterparty. The use of external derivative instruments is confined to specialist trading and central treasury organisations that have appropriate skills, experience, supervision, control and reporting systems. Credit risk policies are in place to ensure that sales of products are made to customers with appropriate creditworthiness, and include credit analysis and monitoring of customers against counterparty credit limits. Where appropriate, netting arrangements, credit insurance, prepayments and collateral are used to manage credit risk. Management believes it has access to sufficient debt funding sources (capital markets) and to undrawn committed borrowing facilities to meet foreseeable requirements. PENSION COMMITMENTS We have substantial pension commitments, the funding of which is subject to capital market risks (see “Risk factors” on page 30). We address key pension risks in a number of ways. Principal among these is the Pensions Forum, chaired by the Chief Financial Officer, which oversees Shell’s input to pension strategy, policy and operation. A risk committee supports the forum in reviewing the results of assurance processes in respect of pensions risks. In general, local trustees manage the funded defined benefit pension plans, with contributions paid based on independent actuarial valuations in accordance with local regulations. Our total employer contributions were $0.9 billion in 2021 and are estimated to be $0.9 billion in 2022. See Note 18 to the “Consolidated Financial Statements” on pages 261-266. Capitalisation table $ million December 31, 2021 December 31, 2020 Equity attributable to Shell plc shareholders 171,966 155,310 Current debt 8,218 16,899 Non-current debt 80,868 91,115 Total debt [A] 89,086 108,014 Total capitalisation 261,052 263,324 [A] Of total debt, $61.5 billion (2020: $79.4 billion) was unsecured and $27.6 billion (2020: $28.6 billion) was secured. See Note 15 to the “Consolidated Financial Statements” on pages 256-258 for further disclosure on debt. Strategic Report
39Shell Annual Report and Accounts 2021 STATEMENT OF CASH FLOWS Cash flow from operating activities in 2021 was an inflow of $45.1 billion, compared with $34.1 billion in 2020, mainly due to higher earnings, partly offset by unfavourable working capital movements of $10.4 billion (compared with favourable working capital movements of $4.6 billion in 2020). The decrease in cash flow from operating activities in 2020, compared with $42.2 billion in 2019, was mainly due to lower earnings. Cash flow from investing activities in 2021 was an outflow of $4.8 billion, compared with an outflow of $13.3 billion in 2020. The decreased cash outflow was mainly due to higher proceeds from sale of property, plant and equipment in 2021, including the divestment of our Permian business in the USA. The decreased cash outflow in 2020 compared with $15.8 billion in 2019 was mainly due to lower capital expenditure in 2020. Cash flow from financing activities in 2021 was an outflow of $34.6 billion, compared with outflows of $7.2 billion in 2020 and $35.2 billion in 2019, due to net repayment of debt of $19.7 billion (2020: $5.6 billion net issuance; 2019: $3.4 billion net repayment), and higher repurchases of shares of $2.9 billion (2020: $1.7 billion; 2019: $10.2 billion). Cash and cash equivalents were $37.0 billion at December 31, 2021 (December 31, 2020: $31.8 billion; December 31, 2019: $18.1 billion). CASH FLOW FROM OPERATING ACTIVITIES The most significant factors affecting our cash flow from operating activities are earnings, which are mainly impacted by: realised prices for crude oil, natural gas and LNG, production levels of crude oil, natural gas and LNG, chemicals, refining and marketing margins; and movements in working capital. The impact on earnings from changes in market prices depends 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 state-owned oil and gas companies that have limited sensitivity to crude oil and natural gas prices; tax impacts; and the extent to which changes in commodity prices flow through into operating expenses. Changes in benchmark prices of crude oil and natural gas in any particular period provide only a broad indicator of changes in our Integrated Gas and Upstream earnings in that period. Changes in any one of a range of factors, derived from either within the industry or the broader economic environment, can influence refining and marketing margins. The precise impact of any such changes depends on how the oil markets respond to them. The market response is affected by factors such as: whether the change affects all crude oil types or only a specific grade; regional and global crude oil and refined products inventories; and the collective speed of response of refiners and product marketers in adjusting their operations. As a result, margins fluctuate from region to region and from period to period. Cash flow information [A] $ billion 2021 2020 2019 Cash flow from operating activities excluding working capital movements Integrated Gas 18.3 10.8 14.8 Upstream 22.6 9.8 19.9 Oil Products 12.0 7.0 10.7 Chemicals 3.3 1.8 1.7 Corporate (0.7) 0.1 (0.3) Total 55.5 29.5 47.0 (Increase)/decrease in inventories (7.3) 4.5 (2.6) (Increase)/decrease in current receivables (20.6) 9.6 (0.9) Increase/(decrease) in current payables 17.5 (9.5) (1.2) (Increase)/decrease in working capital (10.4) 4.6 (4.8) Cash flow from operating activities 45.1 34.1 42.2 Cash flow from investing activities (4.8) (13.3) (15.8) Cash flow from financing activities (34.7) (7.2) (35.2) Currency translation differences relating to cash and cash equivalents (0.5) 0.2 0.1 Increase/(decrease) in cash and cash equivalents 5.1 13.8 (8.7) Cash and cash equivalents at the beginning of the year 31.8 18.1 26.7 Cash and cash equivalents at the end of the year 37.0 31.8 18.1 [A] See the Consolidated Statement of Cash Flows on page 232. Strategic Report
40 Shell Annual Report and Accounts 2021 DIVESTMENT AND CASH CAPITAL EXPENDITURE The levels of divestment proceeds and cash capital expenditure in 2021 and 2020 reflect our discipline and focus on the Powering Progress strategy. See “Non-GAAP measures reconciliations” on page 326-329. Divestment proceeds $ million 2021 2020 2019 Integrated Gas 3,195 503 723 Upstream 10,930 1,909 5,384 Oil Products 935 1,368 1,517 Chemicals 10 26 22 Corporate 44 205 225 Total divestment proceeds 15,113 4,010 7,871 Cash capital expenditure is used to monitor investing activities on a cash basis, excluding items such as lease additions which do not necessarily result in cash outflows in the period. Cash capital expenditure $ million 2021 2020 2019 Integrated Gas 5,767 4,301 4,299 Upstream 6,269 7,296 10,205 Oil Products 3,868 3,328 4,907 Chemicals 3,573 2,640 4,090 Corporate 221 262 418 Total cash capital expenditure 19,698 17,827 23,919 CONTRACTUAL OBLIGATIONS The table below summarises our principal contractual obligations at December 31, 2021, by expected settlement period. The amounts presented have not been offset by any committed third-party revenue in relation to these obligations. Contractual obligations $ billion Less than 1 year Between 1 and 3 years Between 3 and 5 years 5 years and later Total Debt [A] 4.1 8.2 10.3 38.4 61.0 Leases 5.8 9.1 6.8 18.3 40.0 Purchase obligations [B] 28.8 29.2 21.9 64.1 144.0 Other long-term contractual liabilities [C] 0.4 0.7 0.2 1.1 2.4 Total 39.1 47.2 39.2 121.9 247.4 [A] See Note 15 to the “Consolidated Financial Statements” on pages 256-258. Debt contractual obligations exclude interest, which is estimated to be $1.6 billion payable in less than one year, $3.1 billion between one and three years, $2.7 billion between three and five years, and $15.6 billion in five years and later. For this purpose, we assume that interest rates with respect to variable interest rate debt remain constant at the rates in effect at December 31, 2021, and that there is no change in the aggregate principal amount of debt other than repayment at scheduled maturity as reflected in the table. Leases definition follows IFRS 16, which was implemented as of January 1, 2019. Lease contractual obligations include interest. [B] Purchase obligations disclosed in the above table exclude commodity purchase obligations that are not fixed or determinable and are principally intended to be resold in a short period of time through sale agreements with third parties. Examples include long-term non-cancellable LNG and natural gas purchase commitments and commitments to purchase refined products or crude oil at market prices. Inclusion of such commitments would not be meaningful in measuring liquidity and cash flow, as the cash outflows generated by these purchases will generally be offset in the same periods by cash received from the related sales transactions. [C] Includes all obligations included in “Trade and other payables” and provisions related to onerous contracts included in “Decommissioning and other provisions” in “Non-current liabilities” in 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” on pages 261-266) and obligations associated with decommissioning and restoration (see Note 19 to the “Consolidated Financial Statements” on page 267). GUARANTEES AND OTHER OFF-BALANCE SHEET ARRANGEMENTS There were no guarantees and other off-balance sheet arrangements at December 31, 2021, or December 31, 2020, that were reasonably likely to have a material effect on Shell. DIVIDENDS Subject to Board approval, Shell aims to grow the dividend per share by around 4% every year. In total, Shell targets the distribution of 20-30% of its cash flow from operations to shareholders. Shell may choose to return cash to shareholders through a combination of dividends and share buybacks. When setting the level of shareholder remuneration, the Board looks at a range of factors, including the macro environment, the underlying business earnings and cash flows of Shell Group, the current balance sheet, future investment and divestment plans and existing commitments. We returned $6.3 billion to our shareholders through dividends in 2021. The fourth quarter 2021 interim dividend of $0.24 per share will be payable to shareholders on the register at February 18, 2022. See Note 24 to the “Consolidated Financial Statements” on page 277. The Board expects that the first quarter 2022 interim dividend will increase by around 4% compared with the fourth quarter 2021 interim dividend, to $0.25 per share. PURCHASES OF SECURITIES On July 29, 2021, the Company announced the start of a share buyback programme of $2 billion, which was completed in November 2021. Subsequently, on December 1, 2021, the Company announced the first $1.5 billion tranche of a buyback programme to return $7 billion of proceeds from the divestment of its Permian assets. This tranche was completed in January 2022. In February 2022, share buybacks of $8.5 billion for the first half of 2022 were announced. These included the remaining $5.5 billion of the Permian divestment proceeds that had been allocated for share buybacks. LIQUIDITY AND CAPITAL RESOURCES continued Strategic Report
41Shell Annual Report and Accounts 2021 At December 31, 2021, 126 million B shares with a nominal value of €8.8 million ($10 million) (1.62% of the Company’s total issued share capital at December 31, 2020) were purchased and cancelled during 2021 for a total cost of $2.7 billion including expenses, at an average price of $21.60 per share. This was in accordance with the authorities granted by shareholders at the 2021 Annual General Meeting (AGM) for the Company to repurchase up to a maximum of 10% of its issued ordinary shares, excluding treasury shares (780 million ordinary shares). As at December 31, 2021, 653 million ordinary shares could still be repurchased under the current AGM authority. The purpose of the share repurchases in 2021 was to reduce the issued share capital of the Company. A new resolution will be proposed at the 2022 AGM to renew the authority for the Company to purchase its own share capital, up to specified limits, for a further year. This proposal will be described in more detail in the 2022 Notice of Annual General Meeting. Shares are also purchased by the employee share ownership trusts and trust-like entities (see the “Other regulatory and statutory information” on page 198-206) to meet delivery commitments under employee share plans. All share purchases are made in open-market transactions. The table below provides information on purchases of shares in 2021 by the Company and affiliated purchasers. Purchases in euros and sterling are converted into dollars using the exchange rate on each transaction date. Purchases of equity securities by issuer and affiliated purchasers in 2021 [A] A shares B shares A ADSs [B] Purchase period Number purchased for employee share plans Number purchased for cancellation [C] Weighted average price ($)[D] Number purchased for employee share plans Number purchased for cancellation [C] Weighted average price ($)[D] Number purchased for employee share plans Weighted average price ($)[D] January — — — — — — 1,525,265 37.23 February — — — — — — — — March — — — — — — 34,140 40.17 April — — — — — — — — May — — — — — — — — June 156,668 — 20.61 91,523 — 19.70 23,603 40.74 July — — — — 1,474,422 19.95 — — August — — — — 25,134,113 19.81 — — September — — — — 23,807,741 20.27 32,670 41.01 October — — — — 25,200,000 23.82 — — November 960,000 — 20.93 120,000 17,217,286 22.6 233,300 41.88 December 7,185,000 — 22.03 911,200 33,393,418 21.75 975,299 43.66 Total 2021 8,301,668 — 21.88 1,122,723 126,226,980 21.59 2,824,277 39.94 January — — — — 31,678,192 24.43 1,106,045 46.31 Total 2022 — — — — 31,678,192 24.43 1,106,045 46.31 [A] Reported as at settlement date. [B] American Depositary Shares. [C] Under the share buyback programme. [D] Includes stamp duty and brokers’ commission. FINANCIAL INFORMATION RELATING TO THE ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST The results of operations and financial position of the Royal Dutch Shell Dividend Access Trust (the Trust) are included in the consolidated results of operations and financial position of Shell. Certain condensed financial information in respect of the Trust is given below. See “Royal Dutch Shell Dividend Access Trust Financial Statements” on pages 316-319. The Shell Transport and Trading Company Limited and BG Group Limited have each issued a dividend access share to Computershare Trustees (Jersey) Limited (the Trustee). For the years 2021, 2020 and 2019, the Trust recorded income before tax of £2,201 million, £2,777 million and £5,484 million respectively. In each period, this reflected the amount of dividends payable on the dividend access shares. Dividends are also classified as unclaimed where amounts have not cleared recipient bank accounts. At December 31, 2021, the Trust had total equity of £nil (December 31, 2020: £nil; December 31, 2019: £nil), reflecting assets of £7 million (December 31, 2020: £7 million; December 31, 2019: £3 million) and unclaimed dividends of £7 million (December 31, 2020: £7 million; December 31, 2019: £3 million). The Trust only records a liability for an unclaimed dividend, to the extent that dividend cheque payments have not been presented within 12 months, have expired or have been returned unpresented. On January 29, 2022, one line of shares was established through assimilation of each A share and each B share into one ordinary share of the Company. This assimilation had no impact on voting rights or dividend entitlements. Dutch withholding tax, applied previously on dividends on A shares, no longer applies on dividends paid on the ordinary shares following the assimilation. In relation to the assimilation of the Company’s Class A and B shares, the Trust will continue in existence for the foreseeable future to facilitate the payment of unclaimed dividend liabilities for B shareholders, until these are either claimed or forfeited in line with the terms outlined. Strategic Report
42 Shell Annual Report and Accounts 2021 MARKET OVERVIEW We maintain a large business portfolio across an integrated value chain and are exposed to crude oil, natural gas, hydrocarbon product and chemical prices (see “Risk factors” on page 22). This diversified portfolio helps us mitigate the impact of price volatility. Our annual planning cycle and periodic portfolio reviews aim to ensure that our levels of capital investment and operating expenses are appropriate in the context of a volatile price environment. We test the resilience of our projects and other opportunities against a range of crude oil, natural gas, oil product and chemical prices and costs. We also aim to maintain a strong balance sheet to provide resilience against weak market prices. GLOBAL ECONOMIC GROWTH After a sharp economic deceleration related to the COVID-19 pandemic in 2020, the global economy has experienced a strong but uneven recovery in 2021. In its World Economic Outlook of January 2022, the International Monetary Fund (IMF) estimates that global growth for 2021 has reached 5.9% – its strongest post-recession pace in 80 years. This recovery is uneven and largely reflects sharp rebounds in some major economies, most notably the USA and China, owing to substantial government policy support. In many emerging market and developing economies, inequalities in access to vaccines led to higher infection rates. This combined with a partial withdrawal of policy support have offset some of the benefits of strengthening external demand and rising commodity prices. Early policy support and vaccinations proved effective at mitigating some of the adverse economic and health impacts of COVID-19 during 2021. However, rising energy prices and supply disruptions have also resulted in broad-based inflation in the second half of 2021, notably in the USA and many emerging market and developing economies. The global economic prospects remain highly uncertain. The world remains vulnerable to COVID-19 and the pandemic is continuing, owing to unequal access to vaccines, the reluctance of some to get vaccinated and the emergence of more infectious new variants such as Omicron. Socioeconomic challenges abound, including rising inflation, subdued employment growth, supply chain problems, setbacks to educational attainment, and climate change. Confronted with such complex challenges, policy choice is difficult because a sharp increase in global debt levels during the pandemic has left limited room for manoeuvre. There is also an upside, because the pandemic has induced greater automation and workplace transformation, which could accelerate productivity growth. Structural investment plans implemented in Europe and the USA could also lift the growth outlook. GLOBAL PRICES, DEMAND AND SUPPLY The following table provides an overview of the main crude oil and natural gas price markers to which we are exposed: Oil and gas average industry prices [A] 2021 2020 2019 Brent ($/b) 71 42 64 West Texas Intermediate ($/b) 68 39 57 Henry Hub ($/MMBtu) 4.0 2.0 2.5 EU TTF ($/MMBtu) 16 3 5 Japan Customs-cleared Crude ($/b) – 3 months 60 51 70 [A] Yearly average prices are based on daily spot prices. The 2021 average price for Japan Customs-cleared Crude is based on available market information up to the end of the period. CRUDE OIL Brent crude oil, an international benchmark, rebounded in 2021, supported by stronger demand and moderate supply growth. Brent traded between $50 per barrel (/b) and $86/b in 2021, ending the year at around $77/b and averaging $71/b for the whole year. This was about 70% higher than in 2020. Global oil product demand rose by 5.6 million barrels per day (b/d) in 2021 to 97.4 million b/d, after a sharp drop of around 8.5 million b/d in 2020, according to the IEA. The rebound was supported by successful vaccine roll-outs, especially in developed economies such as the USA, UK and EU. Road mobility has largely returned to pre-pandemic levels, with COVID-19 travel restrictions being lifted and more people switching from public transport to cars. Air travel has begun to recover, but is still around 20-30% below pre-pandemic levels. This is probably attributable to remaining cross-border travel restrictions and public hesitancy about air travel during a global pandemic. Mirroring the broad economic recovery, demand for naphtha, LPG and ethane also picked up. Global oil production has started to rise gradually as demand recovers. Annual growth in 2021 was about 1.5 million b/d, with OPEC+ making up most of the growth. From the second quarter of 2021, OPEC+ has been gradually unwinding the production cuts it implemented in 2020, with full unwinding expected by the second half of 2022. Outside OPEC+, US light tight oil (LTO) has dominated the growth, supported by the rebounding oil price. The number of US rotary oil rigs increased by more than 160% by December 2021, from the record low seen in August 2020. This, though, remained only around 60% of the 2019 average. The OPEC+ production cuts have enabled a quick rundown of a record global oil inventory. The industry stock of Organisation for Economic Co-operation and Development (OECD) economies, which had reached more than 3,200 million barrels by the middle of 2020, fell to around 2,760 million barrels by the end of 2021, a seven-year low. The oil price largely followed an upward trend for most of the year. The Brent daily price passed the $70/b mark in June and $80/b in October. The strong price move reflected a tight market balance, resulting from modest supply growth and robust demand recovery. It also reflected the broad inflationary pricing environment for energy commodities such as coal and natural gas, in a period of economic recovery and supply chain challenges. The price rally was at times interrupted by restrictions introduced in response to new waves of COVID-19, especially those caused by the Delta variant in the summer and Omicron towards the end of the year. In the final few weeks of 2021, the Omicron variant triggered the sharpest sell-off since April 2020, with Brent retreating almost $10/b in a single day at the height of the sell-off. Brent started regaining its strength towards the end of December, as a severe Omicron-induced demand disruption failed to materialise and supply concerns once again prevailed. Strategic Report
43Shell Annual Report and Accounts 2021 Looking forward, demand uncertainties related to the COVID-19 pandemic remain a key uncertainty affecting the recovery of the global crude market. This is particularly so for aviation fuel which has been the most impacted by travel restrictions. But the extent of new COVID-related demand disruption could be moderated by booster programmes and the greater availability of more effective treatments for the virus. At the same time, there has been increasing evidence of supply side risks. Upstream investment worldwide has slowed considerably during the pandemic. As a result, OPEC’s excess capacity will be declining. Meanwhile, US light tight oil is expected to be facing continued capital discipline pressures, restraining its growth. These factors will constrain the global fast response supply capacity to manage demand and supply disruptions, which may lead to price upside and volatilities. NATURAL GAS Global demand for natural gas rose by an estimated 4.6% in 2021, after the COVID-19 pandemic caused consumption to decline by around 1.2% in 2020, according to the IEA. The 2021 rate represents a return to around the historical norms of growth for gas, and is roughly the same as the pre-pandemic growth rate of 2019. The revival of economic growth underpinned the industrial uptake of gas, especially in China. Underperformance of hydroelectric output in China and South America as well as weak renewables generation in Europe drove incremental power demand for gas. Colder-than-normal winters and hotter-than-usual summers also produced higher-than-expected demand for gas from commercial and residential users. Reduced supply from a number of sources led to shortages and record high prices for gas and LNG globally. LNG imports were up 6.0% in 2021 after only a minor increase in 2020. The global LNG supply complex experienced upstream production deficits in 2021. Nigeria, Trinidad and Tobago, Peru and Norway were down a combined 12 million tonnes, or 32%, from 2020. The addition of new liquefaction capacity was also limited in 2021, although utilisation of projects that started in 2020 improved, which provided some support for supply growth. European gas prices rose to unprecedented levels by the middle of 2021, with the average Dutch Title Transfer Facility (TTF) price more than five times that of 2020. The TTF price reached a peak of almost $60 per million British thermal units (MMBtu). TTF and European spot gas hub prices broke above oil parity by the third quarter and continued well above that level for the rest of the year. Prices were supported by an extended heating season that left gas storage at a deficit coming out of winter and prompted fears of scarcity as indigenous production slumped and pipeline and LNG imports were restrained. Record coal and carbon prices also contributed to the price surge. Asian spot LNG prices, as reflected by the Japan Korea Marker (JKM), responded to the tight European market conditions with bids at a premium to TTF for most of the year. This was in order to secure LNG supplies for China and South Korea, where demand was higher than expected. Average JKM prices ended the year up more than 300% from 2020 and up more than 200% from 2019. Long-term contracts indexed to oil prices tracked the wider crude complex upward during the year but did not increase at the same rate as spot gas and LNG prices. Strong Asian and European prices incentivised full US LNG export production. This helped strengthen Henry Hub cash prices to an average of $3.81 per MMBtu for 2021, up more than 90% year-on-year. After trading in a narrow range of around $3 per MMBtu for the first half of 2021, Henry Hub prices rose above $5 per MMBtu by the end of the third quarter. The upstream investment cuts of 2020 continued into 2021. Production did not keep pace with rebounding demand, heightened by a combined 34% increase in LNG and Mexico pipeline exports from a year ago. Looking ahead, we expect that the high gas prices in North America, Europe and Asia-Pacific will go down to more normal levels. This is because we anticipate that global gas inventories will eventually replenish as production recovers in response to the current elevated price levels. Price developments, though, are highly uncertain. We believe gas and LNG prices in Europe and Asia will be increasingly influenced by European gas storage levels and by competition with Asia for LNG imports, particularly flexible supply from the USA. Overall LNG supply is expected to recover and increase as new liquefaction capacity is added in the USA in 2022. But the global LNG market will remain structurally tight as a relatively small amount of incremental supply will come to market over the coming years. In the USA, Henry Hub prices are expected to moderate from 2021 as production increases in response to higher gas prices as well as oil prices (which support associated gas production in the Permian basin). But upward pressures on gas prices are also expected as LNG exports, Mexico pipeline exports and economic growth stimulate demand. CRUDE OIL AND NATURAL GAS PRICE ASSUMPTIONS Our ability to deliver competitive returns and pursue commercial opportunities ultimately depends on the accuracy of our price assumptions (see “Risk factors” on page 22). We use a rigorous assessment of short-, medium- and long-term market uncertainties to determine what ranges of future crude oil and natural gas prices to use in project and portfolio evaluations. Market uncertainties include, for example, future economic conditions, geopolitics, actions by major resource holders, production costs, technological progress and the balance of supply and demand. See also Note 9 to the “Consolidated Financial Statements” on pages 250-254. REFINING MARGINS Refining marker average industry gross margins $/b 2021 2020 2019 US West Coast 14.6 8.5 13.5 US Gulf Coast Coking 9.8 2.3 4.9 Rotterdam Complex 1.9 0.4 2.3 Singapore (1.7) (0.5) (0.6) Strategic Report
44 Shell Annual Report and Accounts 2021 Gross refining margins improved during 2021, especially during the second and third quarters. This is because demand for oil products recovered significantly as economies rebounded and transport use increased with the easing of COVID-19 travel restrictions. Demand for kerosene for aviation remained below pre-pandemic levels because varying levels of international travel restrictions remained in place in 2021. Despite the Omicron variant of COVID-19, demand recovery continued during the fourth quarter. Industry utilisation showed some recovery, but in 2021 there were further announcements that refineries would fully or partially close on a permanent basis. Construction of new capacity continued during the year, especially in the Middle East and Asia. Refining margins for the next few years are expected to be supported by demand returning to pre-pandemic levels in 2022. The continued addition of new refinery capacity, often integrated with chemicals production, will put downward pressure on margins during the next few years. PETROCHEMICAL MARGINS Cracker industry margins [A] $/tonne 2021 2020 2019 North East/South East Asia naphtha 229 362 302 Western Europe naphtha 597 513 528 US ethane 692 433 440 [A] ICIS data are quoted. Cracker margins have been revised from the fourth quarter of 2019 onwards because of ICIS updating its methods for calculating cracker margins. Further revisions are based on available market information to external industry data provider up to the end of the period. Cracker margins were volatile in 2021. This was because of supply interruptions and demand increases as COVID-19 lockdown restrictions eased. Overall margins were higher than in 2020, except in Asia. Chinese demand recovered quickly from the pandemic, but petrochemical supply was constrained by power restrictions that affected manufacturing centres, logistics issues within China because of COVID-19, and global logistics issues. Asia cracker margins were down slightly from 2020 because of the balance of supply and demand, and rising prices for energy, crude oil and naphtha feedstock. US ethane cracker margins were supported by disruption due to winter storm Uri in February and March and to a lesser extent by interruptions caused by Hurricane Ida in August and September. West European cracker margins were supported by the US weather events and strong domestic demand, which offset rising crude and natural gas prices for the majority of 2021. The outlook for petrochemical margins in 2022 and beyond depends on feedstock costs and the balance of supply and demand. Demand for petrochemicals will be affected by the spread of COVID-19 as new variants emerge, and the extent of recovery from the pandemic. Supply of petrochemicals will depend on the net capacity effect of new builds and plant closures (taking into account any delays or cancellations in building new plants or closing old ones). Product prices reflect the prices of raw materials, which are closely linked to crude oil and natural gas prices. The balance of all these factors will drive margins. The statements in this “Market overview” section, including those related to our price forecasts, are forward-looking statements based on management’s current expectations and certain material assumptions and, accordingly, involve risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied herein. See “About this Report” on pages iii-iv and “Risk factors” on pages 22-23. MARKET OVERVIEW continued Strategic Report
45Shell Annual Report and Accounts 2021 Key statistics $ million, except where indicated 2021 2020 2019 Segment earnings/(loss) 6,340 (6,278) 8,628 Including: Revenue (including inter-segment sales) 60,289 36,697 45,602 Share of profit of joint ventures and associates 1,906 562 1,791 Interest and other income 1,787 14 263 Operating expenses [A] 7,126 6,555 6,667 Underlying operating expenses [A] 6,892 5,769 6,534 Exploration 127 611 281 Depreciation, depletion and amortisation 6,188 17,704 6,238 Taxation charge/(credit) 2,246 (2,507) 2,242 Identified Items [A] (2,417) (10,661) (326) Adjusted Earnings [A] 8,757 4,383 8,955 Adjusted EBITDA (CCS basis) [A] 16,421 11,668 16,719 Capital expenditure 5,279 3,661 3,851 Cash capital expenditure [A] 5,767 4,301 4,299 Oil and gas production available for sale (thousand boe/d) 942 911 922 LNG liquefaction volumes (million tonnes) 31.0 33.2 35.6 LNG sales volumes (million tonnes) 64.2 71.9 74.5 [A] See “Non-GAAP measures reconciliations” on pages 326-329. INTEGRATED GAS OVERVIEW Our Integrated Gas segment includes liquefied natural gas (LNG), conversion of natural gas into gas-to-liquids (GTL) fuels and other products, and our Renewables and Energy Solutions activities. The segment includes natural gas and liquids exploration and extraction, and the operation of upstream and midstream infrastructure that delivers gas and liquids to market. It markets and trades natural gas, LNG, power and carbon-emission rights, and LNG as a fuel for heavy-duty vehicles and marine vessels. BUSINESS CONDITIONS Global demand for natural gas rose by an estimated 4.6% in 2021, after the COVID-19 pandemic caused consumption to decline by around 1.2% in 2020, according to the IEA. The 2021 rate represents a return to around the historical norms of growth for gas, and is roughly the same as the pre-pandemic growth rate of 2019. The revival of economic growth underpinned the industrial uptake of gas, especially in China. Underperformance of hydroelectric output in China and South America as well as weak renewables generation in Europe drove incremental power demand for gas. Colder-than-normal winters and hotter-than- usual summers also produced higher-than-expected demand for gas from commercial and residential users. Reduced supply from a number of sources led to shortages and record high prices for gas and LNG globally. LNG imports were up 6.0% in 2021 after only a minor increase in 2020. The global LNG supply complex experienced upstream production deficits in 2021. Nigeria, Trinidad and Tobago, Peru and Norway were down a combined 12 million tonnes, or 32%, from 2020. The addition of new liquefaction capacity was also limited in 2021, although utilisation of projects that started in 2020 improved, which provided some support for supply growth. European gas prices rose to unprecedented levels by the middle of 2021, with the average Dutch Title Transfer Facility (TTF) price more than five times that of 2020. The TTF price reached a peak of almost $60 per million British thermal units (MMBtu). TTF and European spot gas hub prices broke above oil parity by the third quarter and continued well above that level for the rest of the year. Prices were supported by an extended heating season that left gas storage at a deficit coming out of winter and prompted fears of scarcity as indigenous production slumped and pipeline and LNG imports were restrained. Record coal and carbon prices also contributed to the price surge. Asian spot LNG prices, as reflected by the Japan Korea Marker (JKM), responded to the tight European market conditions with bids at a premium to TTF for most of the year. This was in order to secure LNG supplies for China and South Korea, where demand was higher than expected. Average JKM prices ended the year up more than 300% from 2020 and up more than 200% from 2019. Long-term contracts indexed to oil prices tracked the wider crude complex upward during the year but did not increase at the same rate as spot gas and LNG prices. In the USA, Henry Hub prices are expected to moderate from 2021 as production increases in response to higher gas prices as well as oil prices (which support associated gas production in the Permian basin). But upward pressures on gas prices are also expected as LNG exports, Mexico pipeline exports and economic growth stimulate demand. See “Market overview” on pages 42-44. PRODUCTION AVAILABLE FOR SALE In 2021, our production was 344 million barrels of oil equivalent (boe) or 942 thousand boe per day (boe/d), compared with 333 million boe, or 911 thousand boe/d in 2020. Natural gas production was 83% of total production in 2021 and 2020. In 2021, natural gas production increased by 3% compared with 2020. This was mainly because of the restart of production at the Prelude floating LNG facility in Australia, and the effects of production-sharing contracts, partly offset by field decline. Liquids production increased by 6% driven mainly by the restart of production at the Prelude facility. Strategic Report
46 Shell Annual Report and Accounts 2021 LNG LIQUEFACTION VOLUMES LNG liquefaction volumes were 31.0 million tonnes in 2021 compared with 33.2 million tonnes in 2020. The decrease was mainly due to feedgas constraints and higher maintenance activities, partly offset by the restart of production at the Prelude floating LNG facility. LNG sales volumes were 64.2 million tonnes in 2021 compared with 71.9 million tonnes in 2020. This decrease was mainly due to lower LNG liquefaction volumes and lower purchases from third parties. Through our Shell Energy organisation, we market a portion of our share of equity production of LNG and sell and market LNG volumes around the world through our hubs in the UK, UAE and Singapore. Shell has term sales contracts for the majority of our LNG liquefaction and term purchase contracts. We are able to maximise the income we generate from our LNG cargoes through our shipping network, regasification terminals and ability to purchase and deliver LNG spot cargoes from third parties. For example, if one customer does not need a scheduled cargo, we can deliver it to another customer who is in need. Similarly, if a customer needs an additional cargo not available from our production facilities, we can contract with third parties to deliver the additional cargo. We also conduct paper trades, primarily to manage commodity price risk related to sales and purchase contracts. We also sell LNG for trucks in China, Singapore and Europe. INTEGRATED GAS DATA TABLE LNG liquefaction volumes Million tonnes 2021 2020 2019 Australia 13.1 11.8 12.5 Brunei 1.4 1.6 1.6 Egypt 0.3 0.2 0.4 Nigeria 4.3 5.3 5.3 Oman 2.5 2.5 2.6 Peru 0.6 0.9 0.9 Qatar 2.4 2.4 2.5 Russia 2.8 3.1 3.0 Trinidad and Tobago 3.6 5.4 6.7 Other — 0.2 0.2 Total 31.0 33.2 35.6 EARNINGS 2021-2020 Segment earnings in 2021 were $6,340 million, which included a net charge of $2,417 million. The net charge comprised losses of $2,641 million due to the fair value accounting of commodity derivatives, impairment charges of $594 million and provisions for onerous contracts of $217 million, partly offset by gains on sale of assets of $1,086 million. Segment earnings in 2020 were a loss of $6,278 million, which included a net charge of $10,661 million. The net charge reflected impairment charges of $9,282 million mainly reflecting revisions to mid- and long-term price outlook assumptions and primarily related to the Queensland Curtis LNG and Prelude floating liquefied natural gas (FLNG) operations in Australia. It also comprised a net charge of $969 million due to the fair value accounting of commodity derivatives and a charge of $607 million related to onerous contract provisions. Excluding the net charges described above, segment earnings were $8,757 million in 2021 compared with $4,383 million in 2020. The increase was mainly driven by higher realised prices for oil, LNG and gas, favourable tax movements and higher volumes. This was partly offset by higher operating expenditure. PRIOR YEAR EARNINGS SUMMARY Our earnings summary for the financial year ended December 31, 2020, compared with the financial year ended December 31, 2019, can be found in the Annual Report and Accounts (page 47) and Form 20-F (page 31) for the year ended December 31, 2020 as filed with the Registrar of Companies for England and Wales and the US Securities and Exchange Commission, respectively. CASH CAPITAL EXPENDITURE Cash capital expenditure in 2021 was $5,767 million, compared with $4,301 million in 2020. The increase was mainly due to growth in our Renewables and Energy Solutions businesses. Our cash capital expenditure is expected to be around $8 billion in 2022. PORTFOLIO AND BUSINESS DEVELOPMENT Key portfolio events included the following: ■ In March 2021, we completed the sale of a 26.25% interest in the Queensland Curtis LNG Common Facilities to Global Infrastructure Partners Australia for $2.5 billion. ■ In June 2021, Atlantic Shores Offshore Wind, our 50:50 joint venture with EDF Renewables North America, was awarded rights to provide 1.5 GW of renewable offshore wind power to New Jersey, USA. ■ In July 2021, we signed a memorandum of understanding with Deutsche Telekom to advance digital innovation as both companies accelerate their transitions to net-zero emissions. ■ In July 2021, we started production in Block 5C in the East Coast Marine Area off the coast of Trinidad and Tobago. ■ In December 2021, we completed the acquisition of Savion LLC, a large utility-scale solar and energy storage developer in the USA. ■ In December 2021, we signed a gas concession agreement for Block 10 in Oman. ■ In January 2022, we announced that Shell and ScottishPower had won bids to develop 5 GW of floating wind power in the UK. ■ In January 2022, we started operations at the power-to-hydrogen electrolyser in China. ■ In February 2022, we completed the acquisition of online energy retailer Powershop Australia which was announced in November 2021. ■ In February 2022, Atlantic Shores Offshore Wind, our 50:50 joint venture with EDF Renewables North America, became the provisional winner of acreage in the New York Bight offshore wind auction, USA. ■ In February 2022, we announced our intention to exit our joint ventures with Gazprom and related entities, including our 27.5% interest in Sakhalin-2 and involvement in the Nord Stream 2 pipeline project. For more information, see Note 32 to the “Consolidated Financial Statements” on page 283. INTEGRATED GAS continued Strategic Report
47Shell Annual Report and Accounts 2021 BUSINESS AND PROPERTY Integrated Gas A complete list of LNG and GTL plants in operation and under construction in which we have an interest is provided below. LNG liquefaction plants in operation at December 31, 2021 [A] Asset Location Shell interest (%) 100% capacity (mtpa) [B] Shell-operated Asia Brunei Brunei LNG Lumut 25 7.6 No Oman Oman LNG Sur 30 7.1 No Qalhat LNG Sur 11 [C] 3.7 No Qatar Qatargas 4 [D] Ras Laffan 30 7.8 No Russia Sakhalin LNG [D] Prigorodnoye 27.5 10.9 No Oceania Australia Australia North West Shelf [D] Karratha 16.7 16.9 No Gorgon LNG [D] Barrow Island 25 15.6 No Prelude [D] Browse Basin 67.5 3.6 Yes Queensland Curtis LNG T1 [D] Curtis Island 50 4.3 Yes Queensland Curtis LNG T2 [D] Curtis Island 97.5 4.3 Yes Africa Egypt [E] Egyptian LNG T1 Idku 35.5 3.6 No Egyptian LNG T2 Idku 38 3.6 No Nigeria Nigeria LNG Bonny 25.6 24.1 No South America Peru Peru LNG Pampa Melchorita 20 4.5 No Trinidad and Tobago Atlantic LNG T1 Point Fortin 46 3 No Atlantic LNG T2/T3 Point Fortin 57.5 6.6 No Atlantic LNG T4 Point Fortin 51.1 5.2 No [A] We have offtake rights via a lease to 100% of the capacity (2.5 mtpa) of the Kinder Morgan-operated Elba Island liquefaction plant in Georgia, USA. [B] 100% capacity represents the total capacity that all trains can process as reported by the operator. [C] Interest, or part of the interest, is held via indirect shareholding. [D] These assets are clustered as integrated assets and have onshore or offshore upstream production. [E] In January 2014, force majeure notices were issued under the LNG agreements as a result of domestic gas diversions severely restricting volumes available to the Egyptian LNG (ELNG) plant. These notices remain in place. LNG liquefaction plants under construction at December 31, 2021 Asset Location Shell interest (%) 100% capacity (mtpa) [A] Shell-operated Africa Nigeria Train 7 [B] Bonny 25.6 7.6 No North America Canada LNG Canada T1-2 [C] Kitimat 40.0 14.0 No [A] 100% capacity represents the total capacity that all trains can process as reported by the operator. [B] First LNG is expected around the middle of the 2020s. [C] Construction started in October 2018 and first LNG is expected around the middle of the 2020s. GTL plants in operation at December 31, 2021 Asset Location Shell interest (%) 100% capacity (b/d) [A] Shell-operated Asia Malaysia Shell MDS Bintulu 72.0 14,700 Yes Qatar Pearl Ras Laffan 100.0 140,000 Yes [A] 100% capacity represents the total capacity of the plant. We also have interests and rights in the regasification terminals listed below. Extension of leases or rights beyond the periods mentioned below will be reviewed on a case-by-case basis. Strategic Report
48 Shell Annual Report and Accounts 2021 Oil and natural gas production, exploration and development Australia We operate the Queensland Curtis LNG (QCLNG) venture’s natural gas operations, including wells, compression stations and processing plants, in Queensland’s Surat Basin. We have interests ranging from 44% to 74% in 25 field compression stations and six central processing plants. Our production of natural gas from the onshore Surat Basin supplies the QCLNG liquefaction plant and the domestic gas market. We have a 50% interest in Arrow, a Queensland-based joint venture with China National Petroleum Corporation (CNPC). Arrow owns coalbed methane assets and a domestic power business. We have interests in offshore production, LNG liquefaction and exploration licences in the Browse Basin and in the North West Shelf (NWS) and Greater Gorgon areas of the Carnarvon Basin. Woodside is the operator on behalf of the NWS joint venture (Shell interest 16.7%). We have a 25% interest in the Chevron-operated Gorgon LNG joint venture that includes offshore production. Our interests in the Browse Basin include joint arrangements, with Shell as the operator, for: the Prelude field (Shell interest 67.5%); the pre-final investment decision Crux gas and condensate field (Shell interest 82%); and other backfill and contingent resources for Prelude FLNG, including the Bratwurst field (Shell interest 100%). Bratwurst, discovered in 2019, is currently under evaluation as a future backfill opportunity. We are also a partner in the Browse joint arrangement (Shell interest 27%) covering the Brecknock, Calliance and Torosa gas fields, which are under development and operated by Woodside. Bolivia We hold a 37.5% participating interest in the Caipipendi block where we produce and explore. We also have a 25% interest in the Tarija XX West block where we produce from the Itaú field. We hold a 15% participating interest in the Repsol-operated Iniguazu exploration. China We jointly develop and produce from the onshore Changbei tight-gas field under a production-sharing contract (PSC) with CNPC. We took the final investment decision on the Changbei II Phase 1 project in 2017, and started drilling activity in early 2019. Colombia We have 50% interests in three blocks that we operate, and 60% interests in two other deep-water blocks where our partner is the operator. Egypt We have a 25% interest in the Burullus Gas Company (Burullus), a self-operated joint venture which operates the West Delta Deep Marine concession (Shell interest 50%) and supplies gas to the domestic market and the Egyptian LNG plant. We have a 50% interest in the Rashid Petroleum Company (Rashpetco), a self-operated joint venture which operates the Rosetta concession (Shell interest 100%). We have a 30% interest in the El Burg Offshore Company (EBOC), a self-operated joint venture which operates the El Burg offshore concession (Shell interest 60%). We have participating interests in several exploration concessions in the Mediterranean, Nile Delta, and Red Sea. Indonesia We have a 35% interest in the INPEX Masela Ltd joint venture which owns and operates the offshore Masela block. Oman In December 2021, with our partners, OQ and Marsa Liquefied Natural Gas LLC (a joint venture between TotalEnergies and OQ), we signed a concession agreement with the Ministry of Energy and Minerals on behalf of the government of the Sultanate of Oman to develop and produce natural gas from Block 10. We also signed a separate gas sales agreement for gas produced from the block. The two agreements followed an interim upstream agreement that detailed a funding and work programme from 2019 until the end of 2021 to develop gas resources for projects to help meet the Sultanate of Oman’s growing need for energy. Qatar We operate the Pearl GTL plant (Shell interest 100%) in Qatar under a development and PSC with the government. The fully integrated facility has the capacity to produce, process and transport 1.6 billion standard cubic feet per day (scf/d) of gas from Qatar’s North Field. We have a 30% interest in Qatargas 4, which comprises integrated facilities to produce around 1.4 billion scf/d of gas from Qatar’s North Field, an onshore gas-processing facility. LNG regasification terminals Project name Location Shell capacity rights (mtpa) Capacity rights period Shell interest (%) and rights Costa Azul Baja California, Mexico 2.7 [A] 2008–2028 Capacity rights Cove Point Lusby, MD, USA 1.8 2003–2023 Capacity rights Dragon LNG Milford Haven, UK 3.1 2009–2029 50 Elba Island Expansion Elba Island, GA, USA 4.2 2010–2035 Leased Elba Island Elba Island, GA, USA 2.8 2006–2036 Leased Elba Island Elba Island, GA, USA 4.6 2003–2027 Leased GATE (Gas Access to Europe) Rotterdam, the Netherlands 1.5 2015–2031 Capacity rights Shell Energy India Pvt Ltd (formerly Hazira) Gujarat, India 5 2005–2035 100 Lake Charles Lake Charles, LA, USA 4.4 2002–2030 Leased Lake Charles Expansion Lake Charles, LA, USA 8.7 2005–2030 Leased Singapore SGM SLNG, Singapore [B] 2013–2029 Import rights Singapore SETL SLNG, Singapore [B] 2018–2035 Import rights Singapore SETL SLNG, Singapore up to 1.0 [C] 2021–2025 Import rights Shell LNG Gibraltar Gibraltar up to 0.04 2018–2038 51 [A] Force majeure declared in May 2020 because of changes in the Firm Storage and Services Agreement (FSSA) General Terms and Conditions. [B] Licences to import LNG and sell regasified LNG in Singapore with no volume cap. [C] Exclusive licence to import LNG and sell regasified LNG in Singapore for up to 1.0 mtpa. INTEGRATED GAS continued Strategic Report
49Shell Annual Report and Accounts 2021 Russia We have a 27.5% interest in the Sakhalin-2 joint venture with Gazprom. Sakhalin-2 is an integrated oil and gas project on Sakhalin island, in the far east of Russia. Tanzania We operate and have a 60% interest in Blocks 1 and 4 off the coast of southern Tanzania. In June 2020, the government granted a four and a half-year licence extension for both blocks. We continue to develop a potential domestic gas and LNG project. Trinidad and Tobago We have interests in three concessions with producing fields: Central Block (Shell interest 65%), North Coast Marine Area (NCMA) (Shell interest 80.5%), and East Coast Marine Area (Shell interest 100%). The East Coast Marine Area includes Block 5C which started production in July 2021. We also own a 90% interest in Block 22 and an 80% interest in NCMA 4 which includes the undeveloped Iris discovery. Our interests range from 35% to 100% in exploration Blocks 5(d), 5(c)REA, 6(d), and Atlantic Area Block 5. Renewables and Energy Solutions Renewables and Energy Solutions includes Shell’s production and marketing of hydrogen, nature and environmental solutions as well as our integrated power activities. Our integrated power activities comprise: ■ generating electricity through wind and solar; ■ providing electricity storage; ■ marketing and trading gas and power; ■ selling gas and power to commercial, industrial and retail customers; ■ providing electric vehicle charging services; and ■ providing customers with digitally enabled solutions. We are building the Renewables and Energy Solutions portfolio through organic growth and acquisitions. Most of these opportunities are in sectors that are different from Shell’s existing oil and gas businesses, but have some similarities or adjacencies to our other businesses. Shell-controlled Renewables and Energy Solutions companies are subject to the Shell Control Framework. Some are not yet in full compliance with the Shell Control Framework and we are working to bring them into compliance in a fit-for-purpose manner. In 2021, cash capital expenditure in Renewables and Energy Solutions amounted to $2.4 billion. Energy Solutions We provide electricity and smart energy solutions to residential, commercial and industrial customers. We do this through direct electricity sales, storage solutions and energy optimisation services. We sell natural gas and power to more than 1.6 million retail customers. Currently our largest retail market is the UK. We are expanding our retail business in Australia, Germany, the Netherlands and the USA. Our largest markets for commercial and industrial customers are Australia and the USA. In Australia we are the second-largest commercial and industrial retailer of electricity, supplying more than 20% of the market. Electric mobility We sell and install charge points at homes, workplaces, destinations and depots, operating more than 80,000 charge points. We also provide software solutions and access to more than 300,000 public charge points through our roaming networks in Europe, North America, and South-east Asia. We will integrate our electric mobility activities into Marketing, which is currently part of Oil Products, from 2022 onwards. Hydrogen We are part of joint ventures and alliances that have built hydrogen filling stations for passenger cars and trucks. We have built a 10 MW electrolyser in Germany. This began operating in July 2021 and is now producing green hydrogen, which is hydrogen produced using electricity from renewable sources. In China, we developed a 20 MW renewable power electrolyser and hydrogen refuelling stations in Zhangjiakou City in the Beijing-Tianjin-Hebei region. We started operations in January 2022. Nature and Environmental Solutions Nature and Environmental Solutions includes our Nature-Based Solutions (NBS) business and the Environmental Products Trading Business (EPTB). NBS conserve, enhance and restore ecosystems – such as forests, grasslands and wetlands – to prevent greenhouse gas emissions or reduce atmospheric CO₂ levels. Through EPTB we develop, offtake, trade and supply environmental products across compliance and voluntary markets, and this includes partnering with other businesses such as LNG or Marketing to provide integrated energy solutions to customers. Marketing and trading We market and trade natural gas and power from our own assets and from third parties. In North America we are the third-largest power wholesale trader. Wind and solar We enable renewable power generation by owning and operating wind farms and solar plants and participating in joint ventures. At the end of 2021, our share of renewable generation capacity was 1.2 GW in operation and 5.6 GW in development. Our renewable power capacities are listed below: Renewable power capacity in operation and in development In operation In development Location 100% capacity (MW) Shell interest (MW) 100% capacity (MW) Shell interest (MW) Asia 398 123 1,488 1,064 Europe 923 337 929 756 North America 1,442 764 7,510 3,684 Australia 120 120 Strategic Report
50 Shell Annual Report and Accounts 2021 UPSTREAM Key statistics $ million, except where indicated 2021 2020 2019 Segment earnings/(loss) 9,694 (10,785) 3,855 Including: Revenue (including inter-segment sales) 45,487 28,330 45,217 Share of profit of joint ventures and associates 632 (7) 379 Interest and other income 4,602 542 2,180 Operating expenses [A] 10,604 10,983 11,582 Underlying operating expenses [A] 10,362 10,227 11,284 Exploration 1,296 1,136 2,073 Depreciation, depletion and amortisation 13,539 23,119 16,881 Taxation charge/(credit) 6,100 (467) 5,878 Identified Items [A] 1,745 (7,933) (598) Adjusted Earnings [A] 7,950 (2,852) 4,452 Adjusted EBITDA (CCS basis) [A] 27,358 13,247 27,034 Capital expenditure 6,378 6,911 10,003 Cash capital expenditure [A] 6,269 7,296 10,205 Oil and gas production available for sale (thousand boe/d) 2,240 2,424 2,691 [A] See “Non-GAAP measures reconciliations” on pages 326-329. OVERVIEW Our Upstream business explores for and extracts crude oil, natural gas and natural gas liquids. It also markets and transports oil and gas, and operates infrastructure necessary to deliver them to market. BUSINESS CONDITIONS Brent crude oil, an international benchmark, rebounded in 2021, supported by stronger demand and moderate supply growth. Brent traded between $50 per barrel (/b) and $86/b in 2021, ending the year at around $77/b and averaging $71/b for the whole year. This was about 70% higher than in 2020. Global oil product demand rose by 5.6 million barrels per day (b/d) in 2021 to 97.4 million b/d, after a sharp drop of around 8.5 million b/d in 2020, according to the IEA. The rebound was supported by successful vaccine roll-outs, especially in developed economies such as the USA, UK and EU. Road mobility has largely returned to pre-pandemic levels, with COVID-19 travel restrictions being lifted and more people switching from public transport to cars. Air travel has begun to recover, but is still around 20-30% below pre-pandemic levels. This is probably attributable to remaining cross-border travel restrictions and public hesitancy about air travel during a global pandemic. Mirroring the broad economic recovery, demand for naphtha, LPG and ethane also picked up. Global demand for natural gas rose by an estimated 4.6% in 2021, after the COVID-19 pandemic caused consumption to decline by around 1.2% in 2020, according to the IEA. The 2021 rate represents a return to around the historical norms of growth for gas, and is roughly the same as the pre-pandemic growth rate of 2019. The revival of economic growth underpinned the industrial uptake of gas, especially in China. Underperformance of hydroelectric output in China and South America as well as weak renewables generation in Europe drove incremental power demand for gas. Colder-than-normal winters and hotter-than- usual summers also produced higher-than-expected demand for gas from commercial and residential users. Reduced supply from a number of sources led to shortages and record high prices for gas and LNG globally. European gas prices rose to unprecedented levels by the middle of 2021, with the average Dutch Title Transfer Facility (TTF) price more than five times that of 2020. The TTF price reached a peak of almost $60 per million British thermal units (MMBtu). TTF and European spot gas hub prices broke above oil parity by the third quarter and continued well above that level for the rest of the year. Prices were supported by an extended heating season that left gas storage at a deficit coming out of winter and prompted fears of scarcity as indigenous production slumped and pipeline and LNG imports were restrained. Record coal and carbon prices also contributed to the price surge. In the USA, Henry Hub prices are expected to moderate from 2021 as production increases in response to higher gas prices as well as oil prices (which support associated gas production in the Permian basin). But upward pressures on gas prices are also expected as LNG exports, Mexico pipeline exports and economic growth stimulate demand. See “Market overview” on pages 42-44. PRODUCTION AVAILABLE FOR SALE In 2021, production was 818 million boe, or 2,240 thousand boe/d, compared with 887 million boe, or 2,424 thousand boe/d in 2020. Liquids production decreased by 5% and natural gas production decreased by 13% compared with 2020. The decrease in production was mainly caused by divestments in Canada, Egypt and the USA, higher maintenance most significantly in Nigeria and the UK, and the effects of production-sharing contracts (PSCs) which were especially notable in Malaysia and Kazakhstan. Oil production declined by around 8% from 2019 to 2021. Excluding the impact from the Permian divestment, oil production is expected to decrease on average by 1-2% a year until 2030. Strategic Report
51Shell Annual Report and Accounts 2021 EARNINGS 2021-2020 Segment earnings in 2021 were $9,694 million, which included a net gain of $3,268 million on sale of assets mainly related to the sale of the Permian business in the USA, partly offset by post-tax impairment charges of $479 million, a net charge of $393 million due to the fair value accounting of commodity derivatives and fourth quarter 2021 legal provisions of $287 million. Segment earnings in 2020 were a loss of $10,785 million, which included a net charge of $6,447 million related to impairments, primarily in the US Gulf of Mexico, unconventional assets in North America, offshore assets in Brazil and Europe, and a project in Nigeria (OPL245), mainly triggered by revision of Shell’s mid- and long-term commodity price and updated Appomattox subsurface understanding. Also included was a net charge of $782 million related to the impact of the weakening Brazilian real on a deferred tax position. Excluding the net gains described above, segment earnings in 2021 were a profit of $7,950 million, compared with a loss of $2,852 million in 2020. Earnings excluding the net gains were helped by higher oil and gas prices mainly driven by the improved macroeconomic conditions as described in the business condition section and the one-off release of a tax provision in Nigeria of $628 million. PRIOR YEAR EARNINGS SUMMARY Our earnings summary for the financial year ended December 31, 2020, compared with the financial year ended December 31, 2019, can be found in the Annual Report and Accounts (page 54) and Form 20-F (page 37) for the year ended December 31, 2020, as filed with the Registrar of Companies for England and Wales and the US Securities and Exchange Commission, respectively. CASH CAPITAL EXPENDITURE Cash capital expenditure in 2021 was $6.3 billion, compared with $7.3 billion in 2020. Lower cash capital expenditure in 2021 was mainly driven by deferral and slippage of activities across the portfolio and divestments. PORTFOLIO AND BUSINESS DEVELOPMENT We took the following key portfolio decisions during 2021: ■ In Brazil, in August 2021, we announced the final investment decision (FID) taken by the Libra consortium, operated by Petrobras, to contract the Mero-4 floating production, storage and offloading (FPSO) vessel to be deployed at the offshore Mero field in the Santos Basin. ■ In Malaysia, in August 2021, we announced the FID on the Timi gas development project. ■ In the US Gulf of Mexico, in July 2021, we took the FID for Whale, a deep-water development in the US Gulf of Mexico that features a 99% replicated hull and an 80% replication of the topsides of our Vito project. ■ We continue to review positions that are outside our risk appetite, such as Nigeria onshore. In the last decade we have reduced the total number of licences by half and we continue to review the portfolio options for Nigeria onshore oil and gas. We continued to divest assets during 2021, including: ■ in Canada, in April 2021, we completed the sale of our Duvernay light oil position in Alberta. The transaction had an effective date of January 1, 2021; ■ in Egypt, in September 2021, we completed the sale of our upstream assets in Egypt’s Western Desert; ■ in Nigeria, in January 2021, we completed the sale of our 30% interest in oil mining lease (OML) 17 in the Eastern Niger Delta, and associated infrastructure; ■ in the Philippines, in May 2021, we agreed to sell our 100% shareholding in Shell Philippines Exploration B.V. (SPEX). We aim to complete the sale in 2022; and ■ in the USA, in December 2021, we completed the sale of our Permian business. As announced on February 28, 2022, Shell intends to exit its joint ventures with Gazprom and related entities, including our 50% interest in Salym Petroleum Development and our 50% interest in Gydan energy venture. For more information see Note 32 on page 283. BUSINESS AND PROPERTY Our subsidiaries, joint ventures and associates are involved in all aspects of upstream activities, including land tenure, entitlement to produced hydrocarbons, production rates, royalties, 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, legal agreements are generally granted by, or entered into with, a government, state-owned company, government- run oil and gas company or agency. The exploration risk usually rests with the independent oil and gas company. In North America, these agreements may also be with private parties that own mineral rights. Of these agreements, the following are most relevant to our 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 is responsible for financing these activities. In principle, the licence holder is entitled to the totality of production less any royalties in kind. The government, state-owned company or government-run oil and gas company may sometimes enter into a joint arrangement as a participant, sharing the rights and obligations of the licence but usually without sharing the exploration risk. In a few cases, the state-owned company, government-run oil and gas company or agency has an option to purchase a certain share of production. ■ Lease agreements, which are typically used in North America and are usually governed by terms similar to licences. Participants may include governments or private entities. Royalties are either paid in cash or in kind. ■ Production-sharing contracts (PSCs) entered into with a government, state-owned company or government-run oil and gas company. PSCs generally oblige the independent oil and gas company, as contractor, to provide all the financing 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 that is reserved for the recovery of the contractor’s cost (cost oil). The remaining production is split with the government, state-owned company or government-run oil and gas company on a fixed or volume/revenue-dependent basis. In some cases, the government, state-owned company or government-run oil and gas 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 field-by-field basis. Additionally, as the price of oil or gas increases above certain predetermined levels, the independent oil and gas company’s entitlement share of production normally decreases, and vice versa. Accordingly, its interest in a project may not be the same as its entitlement. Strategic Report
52 Shell Annual Report and Accounts 2021 Europe Italy We have a 39% interest in the Val d’Agri producing concession, operated by ENI S.p.A. We also have a 25% interest in the Tempa Rossa producing concession operated by TotalEnergies EP Italia S.p.A. Netherlands Shell and ExxonMobil are 50:50 shareholders in Nederlandse Aardolie Maatschappij B.V. (NAM). A significant part of NAM’s gas production comes from the onshore Groningen gas field, in which NAM holds a 60% interest. The remaining 40% interest is held by EBN, a Dutch government entity. NAM also has a 60% interest in the Schoonebeek oil field and operates 25 other hydrocarbon production licences. Production from the Groningen field induces earthquakes that have damaged houses and other buildings and structures in the region. This has led to complaints and claims for compensation for damage from the local community. Since 2013, the Dutch Minister of Economic Affairs and Climate Policy has set an annual production level for the Groningen field, taking into account all interests, including residents’ safety, security of supply in the domestic gas market and supply commitments in EU member states. The production level in the gas year 2021-2022 (ending October 1, 2022) was set as 3.9 billion cubic metres, subject to revision by the Minister. In June 2018, NAM’s shareholders and the Dutch government signed a heads of agreement (HoA) to reduce production from Groningen and to ensure the financial robustness of NAM to fulfil its obligations. In the HoA, NAM’s shareholders agreed not to declare dividends for 2018 and 2019. Dividend payments for 2020 and beyond will be made only if a solvency ratio of 25% is reached and maintained, which was not the case for 2021. In September 2018, detailed agreements were signed to further implement the HoA. As part of these agreements, Shell guarantees NAM’s payment obligations vis-à-vis the Dutch government in relation to earthquake- related damages and costs of strengthening houses, up to a maximum of 30%. This maximum equates to Shell’s indirect interest in the Groningen production system. In conjunction with the HoA, it was agreed that NAM would cease all involvement in handling damage claims or strengthening buildings to make them safe. The Dutch government has stepped into these two roles and has developed legislation and policies to deal with earthquake-related matters. The Dutch government passes on to NAM the cost of the elements for which NAM is liable. NAM has started arbitration with the Dutch government to have its financial liability determined for certain earthquake costs which the Dutch government compensates to claimants and subsequently recovers from NAM. In September 2019, the Dutch government issued an update announcing that it was able to reduce Groningen production faster, stopping production in 2022, eight years earlier than initially planned. Discussions have not been concluded between the Dutch government and NAM shareholders regarding the compensation payable by the Dutch government to NAM in order to restore the balance of the package of arrangements laid down in the HoA. A parliamentary inquiry into production from the Groningen gas field officially started in the spring of 2021. Public hearings are scheduled for the summer of 2022. On October 26, 2021, NAM announced that it will split up its assets into four new legal entities, with the intent to sell those new entities. This excludes the wider Groningen business, which will remain in the existing NAM legal entity. Norway We are a partner in 21 production licences on the Norwegian continental shelf. We are the operator in nine of these, of which two are producing: the Knarr field (Shell interest 45%) and the Ormen Lange gas field (Shell interest 17.8%). In 2021, we took the final investment decision on the Phase 3 project for Ormen Lange, adding subsea compression to the field. We hold a non-operated interest in the producing field Troll (operated by Equinor, Shell interest 8.1%) where the Phase 3 gas project came on stream in 2021 adding new production. Decommissioning is planned for Gaupe (cessation of production was in 2018) and Knarr (cessation of production is expected in May 2022). We have a 33.3% interest in the Northern Lights joint venture, where the other partners are Equinor and TotalEnergies (equal partners). The joint venture is developing a carbon dioxide transportation and storage project. UK For more than 50 years we have operated a significant number of our interests on the UK continental shelf under a 50:50 joint-venture agreement with ExxonMobil. In the fourth quarter of 2021, ExxonMobil completed the sale of its share of some of these and other UK continental shelf assets to Neo Energy. In addition to our oil and gas production from North Sea fields, we have various interests in the Atlantic Margin area where we are not the operator. These are mainly in the West of Shetland area (Clair, Shell interest 27.97%, and Schiehallion, Shell interest 44.89%). In 2021, new production came on stream in Arran (Shell interest 44.57%), which is a tie-back to the Shearwater facility. New production also came on stream at new wells in the existing and producing Clair Ridge (Shell interest 27.97%, non-operated). In the fourth quarter of 2021, Shell completed a deal to increase its equity in the Shearwater field (from 28% to 55.5%) by purchasing BP’s entire interest in the field. Shell will continue to be the operator of the Shearwater field. In October 2021, the UK’s Offshore Petroleum Regulator for Environment and Decommissioning (OPRED) advised that it was unable to approve the environmental statement consent for the Jackdaw Project. Engagement with OPRED has continued, during which there have been discussions of alternative proposals to address the regulator’s concerns. In 2021, Shell increased its stake in the early-stage Acorn carbon capture, utilisation and storage (CCUS) and blue hydrogen (BH2) project from 25% to 30%. Shell was appointed technical development lead for certain parts of the CCS project and will take up the role at the end of the first quarter of 2022. The UK government selected the Scottish Cluster (of which Acorn is part) as a reserve cluster for track 1 in its CCUS cluster sequencing process. This means that if another cluster selected as track 1 is discontinued the Scottish Cluster may take its place. The UK government has stated that it will prioritise track 1 cluster for accelerated negotiation of terms. UPSTREAM continued Strategic Report
53Shell Annual Report and Accounts 2021 In December 2021, after comprehensive screening, Shell concluded that the economic case for investment in Cambo, considering also the potential for delays, was not strong enough to proceed. Shell continues to work with its co-venturer and the UK government to map out the next steps on Cambo. Decommissioning of the Heather, Goldeneye and Curlew FPSO assets continued. In September 2021, Heerema’s Thialf vessel safely lifted Goldeneye’s 3,000-tonne jacket and 1,300-tonne topsides, before transporting them to Norway to be dismantled at the AF Offshore Decom yard in Vats. In Brent, production ceased after 45 years when on March 31, 2021, we shut down Brent Charlie. This is due to become the fourth and final platform to be decommissioned and removed from the Brent oil and gas field. Brent Charlie’s topsides are expected to be lifted and removed in 2023, after necessary offshore preparatory works have been completed. The UK regulator OPRED is expected to announce a final decision in the first half of 2022 on the proposed derogations to leave in place the gravity-based concrete structures of Brent Bravo, Brent Charlie and Brent Delta. Rest of Europe We also have interests in Albania, Bulgaria and Germany. Asia (including the Middle East and Russia) Brunei Shell and the Brunei government are 50:50 shareholders in Brunei Shell Petroleum Company Sendirian Berhad (BSP). BSP has long-term onshore and offshore oil and gas concession rights, and sells most of its gas production to Brunei LNG Sendirian Berhad (see “Integrated Gas” on pages 45-49), with the remainder (24% in 2021) sold in the domestic market. In addition to our interest in BSP, we have a non-operating interest in the offshore Block B concession (Shell interest 35%), where gas and condensate are produced from the Maharaja Lela field. We have a non-operating interest in a gas holding area for deep-water Block CA2 (Shell interest 12.5%), under a production-sharing contract (PSC). We also operate in the deep-water Block CA1 (Shell interest 86.95%), under a PSC. Iraq We have a 44% interest in the Basrah Gas Company, which gathers, treats and processes associated gas that was previously being flared from the Rumaila, West Qurna 1 and Zubair fields. The processed gas and associated products, such as condensate and LPG, are sold to the domestic market. Any surplus condensate and LPG is exported. Kazakhstan We are the joint operator of the onshore Karachaganak oil and condensate field (Shell interest 29.3%). The Karachaganak field is in north-west Kazakhstan and covers an area of more than 280 square kilometres. We have an interest in the North Caspian Sea production-sharing agreement (Shell interest 16.8%) which includes the Kashagan field in the Kazakh sector of the Caspian Sea. The North Caspian Operating Company is the operator. This shallow-water field covers an area of around 3,400 square kilometres. Phase 1 development of the field led to plateau oil production capacity of around 66 thousand boe/d (Shell interest) in 2021, with the possibility of increases after later phases of development. We have a 7.4% interest in the Caspian Pipeline Consortium, which owns and operates an oil pipeline running from the Caspian Sea to the Black Sea, across parts of Kazakhstan and Russia. Malaysia We explore for and produce oil and gas offshore Sabah and Sarawak under 16 PSCs, in which our interests range from 20% to 85%. Offshore Sabah: ■ We operate two producing oil fields, the Gumusut-Kakap field (Shell interest 30%) and the Malikai deep-water field (Shell interest 35%). ■ We have a 21% interest in the Siakap North-Petai deep-water field and a 30% interest in the Kebabangan field, both operated by third parties. We also have exploration interests. Offshore Sarawak: ■ We are the operator of eight producing gas fields and one producing oil and gas field. Nearly all the gas produced offshore Sarawak is supplied to Malaysia LNG (MLNG) and to our gas-to-liquids plant in Bintulu. See “Integrated Gas” on pages 45-49. The eight producing gas fields and the one producing oil and gas field are: – gas fields F6, F23, E8, F13 East and F13 West under the MLNG PSC (Shell interest 40%); – gas fields F14 and F28 under the SK308 PSC (Shell interest 50%); – gas field Gorek under the SK408 PSC (Shell Interest 30%); and – producing oil and gas field E6 under the SK-308 PSC (Shell interest 50%). ■ We achieved first oil and gas for Phase 2 of the E6 project in March 2021. We are the operator for Block SK-318 PSC (Shell interest 75%). This block contains the discovered Rosmari, Marjoram and Timi fields. In August 2021, we took the final investment decision on the Timi gas development project. Situated approximately 200 kilometres off the coast of Sarawak, Timi is a sweet gas field discovered in 2018. The Timi project comprises a wellhead platform powered by a solar and wind hybrid renewable power system, two wells and a pipeline tie-in to the F23 production hub, supporting future growth in the Sarawak Central Luconia area. The proposed Rosmari-Marjoram development is the first phase of the Sarawak Integrated Sour Gas Evacuation System (SISGES) development and comprises an offshore platform and onshore gas treatment plant in Bintulu, Sarawak. ■ In July 2021, we signed a new exploration PSC for Block SK-437 (Shell interest 85%). ■ In our non-operated portfolio: ■ We took the final investment decision in March 2021 on Jerun, which is part of the Block SK-408 PSC (Shell interest 30%). Jerun is a gas development with an integrated central processing platform. Block SK-408 also contains the producing non-Shell-operated Larak and Bakong fields. ■ We also have a 40% interest in the amended 2011 Baram Delta enhanced oil recovery PSC, and a 50% interest in the SK-307 PSC. In March 2021, Shell announced that it intended to explore options to divest its non-operated interests in Baram Delta and SK-307. Strategic Report
54 Shell Annual Report and Accounts 2021 Oman We have a 34% interest in the Block 6 oil concession and its operator Petroleum Development Oman (PDO). The Omani government has a 60% interest through its 100% owned affiliate Energy Development Oman (EDO). PDO is the operator of more than 200 oil fields, mainly located in central and southern Oman. We have a 50% interest in the Block 42 exploration and production- sharing agreement. Oman Oil (OQ) has the remaining 50% interest. Shell is the operator of Block 42. We have signed an exploration and production-sharing agreement that makes us the operator and gives us a 100% working interest in Block 55. Russia Shell and Gazprom Neft have a joint interest in several ventures in Russia: ■ We have a 50% interest in Salym Petroleum Development N.V., which is developing the Salym fields and conducting exploration activities in the Khanty Mansiysk Autonomous District of western Siberia. ■ We have a 50% interest in the Khanty-Mansiysk Petroleum Alliance VOF partnership. Through this, Shell is a holder of a 50% interest in the CJSC Khanty-Mansiysk Petroleum Alliance. ■ Because regulatory sanctions prohibit certain defined oil and gas activities in Russia since 2014, we have suspended our support to Salym Petroleum Development N.V. and CJSC Khanty-Mansiysk Petroleum Alliance in relation to shale oil activities. ■ We have a 50% shareholding in LLC Gydan Energy. The joint venture changed its name from LLC Gazpromneft-Aero Bryansk in September 2021. It holds licences to the Leskinsky and Pukhutsayakhsky onshore blocks in the north-eastern part of the Gydan Peninsula. The joint venture is currently carrying out an exploration programme in these blocks. As announced on February 28, 2022, Shell intends to exit its joint ventures with Gazprom and related entities, including our 50% interest in Salym Petroleum Development and our 50% interest in Gydan energy venture. For more information see Note 32 on page 283. Syria Shell holds a 65% interest in Syria Shell Petroleum Development B.V. (SSPD), a joint venture between Shell and the China National Petroleum Corporation. SSPD holds a 31.25% interest in Al Furat Petroleum Company, a Syrian joint stock company, whose role was to perform petroleum operations. Shell also holds a 70% interest in two exploration licences via Shell South Syria Exploration B.V. In December 2011, in compliance with international sanctions on Syria, including European Council Decision 2011/782/CFSP, Shell suspended all exploration and production activities in Syria. Rest of Asia We also have interests in Kuwait, the Philippines, Turkey and the United Arab Emirates. In May 2021, in the Philippines, Shell announced an agreement to sell its shares in Shell Philippines Exploration B.V., which includes its 45% interest in Service Contract 38 (Malampaya), which includes the producing Malampaya gas field, to Malampaya Energy XP Pte. Ltd. Subject to partner and regulatory consent, the transaction is targeted to complete in 2022. Africa Nigeria Our share of production, onshore and offshore, in Nigeria was 175 thousand boe/d in 2021, compared with 223 thousand boe/d in 2020. Security issues, sabotage and crude oil theft in the Niger Delta failed to improve and remained significant challenges to our onshore operations in 2021. We will monitor the situation closely and evaluate implications for the integrity of our infrastructure and the sustainability of our current operations. We announced our intention to reduce our involvement in onshore oil and gas production in Nigeria, in line with our risk appetite. We are in discussion with the Nigerian government and other stakeholders on how this can be best achieved. In August 2021, Nigeria adopted the Petroleum Industry Act (PIA) that creates a new regulatory framework for the industry. The PIA introduces significant changes, some of which require clarification during the 18-month implementation phase. We are actively engaged to ensure that our operations will comply with any new requirements. Onshore The Shell Petroleum Development Company of Nigeria Limited (SPDC) is the operator of a joint venture (JV) (Shell interest 30%) that, after the completion of the sale of its interest in OML 17 on January 15, 2021, has 16 Niger Delta onshore oil mining leases (OML). In 2019, OML 11 expired when the Federal Government (FGN) denied an application of SPDC JV for renewal. While SPDC JV is challenging this decision in court, the FGN and SPDC JV are exploring an out-of-court solution. SPDC continues to operate OML 11 pending these discussions. Offshore Our main offshore deep-water activities are carried out by Shell Nigeria Exploration and Production Company Limited (SNEPCO), (Shell interest 100%). SNEPCO has interests in three deep-water blocks that are under PSC terms: the producing assets Bonga (OML 118) and Erha (OML 133) and the non-producing asset Bolia Chota (OML 135). SNEPCO operates OMLs 118 (including the Bonga field floating production, storage and offloading (FPSO) vessel, Shell interest 55%) and 135 (Bolia and Doro, Shell interest 55%) and has a 43.8% non-operating interest in OML 133 (including the Erha FPSO). In May 2021 OML 118 was renewed for 20 years. In 2021, the licence for the offshore oil block OPL 245 expired. Authorities are investigating our involvement in Nigerian oil block OPL 245 and the 2011 settlement of litigation pertaining to that block. See Note 26 to the “Consolidated Financial Statements” on pages 277-279. SPDC also has three shallow-water licences (OMLs 74, 77 and 79) and a 40% interest in the non-Shell-operated Sunlink joint venture that has one shallow-water licence (OML 144). In our Nigerian operations, we face various risks and adverse conditions which could have a significant adverse effect on our operational performance, earnings, cash flows and financial condition (see “Risk factors” on pages 27). There are limitations to the extent to which we can mitigate these risks. We carry out regular portfolio assessments so we can maintain our long-term competitiveness in Nigeria. We support the Nigerian government’s efforts to improve the efficiency, functionality and domestic benefits of Nigeria’s oil and gas industry. We monitor legislative developments and the security situation. We liaise with host communities, governmental and non-governmental organisations (NGOs) to help promote peaceful and safe operations. We continue to be transparent about how we manage and report spills, and how we deploy oil-spill response capability and technology. We implement a maintenance strategy to support sustainable equipment reliability and have begun a multi-year programme to reduce routine flaring of associated gas. See “Climate change and energy transition” on pages 75-98. UPSTREAM continued Strategic Report
55Shell Annual Report and Accounts 2021 Rest of Africa We also have interests in Algeria, Egypt, Mauritania, Namibia, São Tomé and Príncipe, South Africa and Tunisia. On September 23, 2021, Shell Egypt N.V. and an affiliate completed a full divestment of 13 onshore blocks in the Western Desert. Shell Egypt N.V. subsequently filed a notice of final relinquishment of the North East Obaiyed block, which is the only remaining onshore block still held by Shell Egypt N.V. In 2021, Shell announced plans to hand back to the Government of Tunisia Upstream assets associated with the Miskar and Hasdrubal concessions. Discussions are in progress regarding the terms of the hand-back. North America Canada In Canada, we produce and market natural gas, natural gas liquids and condensate. We hold mineral acres, primarily in the Montney play in British Columbia and Alberta. We currently operate four natural gas processing area facilities in our Groundbirch asset in British Columbia. In April 2021, we sold our Duvernay shale light oil position in Alberta. USA We produce oil and gas in deep water in the Gulf of Mexico. We produce heavy oil in California through a 51.8% interest in Aera Energy LLC which operates wells in the San Joaquin Valley. The majority of our oil and gas interests are acquired under leases granted by the owner of the minerals underlying the relevant area, including many leases for federal offshore tracts. Such leases usually run on an initial fixed term that is automatically extended by the establishment of continued production, subject to compliance with the terms of the lease (including, in the case of federal leases, extensive regulations imposed by federal law). We have sold or relinquished all frontier licences in Alaska and have no plans for frontier exploration off Alaska’s coast. We retain two exploration acreage positions in the long-established North Slope area of Alaska. One is a non-operating interest of 50% in 13 federal leases held since 2007 and operated by Eni. The other position consists of 18 state leases in nearby West Harrison Bay that have been held since 2012, which we plan to turn over to an alternative operator. Gulf of Mexico The Gulf of Mexico is our major production area in the USA. We have an interest in 311 active federal offshore leases. We are the operator of eight production hubs – Mars, Olympus, Auger, Perdido, Ursa, Enchilada/Salsa, Appomattox and Stones – and the West Delta 143 processing facilities (Shell interests ranging from 33% to 100%). We continue to produce from Coulomb (Shell interest 100%) which ties into the Na Kika platform, where Shell has a 50% non-operating interest. We continued exploration, development and abandonment activities in the Gulf of Mexico in 2021. We made discoveries at the Leopard and Blacktip North prospects in the Perdido Corridor. The Leopard well encountered more than 600 feet (183 meters) net oil pay at multiple levels and the Blacktip North well encountered approximately 300 feet net oil pay at multiple levels. Evaluation is ongoing to further define development options. The Leopard and Blacktip North discoveries are opportunities to increase production in the Perdido Corridor, where Shell’s Great White, Silvertip and Tobago fields are already producing. We also took the final investment decision (FID) for Whale, a deep-water development in the Perdido Corridor that features a 99% replicated hull and an 80% replication of the topsides of our Vito project. The Whale development (Shell interest 60%) is currently scheduled to begin production in 2024. We made progress on the development of Powernap and Vito, which are both in the execution phase. Powernap (Shell interest 100%) is a subsea tie-back to the Olympus production hub, while Vito (Shell interest 63%) is a stand-alone host. Both are expected to achieve first oil in 2022. The 2021 Atlantic hurricane season adversely impacted production at our US Gulf of Mexico assets. We experienced extended shutdowns at our Mars, Olympus, and Ursa production hubs because of structural damage to our West Delta-143 (WD-143) processing facilities after Hurricane Ida. We safely reinstated production at Olympus on October 1, (33 days after Hurricane Ida), and at Mars and Ursa on November 4, (67 days after Hurricane Ida). This was ahead of estimated timelines. Shales Our activity in 2021 was focused in the Permian Basin. On December 1, 2021, we completed the sale of Shell’s interest in the Permian to ConocoPhillips for a base consideration of $9.5 billion. As a result of this divestment, Shell no longer has active shales development in the USA. Rest of North America We also have deep-water licences and one shallow-water licence in Mexico. South America Brazil Our operated portfolio consists of offshore assets in: ■ the Bijupirá and Salema fields (Shell interest 80%), which ceased production in December 2021 to begin abandonment operations; ■ the BC-10 field (Shell interest 50%) in the Campos Basin; ■ the Gato do Mato area in the Santos Basin and the adjacent Sul de Gato do Mato area (Shell interest 50%), subject to unitisation, with development options under evaluation; and ■ a total of 22 exploration blocks in the following areas: ■ Barreirinhas Basin (10 blocks with Shell interests ranging from 50% to 100%); ■ Santos Basin (two blocks with Shell interests 45% and 55%); ■ Potiguar Basin (Shell interest 100%); and ■ Campos Basin (three blocks with Shell interest 40% and one block with Shell interest 100%). An additional five blocks were awarded to Shell in the National Petroleum Agency (ANP) permanent offer round in October 2021. Contracts were expected to be signed in the first quarter of 2022. Strategic Report
56 Shell Annual Report and Accounts 2021 Our non-operated portfolio consists of the following fields in the offshore Santos Basin: ■ Sapinhoá field (Shell interest 30%, operated by Petrobras), straddling the BM-S-9 and Entorno de Sapinhoá blocks, already unitised; ■ Lapa field (Shell interest 30%, not subject to unitisation, operated by TotalEnergies) in Block BM-S-9A; ■ Berbigão and Sururu fields (Shell interest 25%, subject to ongoing discussions about unitisation agreements, operated by Petrobras) in Block BM-S-11A; ■ Atapu field (Shell interest 4%, unitised in September 2019) in Block BM-S-11A. In December, Shell placed a successful bid in the ANP Transfer of Rights round for the acquisition of 25% of Atapu ToR area to increase its participation in the Atapu field from 4.3% to 16.7%. The contract is expected to be signed in the second quarter of 2022; ■ Lula field in Block BM-S-11, renamed the Tupi field (subject to unitisation in effect since April 2019, Shell interest 23%, operated by Petrobras); ■ Iracema field in Block BM-S-11 (Shell interest 25%, not subject to unitisation, operated by Petrobras); and ■ Mero field in the Libra PSC area (Shell interest 20%, unitisation with an adjoining area still subject to government approval, operated by Petrobras). In addition to the producing assets, we hold interests in two non-operated exploration blocks in the Santos Basin. These are operated by Petrobras with Shell interests of 20% and 40%. We also hold interests in two non-operated exploration blocks in the Potiguar Basin, operated by Petrobras (Shell interest 40%). The activities of operated and non-operated fields are currently supported by 17 producing deep-water FPSOs. We expect two additional FPSOs (Mero 1 and Mero 2) to be brought online in 2022-2023. In August 2021, we announced the final investment decision to contract the Mero 4 FPSO vessel to be deployed at the Mero field. Rest of South America We also have interests in Argentina and Suriname. TRADING AND SUPPLY We market and trade crude oil from most of our Upstream operations. UPSTREAM continued Strategic Report
57Shell Annual Report and Accounts 2021 OIL AND GAS INFORMATION Proved developed and undeveloped reserves of Shell subsidiaries and Shell share of joint ventures and associates Crude oil and natural gas liquids (million barrels) Synthetic crude oil (million barrels) Bitumen (million barrels) Natural gas (thousand million scf) Total (million boe) [A] Shell subsidiaries Increase/(decrease) in 2021: Revisions and reclassifications 597 (90) — 3,391 1,091 Improved recovery 30 — — 9 31 Extensions and discoveries 175 — — 1,477 430 Purchases and sales of minerals in place (165) — — (383) (230) Total before taking production into account 637 (90) — 4,494 1,322 Production [B] (578) (21) — (2,831) (1,088) Total 59 (111) — 1,663 234 At January 1, 2021 3,761 644 — 22,132 8,222 At December 31, 2021 3,820 533 — 23,795 8,456 Shell share of joint ventures and associates Increase/(decrease) in 2021: Revisions and reclassifications 46 — — 577 146 Improved recovery — — — — — Extensions and discoveries 2 — — 2 2 Purchases and sales of minerals in place — — — — — Total before taking production into account 48 — — 579 148 Production [C] (36) — — (612) (141) Total 12 — — (33) 7 At January 1, 2021 216 — — 3,982 902 At December 31, 2021 228 — — 3,949 909 Total Increase/(decrease) before taking production into account 685 (90) — 5,073 1,470 Production (614) (21) — (3,443) (1,229) Increase/(decrease) 71 (111) — 1,630 241 At January 1, 2021 3,977 644 — 26,114 9,124 At December 31, 2021 4,048 533 — 27,744 9,365 Reserves attributable to non-controlling interest in Shell subsidiaries at December 31, 2021 — 267 — — 267 [A] Natural gas volumes are converted into oil equivalent using a factor of 5,800 standard cubic feet (scf) per barrel. [B] Included 41 million boe consumed in operations (natural gas: 232 thousand million scf; synthetic crude oil: 1 million barrels). [C] Included 7 million boe consumed in operations (natural gas: 41 thousand million scf). Strategic Report
58 Shell Annual Report and Accounts 2021 PROVED RESERVES The proved oil and gas reserves of Shell subsidiaries and the Shell share of the proved oil and gas reserves of joint ventures and associates are set out in more detail in “Supplementary Information – Oil and Gas (unaudited)” on pages 284-301. Before taking production into account, our proved reserves increased by 1,470 million boe in 2021. This consisted of an increase of 1,322 million boe from Shell subsidiaries and an increase of 148 million boe from the Shell share of joint ventures and associates. After taking production into account, our proved reserves increased by 241 million boe in 2021 to 9,365 million boe at December 31, 2021. SHELL SUBSIDIARIES Before taking production into account, Shell subsidiaries’ proved reserves increased by 1,322 million boe in 2021. This consisted of an increase of 637 million barrels of crude oil and natural gas liquids, an increase of 775 million boe (4,494 thousand million scf) of natural gas and a decrease of 90 million barrels of synthetic crude oil. The 1,322 million boe increase was the result of a net increase of 1,091 million boe from revisions and reclassifications, an increase of 430 million boe from extensions and discoveries, an increase of 31 million boe from improved recovery, and a net decrease of 230 million boe related to purchases and sales of minerals in place. After taking into account production of 1,088 million boe (of which 41 million boe were consumed in operations), Shell subsidiaries’ proved reserves increased by 234 million boe in 2021 to 8,456 million boe. In 2021, Shell subsidiaries’ proved developed reserves (PD) decreased by 238 million boe to 6,740 million boe, and proved undeveloped reserves (PUD) increased by 472 million boe to 1,716 million boe. SHELL SHARE OF JOINT VENTURES AND ASSOCIATES Before taking production into account, the Shell share of joint ventures and associates’ proved reserves increased by 148 million boe in 2021. This consisted of an increase of 48 million barrels of crude oil and natural gas liquids and an increase of 100 million boe (580 thousand million scf) of natural gas. The 148 million boe increase comprised a net increase of 146 million boe from revisions and reclassifications and an increase of 2 million boe from extensions and discoveries. After taking into account production of 141 million boe (of which 7 million boe were consumed in operations), the Shell share of joint ventures and associates’ proved reserves increased by 7 million boe to 909 million boe at December 31, 2021. The Shell share of joint ventures and associates’ PD increased by 8 million boe to 801 million boe, and PUD decreased by 3 million boe to 108 million boe. For further information, see “Supplementary Information – oil and gas (unaudited)” on pages 284-301. PROVED UNDEVELOPED RESERVES In 2021, Shell subsidiaries and the Shell share of joint ventures and associates’ PUD increased by 469 million boe to 1,824 million boe. There were decreases of 467 million boe because of maturation to PD, mainly 129 million boe in Troll (Norway), 69 million boe in Tupi (Brazil), and 269 million boe spread across other fields, and a net decrease of 26 million boe due to purchases and sales. These were offset by: increases OIL AND GAS INFORMATION continued of 498 million boe due to revisions, an increase of 31 million boe due to improved recovery, and a net increase of 432 million boe due to extensions and discoveries. The extensions and discoveries consisted of 107 million boe in Mero, 81 million boe in Whale, and 244 million boe spread across other fields. In addition to the maturation of 467 million boe from PUD to PD, 51 million boe was matured to PD from contingent resources through PUD as a result of project execution during the year. PUD held for five years or more (PUD5+) at December 31, 2021, amounted to 238 million boe, an increase of 54 million boe compared with the end of 2020, which was driven mainly by changes in Kolo Creek (Nigeria), Tupi (Brazil) and Groundbirch (Canada). The fields with the largest PUD5+ on December 31, 2021 were Lunskoye (Russia), Gorgon (Australia), Kolo Creek (Nigeria) and Tupi (Brazil). These PUD5+ remain undeveloped because development either requires the installation of compression equipment (Russia) and the drilling of additional wells (Brazil) or will take longer than five years because of the complexity and scale of the project (Australia). During 2021, we spent $5.3 billion on development activities related to PUD maturation. DELIVERY COMMITMENTS We sell crude oil and natural gas from our producing operations under a variety of contractual obligations. Most contracts generally commit us to sell quantities based on production from specified properties, although some natural gas sales contracts specify delivery of fixed and determinable quantities, as discussed below. In the past three years, we met our contractual delivery commitments, with the notable exceptions of Egypt, Trinidad and Tobago, and Malaysia. In the period 2022-2024, we are contractually committed to deliver to third parties, joint ventures and associates a total of 6,976 billion scf of natural gas from our subsidiaries, joint ventures and associates. The sales contracts contain a mixture of fixed and variable pricing formulae that are generally referenced to the prevailing market price for crude oil, natural gas or other petroleum products at the time of delivery. In the period 2022-2024, we expect to meet our delivery commitments for almost all the areas in which they are carried, with an estimated 73.2% coming from PD, 5.0% through the delivery of gas that becomes available to us from paying royalties in cash, and 21.8% from the development of PUD as well as other new projects and purchases. The key exceptions are: ■ Egypt: The government decision to divert gas from the offshore West Delta Deep Marine fields to domestic use has caused a tangible shortfall of 502 billion scf (84% of the promised gas delivery), expected to continue in the near future leaving LNG gas commitment mostly under force majeure; ■ in Trinidad and Tobago (East Coast Marine Area and North Coast Marine Area), we expect to cover 91% of our delivery commitments from existing developed resource volumes and new projects, resulting in an expected true shortfall of some 62 billion scf; and ■ in Malaysia, one of the third-party gas supply lines which was under maintenance has not been repaired during 2021. Force majeure has been declared, and no penalties have been incurred, resulting in an expected true shortfall of some 54 billion scf (48% of the promised gas delivery). Strategic Report
59Shell Annual Report and Accounts 2021 Summary of proved oil and gas reserves of Shell subsidiaries and Shell share of joint ventures and associates (at December 31, 2021) Based on average prices for 2021 Crude oil and natural gas liquids (million barrels) Natural gas (thousand million scf) Synthetic crude oil (million barrels) Total (million boe) [A] Proved developed Europe 146 2,797 — 628 Asia 1,545 11,886 — 3,594 Oceania 71 4,162 — 789 Africa 218 981 — 387 North America USA 397 373 — 461 Canada 2 756 533 667 South America 790 1,306 — 1,015 Total proved developed 3,169 22,261 533 7,541 Proved undeveloped Europe 68 506 — 155 Asia 193 1,247 — 408 Oceania 9 1,218 — 219 Africa 47 1,035 — 225 North America USA 213 242 — 255 Canada 3 783 — 138 South America 346 452 — 424 Total proved undeveloped 879 5,483 — 1,824 Total proved developed and undeveloped Europe 214 3,303 — 783 Asia 1,738 13,133 — 4,002 Oceania 80 5,380 — 1,008 Africa 265 2,016 — 612 North America USA 610 615 — 716 Canada 5 1,539 533 805 South America 1,136 1,758 — 1,439 Total 4,048 27,744 533 9,365 Reserves attributable to non-controlling interest in Shell subsidiaries — — 267 267 [A] Natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel. Strategic Report
60 Shell Annual Report and Accounts 2021 EXPLORATION In 2021, producible hydrocarbons were encountered in the US Gulf of Mexico and Brunei. Gulf of Mexico In 2021, we acquired 19 blocks in the US Gulf of Mexico in Lease Sale 256. We relinquished leases for 22 blocks ahead of expiration. In August 2021, the Mexican regulator, Comisión Nacional de Hidrocarburos, approved the Shell farm-in transaction with China Offshore Oil Corporation E&P Mexico S.A.P.I. de C.V. into a deep- water licence in the offshore Mexico Perdido (Shell interest 30%). Brazil In June 2021, the Brazilian government ratified a block in Outboard Campos Basin (Shell interest 100%), awarded in the second National Petroleum Agency permanent offer bid round in Brazil. In October 2021, we secured five Southern Santos blocks in the 17th National Petroleum Agency bid round in Brazil (Shell interest 100% in four of them, 70% in the remaining one, operator in all cases), all of which are awaiting government ratification. Malaysia In July 2021, we signed an exploration production-sharing contract for an offshore Sarawak block (Shell interest 85%). UK In 2021, we purchased exploration licences across multiple plays in the 32nd UK Offshore Licence Round (Shell interest 50-100%). New frontiers In January 2021, we entered into an agreement with Equinor and YPF for an offshore block in the Argentina basin (Shell interest 30%). In March 2021, we reduced half of our interest, from 90% to 45%, in an exploration block in Namibia. In August 2021, the South African government approved a farm-in transaction with Impact Africa Limited under which Shell acquired a 50% participating interest and operatorship in two frontier deep-water blocks off the east coast of South Africa. We also received regulatory approvals and third-party consents for a portfolio transaction with Kosmos for one block in South Africa under which we acquired an additional 45% working interest. In December 2021, we signed a farm-in agreement into a shallow-water block in Suriname (Shell interest 20%). For further information, see “Supplementary Information – oil and gas (unaudited)” on pages 284-301. OIL AND GAS INFORMATION continued LOCATION OF OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES Location of oil and gas exploration and production activities [A] (at December 31, 2021) Exploration Development and/or Production Shell operator [B] Europe Albania • • • Cyprus • Germany • • Italy • Netherlands • • • Norway • • • UK • • • Asia Brunei • • • China • • Indonesia • Kazakhstan • • Malaysia • • • Oman • • • Philippines • • • Qatar • • Russia • • Turkey • • Oceania Australia • • • Africa Egypt • • • Mauritania • • Namibia • • Nigeria • • • São Tomé and Príncipe • South Africa • • Tanzania • • Tunisia • • North America Mexico • • USA • • • Canada • • • South America Argentina • • • Bolivia • Brazil • • • Colombia • • Suriname • • Trinidad and Tobago • • • Uruguay • • [A] Includes joint ventures and associates. Where a joint venture or an associate has properties outside its base country, those properties are not shown in this table. [B] In several countries where “Shell operator” is indicated, Shell is the operator of some but not all exploration and/or production ventures. Strategic Report
61Shell Annual Report and Accounts 2021 OIL AND GAS PRODUCTION AVAILABLE FOR SALE Crude oil and natural gas liquids [A] Thousand barrels 2021 2020 2019 Shell subsidiaries Shell share of joint ventures and associates Shell subsidiaries Shell share of joint ventures and associates Shell subsidiaries Shell share of joint ventures and associates Europe Denmark — — — — 7,490 — Italy 9,677 — 11,342 — 9,747 — Norway 4,878 — 6,914 — 7,025 — UK 25,554 — 30,061 — 30,677 — Other [B] 578 1,205 609 1,084 723 1,135 Total Europe 40,687 1,205 48,926 1,084 55,662 1,135 Asia Brunei 1,076 17,894 387 17,094 196 20,002 Kazakhstan 35,592 — 37,769 — 34,269 — Malaysia 17,983 — 18,494 — 21,993 — Oman 78,745 — 74,854 — 76,493 — Russia 21,012 7,769 20,816 9,050 22,442 9,413 Other [B] 30,061 7,548 30,101 7,629 28,796 7,709 Total Asia 184,469 33,211 182,421 33,773 184,189 37,124 Total Oceania [B] 11,844 — 7,416 — 10,058 — Africa Nigeria 35,911 — 48,620 — 56,589 — Other [B] 5,540 — 8,485 — 7,802 — Total Africa 41,451 — 57,105 — 64,391 — North America USA 164,811 — 165,169 — 171,204 — Canada 2,640 — 8,128 — 11,506 — Total North America 167,451 — 173,297 — 182,710 — South America Brazil 126,566 — 131,339 — 126,366 — Other [B] 6,456 1,566 5,072 729 3,900 — Total South America 133,022 1,566 136,411 729 130,266 — Total 578,924 35,982 605,576 35,586 627,276 38,259 [A] Reflects 100% of production of subsidiaries except in respect of production-sharing contracts (PSCs), where the figures shown represent the entitlement of the subsidiaries concerned under those contracts. [B] Comprises countries where 2021 production was lower than 10,100 thousand barrels or where specific disclosures are prohibited. Synthetic crude oil Thousand barrels 2021 2020 2019 Shell subsidiaries Shell subsidiaries Shell subsidiaries North America – Canada 19,891 18,920 19,076 Strategic Report
62 Shell Annual Report and Accounts 2021 OIL AND GAS INFORMATION continued Natural gas [A] Million standard cubic feet 2021 2020 2019 Shell subsidiaries Shell share of joint ventures and associates Shell subsidiaries Shell share of joint ventures and associates Shell subsidiaries Shell share of joint ventures and associates Europe Denmark — — — — 24,433 — Germany 36,798 — 35,918 — 41,846 — Netherlands — 159,107 — 131,648 — 244,286 Norway 178,577 — 187,627 — 182,683 — UK 49,128 — 65,012 — 62,174 — Other [B] 10,329 — 13,005 — 15,062 — Total Europe 274,832 159,107 301,562 131,648 326,198 244,286 Asia Brunei 17,989 147,865 21,025 159,846 22,185 160,648 China 55,967 — 46,750 — 44,510 — Kazakhstan 72,176 — 86,999 — 84,499 — Malaysia 193,871 — 226,791 — 226,277 — Philippines 34,361 — 40,549 — 44,374 — Russia 4,113 125,973 4,301 142,418 4,563 134,807 Other [B] 413,382 118,397 411,979 118,153 407,899 118,253 Total Asia 791,859 392,235 838,394 420,417 834,307 413,708 Oceania Australia 696,562 19,272 633,580 20,646 686,956 20,840 Total Oceania 696,562 19,272 633,580 20,646 686,956 20,840 Africa Egypt 86,348 — 104,946 — 92,169 — Nigeria 161,916 — 190,982 — 234,332 — Other [B] 23,473 — 27,438 — 30,266 — Total Africa 271,737 — 323,366 — 356,767 — North America USA 198,578 — 255,383 — 389,130 — Canada 116,423 — 164,451 — 220,005 — Total North America 315,001 — 419,834 — 609,135 — South America Bolivia 45,214 — 45,015 — 48,501 — Brazil 72,107 — 73,914 — 78,526 — Trinidad and Tobago 121,411 — 141,576 — 159,698 — Other [B] 11,006 393 9,609 830 8,662 — Total South America 249,738 393 270,114 830 295,387 — Total 2,599,729 571,007 2,786,850 573,541 3,108,750 678,834 [A] Reflects 100% of production of subsidiaries except in respect of PSCs, where the figures shown represent the entitlement of the subsidiaries concerned under those contracts. [B] Comprises countries where 2021 production was lower than 41,795 million scf or where specific disclosures are prohibited. Strategic Report
63Shell Annual Report and Accounts 2021 AVERAGE REALISED PRICE BY GEOGRAPHICAL AREA Crude oil and natural gas liquids $/barrel 2021 2020 2019 Shell subsidiaries Shell share of joint ventures and associates Shell subsidiaries Shell share of joint ventures and associates Shell subsidiaries Shell share of joint ventures and associates Europe 68.30 64.18 39.51 39.05 65.11 58.08 Asia 63.82 70.09 38.73 42.51 58.16 65.25 Oceania 63.56 — 21.29 — 51.51 — Africa 70.89 — 41.23 — 65.39 — North America – USA 62.75 — 34.17 — 54.56 — North America – Canada 46.58 — 27.17 — 36.61 — South America 64.28 56.91 36.01 37.28 56.68 — Total 64.28 69.34 36.72 42.31 57.56 65.05 Synthetic crude oil $/barrel 2021 2020 2019 Shell subsidiaries Shell subsidiaries Shell subsidiaries North America – Canada 60.11 31.13 50.27 Natural gas $/thousand scf 2021 2020 2019 Shell subsidiaries Shell share of joint ventures and associates Shell subsidiaries Shell share of joint ventures and associates Shell subsidiaries Shell share of joint ventures and associates Europe 10.71 9.86 3.66 3.76 5.59 4.95 Asia 2.54 6.91 1.88 [A] 4.19 2.66 6.34 Oceania 7.74 4.04 5.95 [A] 3.15 7.83 [A] 3.91 Africa 3.43 — 2.55 — 2.92 — North America – USA 4.40 — 1.72 — 2.27 — North America – Canada 2.70 — 1.61 — 1.37 — South America 4.04 1.82 1.35 1.90 2.33 — Total 5.39 7.60 2.99 [A] 4.06 3.95 5.80 [A] As revised, following a reassessment. Strategic Report
64 Shell Annual Report and Accounts 2021 OIL AND GAS INFORMATION continued AVERAGE PRODUCTION COST BY GEOGRAPHICAL AREA Crude oil, natural gas liquids and natural gas [A] $/boe 2021 2020 2019 Shell subsidiaries Shell share of joint ventures and associates Shell subsidiaries Shell share of joint ventures and associates Shell subsidiaries Shell share of joint ventures and associates Europe 21.48 8.59 20.05 [B] 11.44 14.14 5.76 Asia 5.66 7.64 5.54 6.83 6.30 6.17 Oceania 9.26 24.68 8.92 20.23 9.17 24.49 Africa 11.47 — 9.43 — 8.44 — North America – USA 10.88 — 12.50 — 11.78 — North America – Canada 10.64 — 10.52 — 11.88 — South America 5.80 5.51 5.18 [B] 9.18 [B] 6.33 [B] — Total 9.12 8.23 9.10 [B] 8.02 [B] 8.95 6.48 [A] Natural gas volumes are converted into oil equivalent using a factor of 5,800 scf per barrel. [B] As revised, following a reassessment. Synthetic crude oil $/barrel 2021 2020 2019 Shell subsidiaries Shell subsidiaries Shell subsidiaries North America – Canada 18.87 18.28 19.29 Strategic Report
65Shell Annual Report and Accounts 2021 OIL PRODUCTS Key statistics $ million, except where indicated 2021 2020 2019 Segment earnings/(loss) [A] 2,664 (494) 6,139 Including: Revenue (including inter-segment sales) 194,734 134,930 288,279 Share of profit of joint ventures and associates 765 988 1,179 Interest and other income 328 (93) 273 Operating expenses [B] 14,376 13,511 15,730 Underlying operating expenses [B] 14,272 12,970 15,590 Depreciation, depletion and amortisation 5,657 10,473 4,461 Taxation charge/(credit) 751 (898) 1,319 Identified Items [B] (1,280) (6,489) (93) Adjusted Earnings [B] 3,944 5,995 6,231 Adjusted EBITDA (CCS basis) [B] 8,821 10,421 11,779 Capital expenditure 3,705 3,236 4,654 Cash capital expenditure [B] 3,868 3,328 4,907 Refinery utilisation (%) 72 72 78 Refinery processing intake (thousand b/d) 1,639 2,063 2,564 Oil Products sales volumes (thousand b/d) 4,459 4,710 6,561 [A] See Note 5 to the “Consolidated Financial Statements” on pages 245-248. Segment earnings are presented on a current cost of supplies basis. [B] See “Non-GAAP measures reconciliations” on pages 326-329. OVERVIEW Our Oil Products business is part of an integrated value chain that refines crude oil and other feedstocks into products that are moved and marketed around the world for domestic, industrial and transport use. The products we sell include low-carbon fuels, lubricants, bitumen, sulphur, gasoline, diesel, heating oil, aviation fuel and marine fuel. We provide access to electric vehicle charge points at home, at work and on-the-go, including at our fuel and convenience retail site forecourts and at a range of public locations. We also trade crude oil, oil products and petrochemicals. Our Oil Products activities comprise Marketing and Refining & Trading. These are sub-segments of Oil Products that are made up of various classes of business. Marketing includes Retail, Lubricants, Business-to- Business (B2B), Low-Carbon Fuels (biofuels and renewable natural gas (RNG)), our interests in the Raizen JV, and Pipelines. In Trading and Supply, we trade crude oil, low-carbon fuels, oil products and petrochemicals to optimise feedstocks for Refining, to supply our Marketing businesses and third parties, and for our own profit. The Oil Products business also manage Oil Sands activities – the extraction of bitumen from mined oil sands and its conversion into synthetic crude oil. BUSINESS CONDITIONS Global oil product demand rose by 5.6 million barrels per day (b/d) in 2021 to 97.4 million b/d, after a sharp drop of around 8.5 million b/d in 2020, according to the IEA. The rebound was supported by successful vaccine roll-outs, especially in developed economies such as the USA, UK and EU. Road mobility has largely returned to pre-pandemic levels, with COVID-19 travel restrictions being lifted and more people switching from public transport to cars. Air travel has begun to recover, but is still around 20-30% below pre-pandemic levels. This is probably attributable to remaining cross-border travel restrictions and public hesitancy about air travel during a global pandemic. Mirroring the broad economic recovery, demand for naphtha, LPG and ethane also picked up. Gross refining margins improved during 2021, especially during the second and third quarters. This is because demand for oil products recovered significantly as economies rebounded and transport use increased with the easing of COVID-19 travel restrictions. Demand for kerosene for aviation remained below pre-pandemic levels because varying levels of international travel restrictions remained in place in 2021. Despite the Omicron variant of COVID-19, demand recovery continued during the fourth quarter. Industry utilisation showed some recovery, but in 2021 there were further announcements that refineries would fully or partially close on a permanent basis. Construction of new capacity continued during the year, especially in the Middle East and Asia. See “Market overview” on pages 42-44. REFINERY UTILISATION Utilisation is defined as the actual usage of the plants as a percentage of the rated capacity. Utilisation remained at 72%, unchanged from 2020. OIL PRODUCTS SALES Oil Products sales volumes decreased by 5% in 2021 compared with 2020. The decrease was largely driven by lower Trading volumes, partly offset by higher Marketing volumes. EARNINGS 2021-2020 Segment earnings in 2021 were $2,664 million, 639% higher than in 2020. Earnings in 2021 included a net charge of $1,280 million, compared with a net charge of $6,489 million in 2020 which is described at the end of this section. Strategic Report
66 Shell Annual Report and Accounts 2021 Excluding the impact of the net charges (described below), earnings in 2021 were $3,944 million, compared with $5,995 million in 2020. Marketing accounted for 106% of these 2021 earnings, Refining for (36)% and Trading and Supply for 30%. Oil Products earnings, excluding the net charge, decreased by $2,051 million, or 34% compared with 2020. This was driven by lower contributions from trading and optimisation (around $1,100 million), higher operating expenses (around $1,000 million) and other items, mainly unfavourable deferred tax movements (around $1,100 million), partly offset by higher Marketing volumes (around $700 million) and higher Oil Sands margins (around $500 million). The decrease in earnings of $2,051 million, analysed by sub-segment, was as follows: ■ Marketing earnings were $379 million lower than in 2020, mainly driven by higher operating expenses. These were partially offset by higher sales volumes. ■ Refining and trading earnings were $1,671 million lower than in 2020, mainly because of lower contributions from trading and optimisation, higher operating expenses and unfavourable deferred tax movements. These were partly offset by higher refining margins, higher Oil Sands margins due to increased average realised prices and lower depreciation. Segment earnings in 2021 included a net charge of $1,280 million. This included: ■ impairment charges of $1,619 million mainly related to the divestment of Puget Sound and Deer Park refineries in the USA; ■ redundancy and restructuring costs of $62 million (mainly the cost of Reshape 2020-2021, partly offset by Bukom transformation provision release); and ■ other net charges of $32 million; These charges were partly offset by: ■ net gains from disposal of assets of $291 million mainly related to the dilution of interest in the Raízen joint venture; and ■ a net gain of $142 million due to the fair value accounting of commodity derivatives. Segment earnings in 2020 included a net charge of $6,489 million. This included: ■ impairment charges of $5,530 million across sites, reflecting revisions to medium- and long-term price outlook assumptions in light of: changes in supply and demand fundamentals in the energy market; macroeconomic conditions; the COVID-19 pandemic; impairment and transformation charges at Pulau Bukom; and the shutdown of Convent; ■ restructuring costs of $365 million (mainly shutdown of Convent, Pulau Bukom transformation and various initiatives across Oil Products); ■ other net charges of $552 million (mainly onerous contract provisions due to shutdown of Convent); and ■ a net charge of $101 million due to the fair value accounting of commodity derivatives. These charges were partly offset by net gains from disposal of assets of $59 million. PRIOR YEAR EARNINGS SUMMARY Our earnings summary for the financial year ended December 31, 2020, compared with the financial year ended December 31, 2019, can be found in the Annual Report and Accounts (page 71) and Form 20-F (page 52) for the year ended December 31, 2020, as filed with the Registrar of Companies for England and Wales and the US Securities and Exchange Commission, respectively. CASH CAPITAL EXPENDITURE Cash capital expenditure (cash capex) was $3.9 billion in 2021, compared with $3.3 billion in 2020. Cash capital expenditure in Marketing increased by $0.3 billion mainly because of higher spend in growth projects relating to biofuels and retail. In Refining and trading, cash capital expenditure increased by $0.2 billion due to turnarounds. Our cash capital expenditure is expected to be around $7 billion to $8 billion in 2022. PORTFOLIO AND BUSINESS DEVELOPMENTS Significant portfolio and business developments in 2021 included: ■ In July 2021, we announced the start-up of Europe’s largest polymer electrolyte membrane hydrogen electrolyser at the Shell Energy and Chemicals Park Rheinland, Germany, producing green hydrogen (hydrogen produced from renewable energy sources). ■ In July 2021, our subsidiary Shell Deutschland reached an agreement for the sale of its non-operated 37.5% shareholding in the PCK Schwedt Refinery, 120 km north-east of Berlin, Germany. ■ In August 2021, trading in shares of Raízen S.A., our joint venture (Shell interest 44%), began on the São Paulo Stock Exchange (B3) in Brazil, after a successful initial public offering. ■ In September 2021, we announced a final investment decision to build an 820,000-tonnes-a-year biofuels facility at the Energy and Chemicals Park Rotterdam, the Netherlands, which was formerly known as the Pernis refinery. ■ In October 2021, we signed an agreement to acquire the retail gas station network (including gas stations, convenience retail and dealer supply agreements) from the Landmark group of companies, a Texas-based fuel retail and convenience retailing business. Subject to the satisfaction of closing conditions, the deal expected to be completed in the first half of 2022. ■ In January 2022, our subsidiary Shell Oil Company completed the sale of its interest in Deer Park Refining Limited Partnership, in Texas, USA. This was a 50:50 joint venture between Shell Oil Company and P.M.I. Norteamerica, S.A. De C.V. (a subsidiary of Petróleos Mexicanos, or Pemex). The transaction transferred Shell’s interest in the partnership, and with it full ownership of the refinery, to Pemex. The agreement for sale of its interest was reached in May 2021. Shell Chemical L.P. continues to operate its 100% owned Deer Park Chemicals facility located adjacent to the site. ■ In February 2022, we have made a non-binding offer to purchase all remaining common units held by the public representing limited partner interests in Shell Midstream Partners, L.P. for $12.89 per common unit in cash. The proposed transaction is subject to a number of contingencies, including the approval of the board of directors of Shell Midstream Partners, L.P. and the satisfaction of any conditions to the consummation of a transaction set forth in any definitive agreement concerning the transaction. OIL PRODUCTS continued Strategic Report
67Shell Annual Report and Accounts 2021 BUSINESS AND PROPERTY Marketing Mobility Shell is the world’s largest mobility retailer, by number of sites, with more than 46,000 service stations operating in more than 70 countries at the end of 2021. We operate different models across these markets, from full ownership of retail sites through to brand licensing agreements. Every day, around 32 million customers visit these sites to buy fuel, convenience items including beverages and fresh food, and services such as lubricant changes and car washes. We offer our business customers Shell Fleet Solutions, through which they can obtain items including fuel cards, road services and carbon-offset offers. At the end of 2021, Shell operated 12,400 convenience stores worldwide and we expect to grow this number to 15,000 by 2025. We have more than 100 years’ experience in fuel development. Aided by our partnership with Scuderia Ferrari, we have concentrated on developing fuels with special formulations designed to clean engines and improve performance. We sold such fuels under the Shell V-Power brand in 66 countries in 2021. In a growing number of markets, we are offering customers lower-emission products and services, including biofuels, electric vehicle fast charging, hydrogen and various gaseous fuels such as LNG. In eight markets, including the UK and the Netherlands, Shell Mobility provides customers with the opportunity to offset their carbon emissions. Shell Mobility offers electric vehicle (EV) customers nearly 8,000 public charge points at Shell stations, on-street and at destinations like supermarkets. In addition, Shell Renewables and Energy Solutions operates around 80,000 private charge points and offers customers access to more than 300,000 charge points through its growing roaming networks in Europe, North America and South East Asia. In 2021, Shell, Waitrose and Partners in the UK, and REWE and Penny supermarkets in Germany, announced the intention to install hundreds of charge points over the coming years. In January 2022, Shell opened its first EV charging hub in the UK in Fulham, London, where petrol and diesel pumps at an existing fuel station have been replaced with charge points. Shell Fulham features nine high-powered, ultra-rapid 175 kW charge points. In 2021, Shell Mobility introduced a new premium fresh coffee and food offer, called Shell Café. The launch of Shell Café provides a consistent brand for drivers visiting Shell stations and addresses the evolving needs of customers with enhanced customer facilities and new on-site service offerings. By the end of 2021, there were 800 conversions across 14 markets in Europe with plans to expand to other regions in 2022. We have around 50 hydrogen retail sites in Europe and North America, where drivers can fill up their vehicles with hydrogen fuel. Lubricants Shell Lubricants has been the number one global finished lubricants supplier in terms of market share for 15 consecutive years, according to Kline & Company data for 2021. Across more than 160 markets, we produce, market and sell technically advanced lubricants for passenger cars, motorcycles, trucks, coaches, and machinery used in manufacturing, mining, power generation, agriculture and construction. We also make premium lubricants for conventional vehicles and Shell E-fluids for electric vehicles using gas-to-liquids (GTL) base oils that are made from natural gas at our Pearl GTL plant in Qatar (see “Integrated Gas” on pages 45-49). We have a global lubricants supply chain with a network of four base oil manufacturing plants, 33 lubricant blending plants, eight grease plants and six GTL base oil storage hubs. Through our marine activities, we primarily provide the shipping and maritime sectors with lubricants. We also provide fuels, chemical products and related technical and digital services. We supply more than 200 grades of lubricants and seven types of fuel to vessels worldwide, ranging from large ocean-going tankers to small fishing boats. Business-to-business Our Business-to-business (B2B) activities encompass the sale of fuels, speciality products and services to a broad range of commercial customers. Shell Aviation provides aviation fuel, lubricants and low-carbon solutions globally. In 2021, we took a final investment decision to build a new biofuels facility at the Shell Energy and Chemicals Park Rotterdam. This will be among the largest in Europe producing sustainable aviation fuel (SAF). We announced plans to produce SAF at our energy and chemicals parks in Germany and Singapore. We also invested in LanzaJet, a leading sustainable fuels technology company. Shell Bitumen supplies customers across 60 markets and provides enough bitumen to resurface 500 kilometres of road lanes every day. It also invests in research and development to create innovative products. Shell Sulphur Solutions is a business that manages the complete value chain of sulphur, from refining to marketing. The business provides sulphur for use in applications such as fertiliser, mining and chemicals. The business also licenses Shell Thiogro technologies to create innovative and custom sulphur-enhanced fertilisers. Low-carbon fuels Biofuels In 2021, around 9.1 billion litres of biofuels went into Shell’s fuels worldwide, which includes sales made by Raízen, our joint venture in Brazil (Shell interest 44%, not operated by Shell). Raízen produced around 2.5 billion litres of ethanol and around four million tonnes of sugar from sugar cane in 2021. The cellulosic ethanol plant at Raízen’s Costa Pinto mill in Brazil produced 19 million litres of ethanol in 2021. In February 2021, Raízen announced the acquisition of Biosev, adding a further 50% of production capacity in low-carbon fuels. We believe this will allow Raízen to increase its bioethanol production capacity to 3.75 billion litres a year. The transaction contributes to Shell’s target to be a net-zero emissions energy business by 2050, in step with society. Strategic Report
68 Shell Annual Report and Accounts 2021 RNG Renewable natural gas (RNG), also known as biogas or biomethane, is gas derived from processing organic waste in a controlled environment until it is fully interchangeable with conventional natural gas. In September 2021, we opened our first US renewable natural gas production facility in Junction City, Oregon. The plant uses locally sourced cow manure and agricultural residues to produce low-carbon fuel for heavy-duty road transport. We opened our first renewable compressed natural gas (R-CNG) fuelling site in the USA at our products distribution complex in Carson, California. The R-CNG is sourced from Shell’s portfolio of anaerobic digestion projects. In Europe, we are offering liquefied renewable natural gas (bio-LNG) to customers with trucks powered by natural gas. In 2021, in collaboration with Nordsol, we opened our first European bio-LNG plant, in Amsterdam Westpoort, in the Netherlands. This will make us the first fuel provider to offer a blend of bio-LNG throughout the entire LNG network in the Netherlands. Midstream Shell Pipeline Company LP (Shell interest 100%) operates eight tank farms across the USA. It owns all the interest in one tank farm, and has majority-ownership interests in the other seven through its subsidiaries. It transports around 2 billion barrels of crude oil and refined products a year through around 6,000 kilometres of pipelines in the Gulf of Mexico and five US states. Our various non-Shell-operated ownership interests provide a further 13,000 kilometres of pipeline. We carry more than 40 types of crude oil and more than 20 grades of fuel and chemicals, including gasoline, diesel, aviation fuel, chemicals and ethylene. Shell Midstream Partners, L.P., a master limited partnership that is headquartered in Houston, Texas; owns, operates, develops and acquires pipelines and other midstream and logistics assets. The Partnership’s assets include interests in entities that own (a) crude oil and refined products pipelines and terminals that serve as key infrastructure to transport onshore and offshore crude oil production to Gulf Coast and Midwest refining markets and deliver refined products from those markets to major demand centers and (b) storage tanks and financing receivables that are secured by pipelines, storage tanks, docks, truck and rail racks and other infrastructure used to stage and transport intermediate and finished products. The Partnership’s assets also include interests in entities that own natural gas and refinery gas pipelines that transport offshore natural gas to market hubs and deliver refinery gas from refineries and plants to chemical sites along the Gulf Coast. Shell controls the General Partner of Shell Midstream Partners. See “Governance – Related Party Transactions” on page 201 for information on transactions between Shell and Shell Midstream Partners, L.P. Refining and trading Refining We have interests in 10 refineries worldwide, with a capacity to process a total of 1.6 million barrels of crude oil per day. The distribution of our refining capacity is 52% in Europe and Africa, 34% in the Americas and 14% in Asia. Shell’s Refining business is transforming. We are concentrating our refineries portfolio to meet our strategic aims and to capitalise on the strong integration between our customers, trading operations, chemical plants and, increasingly, our low-carbon fuels output. We are transforming our refining sites into five energy and chemicals parks. These are expected to be Rotterdam in the Netherlands, Rheinland in Germany, Pulau Bukom in Singapore, Norco in Louisiana, USA, and Scotford in Alberta, Canada. Transforming our refinery business will mean developing new facilities and converting or dismantling existing units. We plan to process less crude oil and use more renewable and recycled feedstocks such as hydrogen, biofuels and plastic waste. In 2021, we completed the sale of the Puget Sound refinery near Anacortes, Washington, USA, to a subsidiary of HollyFrontier Corporation. We also completed the sale of Fredericia refinery, Denmark. Trading and Supply Through our main trading offices in London, Houston, Singapore and Rotterdam, we trade crude oil, low-carbon fuels, refined products, chemical feedstocks and environmental products. Trading and Supply trades in physical and financial contracts, lease storage and transportation capacities, and manages shipping and wholesale commercial fuel activities globally. Operating in around 25 countries, with about 130 Shell and joint-venture terminals, we believe our supply and distribution infrastructure is well positioned to make deliveries around the world. Shipping and Maritime enables the safe delivery of the Shell Trading and Supply contracts. This includes supplying feedstocks for our refineries and chemical plants, and finished products such as gasoline, diesel and aviation fuel to our Marketing businesses and customers. Shell Wholesale Commercial Fuels provides fuels for transport, industry and heating ranging from reliable main-grade fuels to premium products. Oil Sands Synthetic crude oil is produced by mining bitumen-saturated sands, extracting the bitumen, and transporting it to a processing facility where hydrogen is added to make a wide range of feedstocks for refineries. The Athabasca Oil Sands Project (AOSP) in Alberta, Canada, includes the Albian Sands mining and extraction operations, the Scotford upgrader and the Quest carbon capture and storage (CCS) project. We have a 50% interest in 1745844 Alberta Ltd. (formerly known as Marathon Oil Canada Corporation), which holds a 20% interest in the Athabasca Oil Sands Project. BUSINESS ACTIVITIES WITH SYRIA AND CUBA Syria We ceased all operational activities in Syria in 2011. Cuba We do not have any operational activities in Cuba. OIL PRODUCTS DATA TABLES The tables below reflect Shell subsidiaries and instances where Shell owns the crude oil or feedstocks processed by a refinery. The tables include Fredericia refinery until the date of divestment in June 2021 and Puget Sound refinery until the date of divestment in October 2021. Other joint ventures and associates are only included where explicitly stated. OIL PRODUCTS continued Strategic Report
69Shell Annual Report and Accounts 2021 Oil Products sales volumes [A][B] Thousand b/d 2021 2020 2019 Europe Retail 360 344 410 Lubricants 17 15 16 Other Marketing 120 107 178 Refining & Trading 426 472 1,183 Total 923 938 1,787 Asia Retail 512 475 535 Lubricants 46 35 36 Other Marketing 103 106 169 Refining & Trading 870 974 1,260 Total 1,531 1,590 2,000 Africa Retail 45 40 45 Lubricants 3 3 3 Other Marketing 7 7 11 Refining & Trading 47 70 78 Total 102 120 137 Americas Retail 828 782 924 Lubricants 25 24 27 Other Marketing 367 338 450 Refining & Trading 683 918 1,236 Total 1,903 2,062 2,637 Total product sales [C][D] Retail 1,745 1,641 1,914 Lubricants 91 77 82 Other Marketing 597 558 808 Refining & Trading 2,026 2,434 3,757 Total 4,459 4,710 6,561 [A] Excludes deliveries to other companies under reciprocal sale and purchase arrangements, that are in the nature of exchanges. Sales of condensate and natural gas liquids are included. [B] Includes the Shell share of Raízen’s sales volumes. [C] Certain contracts are held for trading purposes and reported net rather than gross. The effect in 2021 was a reduction in oil product sales of approximately 1,127 thousand b/d (2020: 1,284 thousand b/d; 2019: 546 thousand b/d). With effect from January 1, 2020, certain contracts held for trading purposes and reported net for Europe and Asia regions are consolidated in Europe. [D] Reported volumes include the Shell joint ventures’ sales volumes from key countries. Branded retail sites [A] 2021 2020 2019 Europe 8,178 8,071 7,978 Asia [B] 10,753 10,387 10,138 Oceania [B] 1,060 1,071 1,038 Africa 2,724 2,622 2,494 Americas [C] 23,305 23,461 23,021 Total 46,020 45,612 44,669 [A] Excludes sites closed for more than six months. [B] Asia includes Turkey and Russia; Oceania includes French Polynesia, Guam, Palau and New Caledonia. [C] Includes around 7,500 retail sites operated by Raizen joint venture. Oil products – cost of crude oil processed or consumed [A] $/barrel 2021 2020 2019 Total 60.51 35.03 54.97 [A] Includes Upstream and Integrated Gas margins on crude oil supplied by Shell subsidiaries, joint ventures and associates. Crude distillation capacity [A] Thousand b/stream day [B] 2021 2020 2019 Europe 1,023 1,059 1,057 Asia 307 573 767 Africa 90 90 90 Americas 729 1,028 1,171 Total 2,149 2,750 3,085 [A] Average operating capacity for the year, excluding mothballed capacity. [B] Stream day capacity is the maximum capacity with no allowance for downtime. Oil products – crude oil processed [A] Thousand b/d 2021 2020 2019 Europe 761 810 829 Asia 223 292 498 Africa 57 54 55 Americas 455 719 1,004 Total 1,496 1,875 2,386 [A] Includes natural gas liquids, share of joint ventures and associates and processing for others. Refinery processing intake [A] Thousand b/d 2021 2020 2019 Crude oil 1,496 1,876 2,342 Feedstocks 143 187 222 Total 1,639 2,063 2,564 Europe 806 854 875 Asia 225 302 517 Africa 57 54 55 Americas 551 853 1,117 Total 1,639 2,063 2,564 [A] Includes crude oil, natural gas liquids and feedstocks processed in crude distillation units and in secondary conversion units. Refinery processing outturn [A] Thousand b/d 2021 2020 2019 Gasolines 624 771 952 Kerosines 141 158 417 Gas/Diesel oils 611 774 818 Fuel oil 108 140 223 Other 258 279 282 Total 1,742 2,122 2,692 [A] Excludes own use and products acquired for blending purposes. Strategic Report
70 Shell Annual Report and Accounts 2021 MANUFACTURING PLANTS AT DECEMBER 31, 2021 Refineries in operation Thousand barrels/stream day, 100% capacity [B] Location Asset class Shell interest (%) [A] Crude distillation capacity Thermal cracking/ visbreaking/ coking Catalytic cracking Hydro- cracking Europe Germany Miro [C] 32 313 40 96 — Rheinland 100 354 49 — 90 Schwedt [C] 38 233 45 59 — Netherlands Pernis 100 444 — 53 104 Asia Singapore Pulau Bukom 100 307 55 — 61 Africa South Africa Durban [C] 36 180 25 37 — Americas Argentina Buenos Aires [C] 44 108 20 22 — Canada Alberta Scotford 100 100 — — 83 Ontario Sarnia 100 85 5 21 10 USA Louisiana Norco 100 250 29 119 44 Texas Deer Park [D] 50 340 96 75 60 [A] Shell interest is rounded to the nearest whole percentage point; Shell share of production capacity may differ. [B] Stream day capacity is the maximum capacity with no allowance for downtime. [C] Not operated by Shell. [D] The sale of Deer Park refinery concluded in January 2022. Integrated refinery and chemical complex Refinery complex with cogeneration capacity Refinery complex with chemical unit(s) OIL PRODUCTS continued Strategic Report
71Shell Annual Report and Accounts 2021 CHEMICALS Key statistics $ million, except where indicated 2021 2020 2019 Segment earnings [A] 1,390 808 478 Including: Revenue (including inter-segment sales) 23,355 14,571 17,485 Share of profit of joint ventures and associates 609 567 546 Interest and other income (14) — (7) Operating expenses [B] 3,335 3,235 3,430 Underlying operating expenses [B] 3,256 3,035 3,104 Depreciation, depletion and amortisation 1,520 1,116 1,074 Taxation charge/(credit) (41) 7 (2) Identified Items [B] (364) (154) (263) Adjusted Earnings [B] 1,753 962 741 Adjusted EBITDA (CCS basis) [B] 2,959 2,131 1,891 Capital expenditure 3,504 2,608 4,068 Cash capital expenditure [B] 3,573 2,640 4,090 Chemical plant utilisation (%) 78 80 76 Chemicals sales volumes (thousand tonnes) 14,216 15,036 15,223 [A] See Note 5 to the “Consolidated Financial Statements” on pages 245-248. Segment earnings are presented on a current cost of supplies basis. [B] See “Non-GAAP measures reconciliations” on pages 326-329. OVERVIEW Our Chemicals business supplies customers with a range of base and intermediate chemicals to make products that people use every day. We also have major manufacturing plants that are located close to refineries, and our own marketing network. BUSINESS CONDITIONS Cracker margins were volatile in 2021. This was because of supply interruptions and demand increases as COVID-19 lockdown restrictions eased. Overall margins were higher than in 2020, except in Asia. Chinese demand recovered quickly from the pandemic, but petrochemical supply was constrained by power restrictions that affected manufacturing centres, logistics issues within China because of COVID-19, and global logistics issues. Asia cracker margins were down slightly from 2020 because of the balance of supply and demand, and rising prices for energy, crude oil and naphtha feedstock. US ethane cracker margins were supported by disruption due to winter storm Uri in February and March and to a lesser extent by interruptions caused by Hurricane Ida in August and September. West European cracker margins were supported by the US weather events and strong domestic demand, which offset rising crude and natural gas prices for the majority of 2021. The outlook for petrochemical margins in 2022 and beyond depends on feedstock costs and the balance of supply and demand. Demand for petrochemicals will be affected by the spread of COVID-19 as new variants emerge, and the extent of recovery from the pandemic. Supply of petrochemicals will depend on the net capacity effect of new builds and plant closures (taking into account any delays or cancellations in building new plants or closing old ones). Product prices reflect the prices of raw materials, which are closely linked to crude oil and natural gas prices. The balance of all these factors will drive margins. See “Market overview” on pages 42-44. CHEMICAL PLANT UTILISATION Utilisation is defined as the actual usage of the plants as a percentage of the rated capacity. Chemicals manufacturing plant utilisation was 78% in 2021 compared with 80% in 2020. The change was mainly because of the impact of Hurricane Ida in the USA in 2021 and an extended turnaround. CHEMICALS SALES In 2021, Chemicals sales volumes were 14,216 thousand tonnes, which was 5% lower than 2020 sales volumes of 15,036 thousand tonnes, as a result of the impact of Hurricane Ida in the USA. EARNINGS 2021-2020 Segment earnings in 2021 of $1,390 million were 72% higher than in 2020. Earnings in 2021 included a net charge of $364 million, compared with a net charge in 2020 of $154 million, which is described below. Excluding the impact of these charges, earnings in 2021 were $1,753 million, compared with $962 million in 2020. Chemicals earnings, excluding the net charges (described below), increased by $792 million, or 82%, compared with 2020. This was driven by higher margins in base chemicals and intermediates (around $800 million) from a stronger price environment, and favourable deferred tax movements (around $200 million), partly offset by higher operating expenses (around $200 million) driven by the impact of Hurricane Ida. Segment earnings in 2021 included a net charge of $364 million. This included: ■ impairment charges of $301 million (mainly due to divestment of the Mobile and Deer Park refineries in the USA and the closure of a production unit on Jurong Island, Singapore); ■ redundancy and restructuring costs of $21 million; ■ other net charges of $38 million (mainly legal provision); and ■ net loss from disposal of assets of $12 million. These charges were partly offset by a net gain from fair value accounting of commodity derivatives of $8 million. Segment earnings in 2020 included a net charge of $154 million. Strategic Report
72 Shell Annual Report and Accounts 2021 This included: ■ impairment charges of $4 million; ■ costs related to restructuring of $38 million (various initiatives across Chemicals); ■ net loss from disposal of assets of $1 million; and ■ other net charges of $115 million (mainly legal provision). These charges were partly offset by a net gain from fair value accounting of commodity derivatives of $4 million. PRIOR YEAR EARNINGS SUMMARY Our earnings summary for the financial year ended December 31, 2020, compared with the financial year ended December 31, 2019, can be found in the Annual Report and Accounts (page 77) and Form 20-F (page 57) for the year ended December 31, 2020, as filed with the Registrar of Companies for England and Wales and the US Securities and Exchange Commission, respectively. CASH CAPITAL EXPENDITURE Cash capital expenditure (cash capex) was $3.6 billion in 2021, compared with $2.6 billion in 2020. Cash capital expenditure increased by $1.0 billion, mainly because of spend on the construction of our cracker facilities in Pennsylvania. Our cash capital expenditure is expected to be around $2 billion to $3 billion in 2022. BUSINESS AND PROPERTY Manufacturing Our plants produce 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. We have the capacity to produce around 6.5 million tonnes of ethylene a year. We are expanding our product portfolio to include sustainable chemicals, more intermediates and performance chemicals such as polyethylene and polycarbonate. We operate chemical plants worldwide and have a global balance of locations, feedstocks and products that allows us to seize commercial opportunities and get through cycles of lower margins. Shell’s Chemicals business is transforming and has integrated further with our Refining business. In addition to our standalone, chemicals-only production sites, we are transforming our refineries into five energy and chemicals parks. We expect this to happen at the following sites: Norco in the USA, Scotford in Canada, Rotterdam in the Netherlands, Rheinland in Germany and Pulau Bukom in Singapore. The energy and chemicals parks are expected to focus more on meeting customers’ low-carbon and sustainability needs. Marketing In 2021, we supplied more than 14 million tonnes of petrochemicals to more than 1,000 industrial customers worldwide. Products made from chemicals are used in everyday life in medical equipment, construction, transport, electronics, agriculture and sports. As global demand for chemicals increases, we plan to increase the size of our business, by understanding and responding to our customers’ needs. BUSINESS ACTIVITIES WITH SYRIA We ceased supplying polyols, via a Netherlands-based distributor, to private-sector customers in Syria in 2018. Polyols are commonly used for the production of foam in mattresses and soft furnishings. CHEMICALS DATA TABLES The tables below reflect Shell subsidiaries and instances where Shell owns the crude oil or feedstocks processed by a refinery. Other joint ventures and associates are only included where explicitly stated. Ethylene capacity [A] Thousand tonnes/year 2021 2020 2019 Europe 1,726 1,701 1,701 Asia 2,542 2,530 2,530 Americas 2,321 2,268 2,268 Total 6,589 6,499 6,499 [A] Includes the Shell share of capacity entitlement (offtake rights) of joint ventures and associates, which may be different from nominal equity interest. Nominal capacity is quoted at December 31. Chemicals sales volumes [A] Thousand tonnes/year 2021 2020 2019 Europe Base chemicals 3,883 3,490 3,666 Intermediates and other chemicals products 2,076 1,990 1,872 Total 5,959 5,480 5,538 Asia Base chemicals 1,354 1,192 1,057 Intermediates and other chemicals products 2,656 2,969 2,848 Total 4,010 4,161 3,905 Americas Base chemicals 1,984 2,936 3,261 Intermediates and other chemicals products 2,263 2,459 2,519 Total 4,247 5,395 5,780 Total product sales Base chemicals 7,221 7,618 7,984 Intermediates and other chemicals products 6,995 7,418 7,239 Total 14,216 15,036 15,223 [A] Excludes feedstock trading and by-products. CHEMICALS continued Strategic Report
73Shell Annual Report and Accounts 2021 Major chemical plants in operation [A] Thousand tonnes/year, Shell share capacity [B] Location Ethylene Styrene monomer Ethylene glycol Higher olefins [C] Additional products Europe Germany Rheinland 340 — — — Netherlands Moerdijk 971 815 153 — UK Mossmorran [D] 415 — — — Asia China Nanhai [D] 1,100 645 415 — Singapore Jurong Island [E] 281 1,069 1,081 — Pulau Bukom 1,161 — — — Americas Canada Scotford — 475 461 — USA Deer Park 889 — — — Geismar — — 400 1,390 Norco 1,432 — — — Total 6,589 3,004 2,510 1,390 [A] Major chemical plants are large integrated chemical facilities, typically producing a range of chemical products from an array of feedstocks, and are a core part of our global Chemicals business. [B] Shell share of capacity of subsidiaries, joint arrangements and associates (Shell- and non-Shell-operated), excluding capacity of the Infineum additives joint ventures. [C] Higher olefins are linear alpha and internal olefins (products range from C4 to C2024). [D] Not operated by Shell [E] The polyethylene, polypropylene and olefins production mentioned refers to Shell share of capacity of our non-operated joint ventures Petchem Corporation of Singapore (PCS) and The Polyolefin Company (TPC) which are on Jurong Island. Aromatics, lower olefins Intermediates Polyethylene, polypropylene Other Other chemical locations [A] Location Products Europe Germany Karlsruhe Schwedt Netherlands Rotterdam Americas Argentina Buenos Aires Canada Sarnia USA Mobile Puget Sound [A] Other chemical locations reflect locations with smaller chemical units, typically serving more local markets. Aromatics, lower olefins Intermediates Other Strategic Report
74 Shell Annual Report and Accounts 2021 CORPORATE Earnings $ million 2021 2020 2019 Segment earnings (2,606) (2,952) (3,273) Comprising: Net interest [A] (2,701) (2,991) (3,080) Taxation and other [B] 96 39 (194) Identified Items 81 460 109 Adjusted Earnings (2,686) (3,412) (3,383) [A] Mainly Shell’s interest expense (excluding accretion expense) and interest income. [B] Other earnings mainly comprise net foreign exchange gains and losses on financing activities, headquarters and central functions’ costs not recovered from business segments, and net gains on sale of properties. OVERVIEW The Corporate segment covers the non-operating activities supporting Shell. It comprises Shell’s holdings and treasury organisation, self- insurance activities and headquarters and central functions. All finance expense and income and related taxes are included in Corporate segment earnings rather than in the earnings of business segments. The holdings and treasury organisation manages many of the Corporate entities. It is the point of contact between Shell and external capital markets, conducting a wide range of transactions, such as raising debt instruments and transacting foreign exchange. Treasury centres in London and Singapore support these activities. Headquarters and central functions provide business support in communications, finance, health, human resources, information technology (IT), legal services, real estate and security. They also provide support for shareholder-related activities. The central functions are supported by business service centres, which process transactions, manage data and produce statutory returns, among other services. Most headquarters and central-function costs are recovered from the business segments. Costs that are not recovered are retained in Corporate. EARNINGS 2021-2020 Segment earnings in 2021 were an expense of $2,606 million, compared with $2,952 million in 2020. Net interest decreased by $289 million in 2021 compared with 2020. This was primarily due to a decrease in interest expense following debt repayments and a reduction in interest expense on lease liabilities, partly offset by a reduction in interest income generated on cash balances. Taxation and other earnings increased by $58 million in 2021, compared with 2020. This largely reflected a foreign exchange gain arising from favourable exchange rate movements and lower financing expenses from joint ventures and associates, partly offset by unfavourable deferred tax impacts due to the weakening Brazilian real on financing positions. PRIOR YEAR EARNINGS SUMMARY Our earnings summary for the financial year ended December 31, 2020, compared with the financial year ended December 31, 2019, can be found in the Annual Report and Accounts (page 80) and Form 20-F (page 60) for the year ended December 31, 2020, as filed with the Registrar of Companies for England and Wales and the US Securities and Exchange Commission, respectively. SELF-INSURANCE We mainly self-insure our hazard risk exposures. Our Group insurance companies are adequately capitalised to meet self-insurance obligations and respective regulations, though they may transfer risks to third-party insurers where economical, effective and relevant (see “Risk factors” on page 30). We continually assess the safety performance of our operations and make risk mitigation recommendations, where relevant, to minimise the risk of an accident. INFORMATION TECHNOLOGY AND CYBER SECURITY Given our digitalisation efforts and increasing reliance on information technology (IT) systems for our operations, we continually monitor external developments and actively share information on threats and security incidents. Shell employees and contract staff are subject to mandatory courses and regular awareness campaigns aimed at protecting us against cyber threats. We periodically test and adapt cyber-security response processes and seek to enhance our security monitoring capability. Given our dependence on IT systems for our operations and the increasing role of digital technologies across our organisation, we are aware that cyber-security attacks could cause significant harm to Shell in the form of loss of productivity, loss of intellectual property, regulatory fines and reputational damage. As a result, we continuously measure and, where required, further improve our cyber-security capabilities to reduce the likelihood of successful cyber attacks. Our cyber-security capabilities are embedded into our IT systems, which are protected by various detective and protective technologies. The identification and assessment capabilities are built into our support processes and adhere to industry best practices. The security of IT services, operated by external IT companies, is managed through contractual clauses and additionally through formal supplier assurance reports for critical IT services. Shell is frequently subjected to cyber attacks and since the COVID-19 pandemic in 2020, we have noticed an increase in such activity. COVID-19 necessitated a switch from office to remote working, which changed and increased the IT systems’ exposure to cyber threats. Shell’s CyberDefence team responded by enhancing cyber-security controls for remote connectivity, strengthening its monitoring and detection, and taking additional measures to improve cyber awareness. See “Risk factors” on page 28. BRAND VALUE In January 2022, Shell’s brand value was estimated at $49.9 billion in Brand Finance Global 500 2022, the annual report by leading brand valuation consultancy Brand Finance. This was up 18% compared with 2021, and up 36% compared with 2017. According to the valuation, the Shell brand remains the most valued in the oil and gas industry. The gap to second place widened from $4.7 billion in 2021 to $6.3 billion in 2022. The report also showed that Shell’s brand rating is AAA- in 2022, which is reduced from AAA in 2021. Strategic Report
75Shell Annual Report and Accounts 2021 CLIMATE CHANGE AND ENERGY TRANSITION Shell has long recognised that greenhouse gas (GHG) emissions from the use of hydrocarbon-based energy are contributing to the warming of the climate system. We support the Paris Agreement’s goal to keep the rise in global average temperature this century to well below two degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius. Shell’s Powering Progress strategy is designed to generate shareholder value while meeting our target of becoming a net-zero emissions energy business by 2050, in step with society’s progress towards achieving the goals of the Paris Agreement. Shell has supported the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) since 2017. The TCFD requires disclosure of qualitative and quantitative information aligned to its core four elements – governance, strategy, risk management, and metrics and targets. The TCFD aims to improve the disclosure of climate-related risks and opportunities and provide stakeholders with the necessary information to undertake robust and consistent analyses of the potential financial impacts of climate change. We recognise the value that the recommendations bring and continue to align and enhance our climate-related disclosures. We set out below our climate-related financial disclosures consistent with all of the TCFD recommendations and recommended disclosures. By this we mean the four TCFD recommendations and the 11 recommended disclosures set out in Figure 4 of Section C of the report entitled “Recommendations of the Task Force on Climate-related Financial Disclosures” published in June 2017 by the TCFD. CLIMATE CHANGE AND ENERGY TRANSITION Strategic Report
Climate change management organogram Shell plc Board Oversight of climate change risk management CEO Strategy, Sustainability and Corporate Relations Director Chief Financial Officer Projects and Technology Director Upstream Director Integrated Gas and Renewables and Energy Solutions Director Downstream Director Safety, Environment and Sustainability Committee Non-executive Directors appointed by the Board to review and advise on sustainability policies and practices including climate change Audit Committee Non-executive Directors appointed by the Board to oversee the effectiveness of the system of risk management and internal control Internal Audit and Investigation Remuneration Committee Non-executive Directors appointed by the Board to set the remuneration policy in alignment with strategy 76 Shell Annual Report and Accounts 2021 GOVERNANCE OF CLIMATE-RELATED RISKS AND OPPORTUNITIES BOARD OVERSIGHT OF CLIMATE-RELATED RISKS AND OPPORTUNITIES In 2021, Shell reshaped and restructured our organisation to place our energy transition strategy at the heart of everything we do. Our governance is designed to effectively manage our transition to a net-zero emissions energy business by 2050, in step with society’s progress towards achieving the goals of the Paris Agreement. Our governance begins with the Board’s approval of our energy transition strategy and oversight of its implementation and delivery. In 2021, the Board considered climate-related matters throughout the year when reviewing and guiding our energy transition strategy, assessing the risk management policies in place, and challenging and endorsing the business plans and budgets, including overseeing major capital expenditures, acquisitions and divestments. In 2021, the Board convened 12 times and continued to regularly oversee the Powering Progress Strategy and net-zero initiatives, including at the Board Strategy Day in June 2021. Three Board committees provide primary oversight of the delivery of our energy transition strategy: the Safety, Environmental and Sustainability Committee (SESCo), the Audit Committee and the Remuneration Committee. See “Climate change governance organogram” below. SESCo provides oversight of our technical delivery in driving reduction of our carbon emissions, and the potential impacts and adaptation measures related to the physical risks of climate change. This includes reviewing our Carbon Management Framework and monitoring progress in reducing emissions to meet targets. SESCo met 13 times in 2021 and discussed climate-related matters at nine meetings. After each meeting the SESCo Chair provided updates to the Board directly. For more information on SESCo’s activities in 2021, see page 152. Our Audit Committee provides oversight of the effectiveness of our internal controls and risk management framework to ensure that our financial statements reflect the risks and opportunities associated with our energy transition strategy and climate change. During 2021, the Audit Committee convened 11 times in total and discussed climate- related matters on at least six occasions. More information on our Audit Committee’s activities in 2021 can be found in the Audit Committee Report on page 156. The Remuneration Committee sets our remuneration policy and targets designed to challenge and support management to reduce our carbon emissions while maintaining shareholder value. The Remuneration Committee met five times during 2021, with climate-related matters discussed at each meeting. Find more information on our Remuneration Committee’s activities in 2021 in the “Directors’ Remuneration Report” on page 167 and the “Annual Report on Remuneration” on page 171. Climate performance and remuneration Climate-related key performance indicators were considered as part of the 2021 annual bonus scorecard (15% weighting) for almost all of Shell’s employees, as well as the 2021 Performance Share Plan (PSP) awards (10% weighting) and the 2021 Long-term Incentive Plan (20% weighting, vesting in 2023) for senior executives. See “Directors’ Remuneration Report” on pages 166-170 for further information. The importance of our energy transition strategy means that all of these committees are informed about climate-related matters on a frequent basis throughout the year. Find additional information on the Board’s oversight in “Governance framework” on page 135. MANAGEMENT’S ROLE IN ASSESSING AND MANAGING CLIMATE-RELATED RISKS AND OPPORTUNITIES CLIMATE CHANGE AND ENERGY TRANSITION continued Strategic Report
77Shell Annual Report and Accounts 2021 The Chief Executive Officer (CEO) has the delegated authority from the Board to manage Shell’s actions in relation to the Company’s strategy, which includes climate change. The CEO is assisted by a number of senior management positions on climate-related matters to implement Shell’s energy transition strategy and ensure that such matters are appropriately monitored: ■ The Director of Strategy, Sustainability and Corporate Relations supports the CEO in developing Shell’s energy transition strategy, including climate scenarios development, and augmenting the Company’s Carbon Management Framework. This framework includes the setting of carbon budgets for our businesses, and the implementation of carbon-related activities. ■ The Downstream Director identifies climate-related opportunities while managing and mitigating the climate risks of our existing Downstream businesses. The Sectors and Decarbonisation organisation supports the Downstream Director in implementing the sectoral decarbonisation approach. ■ The Integrated Gas, Renewables and Energy Solutions Director is responsible for finding and developing low-carbon solutions and opportunities, including those across our solar, hydrogen and wind businesses, as well as managing and mitigating carbon emissions from our business. ■ The Upstream Director is responsible for identifying low-carbon and emission reduction opportunities in our Upstream oil and gas business through managing and mitigating our carbon emissions, for example, by eliminating routine flaring and in some cases by using renewable energy to power our oil and gas extraction activities. ■ The Projects & Technology (P&T) Director is responsible for setting emissions, climate, and reporting standards that are applicable to all our businesses. The P&T Director is also responsible for developing new technologies that will help our businesses to deliver net-zero emissions targets through both energy efficiency measures and research and development activities geared towards decarbonisation. ■ The Chief Financial Officer (CFO) is responsible for monitoring the effective application of the Shell Control Framework, which provides the basis for managing our material risks including climate-related risks and opportunities, and the assurance over our financial information, carbon emissions and climate-related disclosures. Delivering through three strategic pillars There are two key supporting management committees, with representatives from across the organisation: ■ The Capital Investment Committee (CIC) facilitates the portfolio management discussions to ensure that the climate risks and opportunities are embedded in investment decision-making. This committee is made up of senior executives, including the CEO, CFO, and individual business directors. ■ The Carbon Reporting Committee (CRC), which was formed in 2021, is sponsored by the CFO, and includes senior management representatives from business units, Projects & Technology climate- related disciplines and various functions such as Strategy, Finance and Legal. This committee is tasked with ensuring that greenhouse gas (GHG) emissions measures, both absolute emissions and carbon intensity, and associated metrics, comply with all regulatory and legal requirements. The CRC is responsible at Group level for effectively embedding Group-wide training plans, measurement and reporting of GHG emissions metrics, and review and approval of external disclosures. Our network of country chairs supports the overall governance and development of climate-related opportunities. They set each country’s energy transition strategy within our Powering Progress strategy. Processes by which management is informed about climate-related issues Several processes are employed across the organisation to ensure that management teams can effectively monitor and manage climate- related matters. The management teams are helped by a combination of carbon-management-related standards and frameworks, forums at various levels of the organisation, and capability development programmes. These include our Carbon Management Framework, carbon pricing, and the Greenhouse Gas (GHG) and Energy Management Manual. Carbon Management Framework In 2021, we worked on augmenting our comprehensive Carbon Management Framework (CMF). The CMF seeks to implement an approach to managing and reducing our emissions that is similar to how we use our financial framework. This helps to ensure that management considers carbon emissions when making decisions. The CMF helps set carbon budgets in our operating plan. For the 2021 operating plan cycle, our net carbon intensity (NCI) targets were translated into Scope 1, 2 and 3 (see definition below) carbon budgets for each business. These were used as boundaries for optimising each business’ operating plan. As a result, the CMF makes it easier to assess the trade-offs between emitting carbon and generating value. This helps to inform portfolio decisions. Some examples of how our decarbonisation targets are taken into account in fundamental decisions across the organisation are as follows: ■ Our businesses further embedded carbon emissions objectives in their individual business units’ Capital, Portfolio and Carbon forums. The forums consist of the most senior business management representatives who are responsible for active portfolio management through evaluation, and delivery of growth and divestment decisions. ■ Certain assets are required to identify GHG abatement opportunities and reflect them in their annual business plans. Definition – Scope 1, 2 and 3 emissions We follow the GHG Protocol’s Corporate Accounting and Reporting Standard, which defines three scopes of GHG emissions: ■ Scope 1: direct GHG emissions from sources that are owned or controlled by Shell. ■ Scope 2: indirect GHG emissions from generation of purchased energy consumed by Shell. ■ Scope 3: other indirect GHG emissions, including emissions associated with the use of energy products sold by Shell. Strategic Report
78 Shell Annual Report and Accounts 2021 Carbon pricing To assess the resilience of new projects we consider the potential costs associated with operational GHG emissions. We have developed country-specific short-medium and long-term estimates of future costs of carbon which are reviewed and updated annually. In 2021, we increased the expected cost of carbon, so by 2050, in real terms our cost of carbon estimates for all countries increased to between $125 and $200 per tonne of GHG emissions. The process for developing our cost of carbon estimates uses short-term policy outlooks and long-term scenario forecasts. We believe our estimates appropriately reflect society’s current implementation of the Paris Agreement. Unfortunately, however, society is not yet on track to meet the goals of the Paris Agreement. Shell will continue to update the cost of carbon estimates to take account of changes in the economic environment and pace of energy transition. Greenhouse gas and energy management Each Shell entity and Shell-operated venture is responsible for the development of their GHG and energy management plans. In 2021, we updated our Greenhouse Gas and Energy Management standard. It is part of both our health, safety, security, environment, and social performance (HSSE & SP) Control Framework, and Asset Management System. This update streamlines accountabilities for GHG and energy management within businesses, assets and projects, tightening the process for analysing our emissions, benchmarking performance, identifying improvement opportunities, and forecasting future performance. Shell’s GHG and energy management process is integrated into our annual business planning cycles to provide leadership with the robust information required to make decisions on GHG reduction opportunities and portfolio choices required to achieve our decarbonisation targets. We also created the position of a Global Process Owner for GHG and energy management within our Safety, Environment and Carbon, and Asset Management (SEAM) organisation. The Global Process Owner is responsible for working across Shell businesses to ensure the GHG and energy management requirements are adopted and embedded in business operations, planning, and performance management processes. The Global Process Owner also facilitates the ongoing improvement of processes, tools, communications, and capabilities needed within the businesses to achieve our decarbonisation aspirations. CLIMATE CHANGE AND ENERGY TRANSITION continued Our GHG & Energy Management process is integrated into our annual business planning cycle. Shell will continue to update its cost of carbon estimates to take account of changes in the pace of energy transition. Strategic Report
79Shell Annual Report and Accounts 2021 ENERGY TRANSITION STRATEGY In 2021, we announced Powering Progress, our strategy to accelerate our transition to a net-zero emissions energy business, purposefully and profitably. Powering Progress aims to deliver value for our shareholders, for our customers and for wider society. See the “Strategy and outlook” for more information on page 12. CLIMATE-RELATED RISKS AND OPPORTUNITIES IDENTIFIED BY SHELL OVER THE SHORT, MEDIUM AND LONG TERM Our target to become a net-zero emissions energy business by 2050, in step with society’s progress, requires us to continue enhancing our strategic risk management approach to addressing climate risk. Our energy transition strategy is designed to help us identify and shape how we can assist with decarbonising our customer sectors. This means that our strategy is shaped in response to risks and opportunities identified across the sectors and regions we work in. There are many teams across Shell involved in this process, to ensure that we make sound strategic decisions. The process for identifying and assessing climate-related risks and opportunities is set out under “Climate Risk Management” below. Through this process, Shell continues to identify climate change and the associated energy transition as a material risk based on the rapidly evolving societal concerns and developments related to climate change and managing GHG emissions. These developments expose Shell to a variety of factors, which could have an impact on demand for our products, our operational costs, supply chains, markets, regulatory environment, licences to operate and litigation. This risk is composed of a combination of complex elements that affect Shell’s overall business value chain. The risks are interrelated, and generally describe a rapidly evolving risk landscape for our asset, product and business portfolio. To achieve our climate ambition, active holistic management of all climate-related risk components is important. The composite risk is broken down into the following sub-components: ■ commercial risk; ■ regulatory risk; ■ societal risk (including litigation risk); and ■ physical risk. In addition to risk, we also continue to identify opportunities for Shell in the energy transition, from our existing position as a leading global energy provider. These risks and opportunities are described below and are also summarised in the strategic risks report section on page 23. Time horizons: short, medium and long Due to the inherent uncertainty, and the pervasive nature of the risks across our strategy and business model, the climate-related risks and opportunities are monitored across multiple time horizons. ■ Short term (up to three years): we develop detailed financial projections and use them to manage performance and expectations on a three-year cycle. These projections incorporate decarbonisation measures required to meet our short-term targets. ■ Medium term (generally three to 10 years): embedded within our operating plan, with our continued focus on the customer, the investments and portfolio shifts required in the medium term that will fundamentally reshape Shell’s portfolio. At the same time, our existing asset base is expected to provide the cash flow to finance this transition of our revenue in this period. ■ Long term (generally beyond 10 years): it is expected that our portfolio and product mix will look very different, addressing the shift from an asset-based approach to a customer-based business model. Our strategy aims to support the ambitious goal of the Paris Agreement Tackling climate change is an urgent challenge. It requires a fundamental transformation of the global economy and the energy system so that society stops adding to the total amount of greenhouse gases in the atmosphere, achieving what is known as net-zero emissions. That is why Shell has set a target to become a net-zero emissions energy business by 2050, in step with society’s progress in achieving the goal of the Paris Agreement on climate change. There is no established standard for aligning an energy supplier’s decarbonisation targets with the temperature limit goal of the Paris Agreement. In the absence of a broadly accepted standard, we developed our own approach to demonstrate Paris alignment by setting carbon intensity targets using a pathway derived from the Intergovernmental Panel on Climate Change (IPCC) scenarios aligned with the Paris Agreement’s goal. We believe our NCI and absolute emissions targets support the more ambitious goal of the Paris Agreement: to limit the increase in the average global temperature to 1.5 degrees Celsius above pre-industrial levels. It is aligned with the findings of the IPCC which concluded that the world must reach net-zero carbon emissions by around 2050 to limit global warming to 1.5 degrees Celsius and avoid the worst effects of climate change. We determined our targets using scenarios taken from a database developed for the IPCC Special Report on Global Warming of 1.5°C. We filtered out certain outlying IPCC scenarios to ensure that Shell’s targets are aligned with earlier action, and low- overshoot scenarios. Overshoot refers to the extent to which a scenario exceeds an emissions budget and subsequently relies on sinks to compensate for the excess emissions. Becoming a net-zero emissions energy business means that we are reducing emissions from our operations, and from the fuels and other energy products such as electricity that we sell to our customers. It also means capturing and storing any remaining emissions using technology, protecting natural carbon sinks, and providing high quality nature-based solutions to our customers to offset unavoidable emissions. Increasing numbers of countries and companies have announced targets to achieve net-zero emissions by the middle of the century, and we are starting to see some changes in the demand and supply of energy. Achieving the 1.5 degrees Celsius goal will be challenging and require unprecedented global collaboration. The pace of change will also vary around the world. Strategic Report
80 Shell Annual Report and Accounts 2021 Transition risks CLIMATE-RELATED COMMERCIAL RISK ■ The transition to a low-carbon economy may lead to lower sales volumes and/or margins due to a general reduction or elimination of demand for oil and gas products, possibly resulting in under-utilised or stranded oil and gas assets and a failure to secure new opportunities. ■ Changing preferences of investors and financial institutions could reduce access to and increase the cost of capital. Relevant time horizon: Medium Long Potential material impacts on the organisation Lower demand and margins for oil and gas products Changing customer sentiment towards renewable and sustainable energy products may reduce demand for our oil and gas products. An excess of supply over demand could reduce fossil fuel prices. This could be a factor contributing to additional provisions for our assets and result in lower earnings, cancelled projects and potential impairment of certain assets Changing preferences of investors and financial institutions Financial institutions are increasingly aligning their portfolios to a low-carbon and net-zero world, driven by both regulatory and broader stakeholder pressures. A failure to decarbonise the business portfolios in line with investor and lender expectations could have a material adverse effect on our ability to use financing for these types of future projects. This could also adversely affect our potential partners’ ability to finance their portion of costs, either through equity or debt. Remaining in step with the pace and extent of the energy transition The energy transition provides us with significant opportunities, as described in the “Transition opportunities” below. If we fail to stay in step with the pace and extent of change or customer and other stakeholders’ demand for low-carbon products, this could adversely affect our reputation and future earnings. If we move much faster than society, we risk investing in technologies, markets or low-carbon products that are unsuccessful, therefore we cannot transition too quickly or we will be trying to sell products that customers do not want. This could also have a material adverse effect on financial results. Our short-term remuneration targets are not conditioned by society’s progress towards net zero. However, our 2050 net zero target is conditioned by society’s progress as there is significant risk that Shell will not be able to meet its net-zero target if society is not net zero. CLIMATE-RELATED REGULATORY RISK The transition to a low-carbon economy will increase the cost of compliance for our assets and/or products, and may include restrictions on the use of hydrocarbons. The lack of net-zero-aligned global and national policies and frameworks increases the uncertainty around this risk. Relevant time horizon: Short Medium Long Potential material impacts on the organisation Increased compliance costs Some governments have introduced carbon pricing mechanisms, which we believe can be an effective way to reduce GHG emissions across the economy at the lowest overall cost to society. Shell’s cost of compliance with the EU Emissions Trading Scheme (ETS) and related schemes was around $331 million in 2021, as recognised in Shell’s Consolidated Statement of Income for 2021 (see Note 31 to the “Consolidated Financial Statements”). Shell’s annual carbon cost exposure is expected to increase over the next decade because of evolving carbon regulations. The forecasted annual cost exposure in 2030 is estimated to be within the range of $1.0-2.5 billion. This estimate is based on a forecast of Shell’s equity share of emissions from operated and non-operated assets (including joint ventures and associates), and real-terms carbon cost estimates which range from around $25 to around $200 per tonne of GHG emissions in 2030. This exposure also takes into account the estimated impact of free allowances as relevant to assets based on their location. Restrictions on use of hydrocarbons With around 90% of the global economy now signed up to net-zero commitments as of January 2022, according to the Energy and Climate Intelligence Unit of the UK, there is an ever-increasing threat that governments set future regulatory frameworks that restrict further exploration and production of hydrocarbons, and bring in controls to limit the use of such products. Failure to replace proved reserves could result in an accelerated decrease of future production, which could have a material adverse effect on our earnings, cash flows and financial condition. Lack of net-zero-aligned global and national policies and frameworks The lack of net-zero-aligned global and national policies and frameworks increases the uncertainty around how carbon pricing and other regulatory mechanisms will be implemented in the future. This makes it harder to determine the appropriate assumptions to be taken into account in our financial planning and investment decision processes. CLIMATE CHANGE AND ENERGY TRANSITION continued Strategic Report
81Shell Annual Report and Accounts 2021 Transition risks continued CLIMATE-RELATED SOCIETAL RISK (INCLUDING LITIGATION RISK) As societal expectations develop around climate change, there is a potential impact on Shell’s licence to operate, reputation, brand and competitive position. This is likely to include class action lawsuits or similar litigation. Relevant time horizon: Short Medium Long Potential material impacts on the organisation Decline in reputation and brand Societal expectations of businesses are increasing, with a focus on business ethics, quality of products, contribution to society, safety and minimising damage to the environment. There is an increasing focus on the role of the oil and gas sector in the context of climate change and the energy transition. This could negatively affect our brand, reputation and licence to operate, which could limit our ability to deliver our strategy, reduce consumer demand for our branded and non-branded products, harm our ability to secure new resources and contracts, and restrict our ability to access capital markets or attract staff. Deteriorating relationships with key stakeholders Failure to decarbonise Shell’s value chain in line with societal, governmental and investor expectations is a material risk to Shell’s reputation as a responsible and market-leading energy company. The impact of this risk includes shareholder divestment, greater regulatory scrutiny and potential asset closure resulting from public interest groups’ protests. Class action lawsuits and litigation There is an increasing risk for oil and gas companies from public, private and governmental lawsuits taken to inhibit the exploration, excavation and processing of hydrocarbons as a matter of environmental and societal welfare. Such action may force entities to hand over strategic autonomy in part to regulators, divest from hydrocarbon technologies and pay large compensation packages to the plaintiff. In some countries, governments, regulators, organisations and individuals have filed lawsuits seeking to hold oil and gas companies liable for costs associated with climate change. While we believe these lawsuits to be without merit, losing could have a material adverse effect on our earnings, cash flows and financial condition. For example, in May 2021, the District Court in The Hague, Netherlands, ruled that, by 2030, Shell must reduce, from its consolidated subsidiaries, its net Scope 1 emissions by 45% and use it best efforts to reduce its net Scope 2 and net Scope 3 emissions by 45%, compared with 2019 levels. In 2019, our Scope 1 emissions from our consolidated subsidiaries were 86 million tonnes of carbon dioxide equivalent (CO₂e) (rounded) (financial control basis). Physical risks CLIMATE-RELATED PHYSICAL RISK The potential physical effects of climate change may impact Shell’s assets, operations, supply chains, employees and markets. Relevant time horizon: Medium Long Potential material impacts on the organisation Mitigation of physical risks, whether or not related to climate change, are considered and embedded in the design and construction of assets. The potential impact of physical changes come from both acute and chronic physical risks. Acute risks, such as flooding and droughts, wildfires and more severe tropical storms, could potentially impact our operations and supply chains. The frequency of these hazards and impacts is expected to increase in certain high-risk locations. Extreme weather events, whether or not related to climate change, could have a negative impact on earnings. Recent examples in 2021 include the Texas winter storm and Hurricane Ida. These had an impact on our operations and an adverse impact on 2021 earnings of around $200 million and around $400 million respectively. Chronic risks, such as rising temperatures and rising sea levels, could potentially impact the efficiency of our plants, increase equipment corrosion, decrease gas pipeline capacity, and impact our coastal facilities. The assets at highest risk from these impacts are those in coastal locations across refining, We have performed analyses addressing a range of typical climate change features for a select group of assets. We concluded that currently any adaptation costs for those selected assets are not expected to be significant. We recognise that we need to deepen and widen these analyses for a more comprehensive climate resilience assessment. We continue to monitor this and plan to conduct further analysis on other assets as well as assess long-term physical impacts. Additionally, the impact of physical climate change on our operations is unlikely to be limited to the boundaries of our assets. The overall impact including how supply chains, resource availability and markets may be affected also needs to be considered, for a holistic assessment of this risk. The risk assessment and mitigation actions are based on our current understanding and we continue to track ongoing research on the subject to update our assessment and actions. Strategic Report
82 Shell Annual Report and Accounts 2021 Transition opportunities CLIMATE-RELATED OPPORTUNITIES The transition to a low-carbon economy also brings significant opportunities for us to benefit from changing customer demands, given our position as a leading global energy provider. Relevant time horizon: Short Medium Long Potential material impacts on the organisation As the global energy mix changes, our current infrastructure, know-how and global footprint put us in an ideal position to service the changing energy demands of the market. Our research and development (R&D) activities are key to achieving our net-zero emissions target. As we shift from an asset-based to a customer- focused business model our current key focus areas for seizing this opportunity are: 1. Renewables and Energy Solutions This encompasses our wind, solar, hydrogen, electric vehicle charging, nature-based solutions, and carbon capture and storage businesses. Electricity generated by wind and solar power plays a direct role in reducing emissions in passenger transport and parts of industry. It can also be used to create hydrogen. We expect hydrogen to present a business opportunity for heavy-duty road freight over a shorter time horizon and within shipping, industry and, possibly, aviation, over a longer time horizon. Hydrogen also has the potential to become a material part of Shell’s business-to-business (B2B) operations, as heavy industry begins to transition away from energy sourced from hydrocarbons. 2. Biofuels Shell and our joint venture Raízen (Shell interest 44%, not operated by Shell) are together one of the world’s largest blenders and distributors of biofuels. Shell plans to continue to invest in and increase the production of these low-carbon fuels. Our low-carbon fuels projects and operations around the world form part of a wider commitment to provide a range of energy choices for customers. For example, we believe that sustainable aviation fuels (SAF) provide the most effective way of removing emissions within the aviation sector, with wider adoption of SAF enabling us to provide more low-carbon fuels to our customers. Biofuels may also present opportunities in the shipping, road freight and other sectors. 3. Natural gas Shifting from coal and oil to natural gas is one way for countries to take action as the world moves to a net-zero emissions future. It is a key component of the energy transition. Demand for liquefied natural gas (LNG) is expected to grow and we are a leading LNG supplier, with around 40 million tonnes of equity capacity. 4. Transforming refineries into energy and chemicals parks An important aim of our Powering Progress strategy is to transform refineries into energy and chemicals parks so that we can sell more low-carbon and sustainable products. CLIMATE CHANGE AND ENERGY TRANSITION continued IMPACT OF CLIMATE-RELATED RISKS AND OPPORTUNITIES ON SHELL’S BUSINESSES, STRATEGY AND FINANCIAL PLANNING The transformation of the energy system to net-zero emissions will require simultaneous action in three areas – an unprecedented improvement in the efficiency with which energy is used, a sharp reduction in the carbon intensity of the energy mix and the mitigation of residual emissions using technology and natural sinks. While it is difficult to predict the exact combination of actions that will deliver the net-zero goal, scenarios help us to understand the direction and pace of the transition needed. We have been developing scenarios within Shell for almost 50 years, helping Shell leaders to explore ways forward and make better decisions. Shell scenarios are designed to stretch management’s thinking in considering events that may be only remotely possible. They help them make crucial choices in times of uncertainty and transition as we grapple with tough energy and environmental issues. Shell scenarios are aligned to different energy transition pathways and help guide risk and opportunity identification and decision-making. Our energy transformation scenarios – Waves, Islands and Sky 1.5 – are all possible pathways towards the future that have both attractive and challenging features. Out of the three scenarios, Sky 1.5 has a pace and timing for energy decarbonisation that is fast enough to limit global warming to 1.5 degrees Celsius above pre-industrial levels by the end of this century. The full report can be found at www.shell.com/ transformationscenarios. Different socio-economic and technological parameters are used to construct these scenarios, such as: ■ sectoral and regional energy demand; ■ future trajectory of oil consumption, demand for natural gas; ■ renewable electricity demand and the pace of the electrification of the global energy system; ■ supply of solar and wind energy; ■ pace of uptake of electric vehicles; ■ demand for biofuels; ■ growth of the hydrogen economy; ■ level of carbon capture and storage; ■ deployment of lower-carbon energy technologies; and ■ global trade of oil and gas. Management consideration of different climate change outcomes informs a range of areas including, but not limited to, the setting of the long-term strategy, business planning, and investment and divestment decisions. The outcomes considered by management vary in relation to the extent and pace of the energy transition. Strategic Report
83Shell Annual Report and Accounts 2021 Impact on strategic planning The application of scenario analysis informs our assessment of the impact of climate-related risks and opportunities on our strategy and business planning, both at the Group and business units’ levels. At the Group level, the potential impacts of the energy transition on our business model are discussed and assessed at the Board and the Executive Committee level as part of the annual strategic and business planning cycle. This assessment allows us to challenge accepted ways of thinking, identify material risks and opportunities, and formulate key tensions and trade-offs. Key financial and non-financial components of business planning The output of our annual business planning process is presented and approved by the Board. The plan contains operational and financial metrics, and its objective is to drive delivery of our Powering Progress strategy. Decarbonisation targets are key inputs of our business planning process. Each business owner offers viable Scope 1, 2 and 3 reduction opportunities as part of this process, in line with the Carbon Management Framework (CMF) (see page 77). The business plan is underpinned by assumptions about internal and external parameters. These assumptions are developed with input from our scenarios and internal estimates and outlooks. Some of the key assumptions relate to: ■ commodity prices; ■ refining margins; ■ production levels and product demand; ■ exchange rates; ■ future carbon costs; ■ the schedules of capital investment programmes; and ■ risks and opportunities that may have material impacts on free cash flow. The level of uncertainty around these assumptions increases over longer time horizons. Impact on business and financial planning There is no one single scenario that underpins Shell’s business and financial planning. Generally, our scenarios are designed to stretch management’s thinking including considering events that may be only remotely possible. Scenarios are not intended to be predictions of likely future events or outcomes and, therefore, are not the basis for Shell’s operating plans and financial statements. Our scenarios help in developing our future oil and gas pricing outlooks. The oil and gas pricing outlooks take account of various factors relating to the energy transition such as potential changes in supply and demand (see details of scenario parameters above). The low, medium and high pricing outlooks are prepared by a team of experts, reviewed by the Shell Executive Committee and approved by the CEO and CFO. The medium pricing outlook represents management’s reasonable best estimate and is the basis for Shell’s financial statements, operating plans and impairment testing. Shell’s targets to reduce absolute Scope 1 and 2 emissions by 50% by 2030, compared with 2016 levels on a net basis, and 20% reduction of net carbon intensity of Scope 3 emissions by 2030 have been included in Shell’s operating plan. Meeting the goals of the Paris Agreement requires the global economy to transform in a number of complex and connected ways. Shell will continue to revise its operating plan, price outlooks and assumptions as it moves towards net-zero emissions by 2050, in step with society. Meeting the goals of the Paris Agreement requires the global economy to transform in a number of complex and connected ways. We continue to update our analysis and the corresponding price outlooks and business plans, in line with our strategy and in step with society. As described in “Climate-related risks and opportunities identified by Shell over the short, medium and long term”, the low pricing outlooks could result in increased commercial, regulatory and societal risks, as well as transition opportunities. How these risks are prioritised is described in “Shell’s processes for identifying and assessing climate-related risks”. Given our ambition to become a net-zero emissions energy business by 2050, in step with society, the use of low-pricing outlooks is a part of our resilience testing and resulting actions. Physical risk is expected to be more material in higher temperature scenarios. RESILIENCE OF SHELL’S STRATEGY, TAKING INTO CONSIDERATION DIFFERENT CLIMATE-RELATED SCENARIOS, INCLUDING A TWO DEGREES CELSIUS OR LOWER SCENARIO Shell’s financial strength and access to capital give us the ability to reshape our portfolio as the energy system transforms and demand changes. They also allow us to withstand volatility in oil and gas markets. We are shifting capital from our Upstream business to our Transition and Growth businesses as the energy transition accelerates and we sell more low-carbon energy products. We aim to find the right balance between managing our Upstream assets – which will produce the returns needed to help us fund the transition – and investing in our Transition and Growth businesses. These businesses are essential to identify, build and scale up profitable projects that offer low-carbon energy solutions for our customers. Strategic Report
84 Shell Annual Report and Accounts 2021 CLIMATE CHANGE AND ENERGY TRANSITION continued Cash capital expenditure evolution a b c 2025-20302021 45-50% 30-35% ~20% 32% 44% 24%c b a Upstream GrowthTransition Operational expenditure evolution 2025-20302021 40-45% 35-40% 20-25% 32% 40% 28%c b a a b cUpstream GrowthTransition Key aspects of Shell’s financial resilience in the context of climate related impacts is assessed and described in more detail in Note 4 to the “Consolidated Financial Statements”. This provides an overarching summary of the key areas where climate change and the energy transition impact Shell’s financial statements. Shell’s financial statements are based on reasonable and supportable assumptions that represent management’s current best estimate of the range of economic conditions that may exist in the foreseeable future. As referred to above, the medium pricing outlook informed by Shell’s scenario planning represents management’s best estimate. Sensitivity analysis using external climate scenarios has been performed for the period covering asset life cycles. If these different price outlooks from external and often normative climate change scenarios were used, this would impact the recoverability of certain assets recognised in the Consolidated Balance Sheet as at December 31, 2021. Price outlooks have been used as the basis for sensitivity analysis because oil and gas prices are one of the key assumptions that underpin Shell’s financial statements. Price outlooks reflect a broad range of factors, including but not limited to future supply and demand and the pace of growth of low-carbon solutions. Sensitivity of asset-carrying amounts to prices are under the assumption that all other factors in the models used to calculate impacts remain unchanged. Changes to prices are applied due to the significant impact on Shell’s business. Sensitivity analysis has been performed using price outlooks from: 1. Average prices from four 1.5-2 degrees Celsius external climate change scenarios. In view of the broad range of price outlooks across the various scenarios, the average of four external price outlooks was taken from IHS Markit/ACCS 2021; Woodmac WM AET 2 degree; IEA NZE50; and IEA SDS. Applying these prices to Integrated Gas assets of $65 billion and Upstream assets of $89 billion as at December 31, 2021, shows recoverable amounts that are $13-16 billion and $14-17 billion lower, respectively, than the carrying amounts as at December 31, 2021. 2. Hybrid Shell Plan and IEA NZE50: for this Shell’s mid-price outlook is applied for the next 10 years. Because of the greater uncertainty, the International Energy Agency (IEA) normative Net Zero Emissions scenario is applied for the period after 10 years. This weights less price-risk uncertainty to the first 10 years reflected in the operating plan period and applies more risk to the more uncertain subsequent periods. Applying this priceline to Integrated Gas assets of $65 billion and Upstream assets of $89 billion as at December 31, 2021, shows recoverable amounts that are 10-12 billion and $5-6 billion lower, respectively, than the carrying amounts as at December 31, 2021. In addition, further sensitivities are provided of -10% or +10% to Shell’s medium pricing outlook, as an average percentage over the full period. Applying -10% to Shell’s medium pricing outlook to Integrated Gas assets of $65 billion and Upstream assets of $89 billion as at December 31, 2021, shows recoverable amounts that are $8-10 billion and $4-5 billion lower, respectively, than the carrying amounts as at December 31, 2021. Applying +10% to Shell’s medium pricing outlook to Integrated Gas assets of $65 billion and Upstream assets of $89 billion as at December 31, 2021, shows recoverable amounts that are $3-5 billion and $3-4 billion higher, respectively, than the carrying amounts as at December 31, 2021. Note 4 to the “Consolidated Financial Statements” describes how Shell has considered climate-related impacts in key areas of the financial statements and how this translates into the valuation of assets and measurement of liabilities as Shell makes progress in the energy transition. Items in Note 4 include: sensitivity analysis on asset-carrying values using price outlooks from external and often normative climate change scenarios; shifting trends in our portfolio, particularly exploration and evaluation, Upstream production and refineries; risks related to stranded assets; resilience of investments for transformation of the refining portfolio into five energy and chemical parks; forecasted taxable profits sufficient to recover deferred tax assets; dividend resilience; and limited risk on timing of decommissioning and restoration activities for Integrated Gas and Upstream. To ensure the resilience of our Powering Progress strategy, our responses to the risks and opportunities identified are: ■ delivering through three strategic pillars – Upstream, Transition and Growth; ■ our sectoral decarbonisation approach – recognising that we need to work with our customers to identify low-carbon energy solutions for their energy demand; and ■ decarbonising our energy value chains and operations. Strategic Report
85Shell Annual Report and Accounts 2021 We have restructured our company so that we can better identify opportunities and the role that we can play in each sector to help transform demand. We are moving from an approach focused on types of products to one where our customer and account management is focused on sectors. We have introduced a sector-based approach, so our businesses can help drive the decarbonisation of the sectors they cover such as aviation, commercial road transport, passenger transport, shipping, technology and industry. We will build on our existing relationships across each sector, with consumers, infrastructure owners, other suppliers and policymakers to help to accelerate change. A key theme running through the whole of our strategic approach to climate change is to work collaboratively. We aim to make strategic alliances with customers, other companies and entire sectors so we and they can make profitable progress towards net zero. For example, we are working with Swiss food and drinks group Nestlé to reduce emissions across the full cycle of their products, from increasing agricultural yields with high performance fertilisers, to providing renewable energy for the manufacturing process and providing low-carbon fuels for transport. We continue to engage with the Science Based Targets initiative (SBTi), and we are a member of its Technical Working Group that is currently working to define its methodology to set science-based targets for the oil, gas and integrated energy sector. As a founding member of the Oil and Gas Climate Initiative (OGCI) we are part of a group of 12 national and international energy companies. OGCI supports the climate goals of the UN Paris Agreement and recognises that collective actions, such as the reduction in methane emissions and accelerating the deployment of carbon capture and storage, will help drive the energy transition. Decarbonising our energy value chains and operations We plan to keep customers at the centre of our strategy as we decarbonise our energy value chains and operations. We will seek to base our actions on a deep understanding of the decarbonisation strategies and plans of the users of our energy products. In accordance with our energy transition strategy, the 10 ways below support our net-zero emissions ambition, including changing our product mix to lower-carbon intensity energy products: ■ developing our low-carbon Power business through wind and solar; ■ transforming refineries into energy and chemicals parks; ■ providing low-carbon fuels; ■ producing and selling hydrogen; ■ providing electric vehicle charging; ■ shifting to natural gas; ■ using nature-based solutions; ■ developing carbon capture and storage (CCS); ■ research and development contributing to decarbonisation; and ■ pursuing operational efficiency in our assets. Delivering through three strategic pillars One of the ways to address the resilience of our portfolio is to continue delivering through our three strategic business pillars: Upstream, Transition and Growth. Shell’s financial strength and access to capital give us the ability to reshape our portfolio as the energy system transforms and demand changes. It also allows us to withstand volatility in oil and gas markets. Our financial framework is based on sector-leading cash flow, continued capital discipline, capital flexibility and a strong balance sheet. ■ Our Upstream pillar delivers the cash and returns needed to fund our shareholder distributions and the transformation of our portfolio, and provides vital supplies of oil and natural gas which the world needs today. ■ Our Transition pillar comprises Integrated Gas, and our Chemicals and Oil Products businesses and it makes the products needed to enable the energy transition. It produces sustainable cash flow and gives us the asset infrastructure to support our investments in our Growth business. ■ Our Growth pillar includes our service stations, sales of gasoline and diesel, fuels for business customers, power, hydrogen, biofuels, charging for electric vehicles, nature-based solutions, and carbon capture and storage. It focuses on working with our customers to accelerate the transition to net zero and is the foundation for the future businesses in Shell. See “Strategy and outlook” for more information on page 14. Our sectoral decarbonisation approach Changes to the supply of energy products and decarbonising the energy system require structural changes in the end-use of energy. This requires energy users to improve, update or replace equipment so that they can use carbon-based energy more efficiently, or switch to low- and zero- carbon energy. For example, in the transport sector, decarbonisation includes replacing internal combustion engine vehicles with electric and hydrogen vehicles. In the industrial sector, replacing oil- and coal-fired furnaces with electrical furnaces would be one solution, carbon capture and storage is another. And in the buildings sector, replacing gas heating systems with electric heating systems would also contribute to decarbonisation. Such structural changes will help to trigger transitions along the supply chain of individual sectors and across sectors, including the production of energy and emissions over time. The International Energy Agency (IEA) estimates that these changes in the end-use of energy will require substantial investment. Under the IEA’s Paris-aligned Sustainable Development Scenario, of the more than $1.5 trillion extra annual spending required on energy-sector investment, 55% will need to be spent on end-use or what is more commonly known as demand-side investment. Transforming energy demand is the focus of our decarbonisation strategy. To transform demand, we are working with customers sector-by-sector across the energy system. We will change the mix of energy products we sell to our customers as their needs for energy change. Because emissions resulting from customer use of our energy products make up the greatest percentage of Shell’s carbon emissions, this is where we can make the greatest contribution to the energy transition, by increasing sales of low-carbon energy products and services. Today, we sell around 4.6% of final energy consumed in the world and produce around 1.4% of total primary energy. Our share of energy production may decline over the coming decades, but we intend to increase our share of low-carbon energy sales. Strategic Report
86 Shell Annual Report and Accounts 2021 CLIMATE RISK MANAGEMENT SHELL’S PROCESSES FOR IDENTIFYING AND ASSESSING CLIMATE-RELATED RISKS Identifying climate-related risks As discussed in “Energy transition strategy”, Shell considers climate change and GHG emissions, referred to as “Rising concerns about climate change and effects of energy transition”, as a material risk factor. We monitor the risk related to climate change and GHG emissions across four components: ■ commercial risks; ■ regulatory risks; ■ societal risks (including litigation risk); and ■ physical risks. These components are monitored and assessed on an integrated basis, necessitated by the interdependence of the risks and the related actions. The different components pose different kinds of exposures spanning different time horizons. Similarly, the risk responses for the different components of the risk are also planned by taking a holistic view. For example, the increasing cost of complying with emission limits in some regions is a regulatory risk that may require operational responses in the near term. The reduction in demand for legacy hydrocarbons is a commercial risk that is likely to have a medium- to long-term impact, demanding changes to our strategic portfolio and business models. The risk of physical impacts of climate change is likely to occur in the medium and long term and would require actions to mitigate adverse impacts to our assets and supply chain. As an example, the transformation of our refineries into energy and chemicals parks mitigates our operational emissions exposure risk, medium- to long-term commercial risks and allows us to plan for other future adaptation measures. This highlights our integrated approach to risk management. These integrated assessments and the resulting changes in our strategy ensure we manage our aggregate climate change risk within our overall risk appetite over different time horizons. Shell’s processes for identifying and assessing risks are part of our Shell Control Framework. Our risk management procedures that help us identify climate-related risks and opportunities include: ■ monitoring external developments, such as the announcements made at COP26 in November 2021; ■ evaluating the status of risk indicators, which illustrate how well we are managing each component of the risk related to climate change and GHG emissions; and ■ learning from incidents and assurance review findings. We use these procedures to identify risks relating to climate change and GHG emissions, which in turn enables us to determine their significance, both individually and relative to other risks. Assessing climate-related risks Processes within the Shell Control Framework that help us assess each identified risk include the evaluation of its impact, likelihood and the level of risk we are willing to accept. When assessing the likelihood of a risk occurring, we consider factors such as our ability to prevent the risk happening, and whether the risk has materialised in the past. When assessing the potential impact of a risk, we consider the financial consequences and how it might affect more qualitative aspects, such as our reputation, our ability to comply with regulations, and possible damage to health, safety, our assets and the environment. The impact and hence, materiality of a risk is based on how critical it could be to our business model. As Shell has operations both onshore and offshore, the potential physical impacts of climate change are also important for us to manage. In this respect, we consider the physical risks to our assets and facilities to ensure they can operate and be accessed safely under extreme weather conditions The physical risks are assessed at an asset level. Metocean (meteorology and oceanography) engineering experts assess and monitor the physical risks and logistical activities for certain of our assets. These studies aim to ensure our operations are safe and that our facilities can be accessed safely under extreme conditions As we operate in multiple countries globally, societal risks are material as they are directly linked to our licence to operate in these countries. The impact and likelihood assessment helps us to prioritise risks and determine their relative materiality, based on a comprehensive picture of all significant risks in the context of the objectives of the relevant business. To support our risk assessments, we also seek to establish our risk appetite, which is the level of risk that we are willing to accept in pursuit of Shell’s strategy and objectives. We consider the amount of resources – such as financial resources, people, processes, systems and controls – that we are willing and able to allocate to manage each risk in pursuit of our objectives. We also consider the impact to Shell’s overall risk profile, such as the change in our overall risks and returns as we develop our Renewables and Energy Solutions businesses and pivot away from our Upstream business. The impact and likelihood assessment, combined with risk appetite, determines the type of risk responses, such as controls and assurance activities, that may be required to manage each risk. Possible responses include: ■ accepting the risk without any further action; ■ mitigating or reducing the risk with appropriate controls, supported by assurance activities; ■ transferring the risk, for example to insurance providers where appropriate; and ■ altogether stopping or forgoing the activity that gives rise to the risk. In determining our risk responses, we always seek to comply with our Code of Conduct and other boundaries, such as our financial framework, which set the aggregate level of risk appetite that could be sustained. The financial framework considers boundaries such as net debt levels and our credit rating. We note that the majority of our emissions are our Scope 3 customer emissions which are outside of our direct control. In recognition of this, we have put customers at the centre of our Powering Progress strategy, partnering with others to reduce carbon emissions, sector-by-sector. CLIMATE CHANGE AND ENERGY TRANSITION continued Strategic Report
87Shell Annual Report and Accounts 2021 Project-level risk management processes At a project level, assessing climate-related risks is an important part of making initial investment decisions. To support project-level risk management, projects of a certain size or which carry unusual risks are required to follow Shell’s Opportunity Realisation Standard, which sets out the rules for managing and delivering opportunities in the organisation. Each project is assisted by experts from our global subject matter groups during their development, implementation and operation. Projects under development that are expected to have a material greenhouse gas impact must meet our internal carbon performance standards or industry benchmarks. This indicates that they will be able to compete and prosper in a future where society aims to limit overall carbon emissions. Our performance standards are used for measuring a project’s average lifetime GHG-intensity or energy efficiency per asset type. Applying these criteria ensures that our projects can compete and prosper in the energy transition. An exception process is in place to manage specific incidental cases. The reporting year 2021 was the first full year of implementation of performance standards across our Upstream and Transition pillars. The performance standards for the Growth businesses are under development. The performance standards are approved by the Executive Vice President accountable for implementation in the relevant businesses, and by the Executive Vice President Safety, Environment and Asset Management. Projects with a material greenhouse gas footprint that meet the performance standards or industry benchmarks will often set more ambitious emissions targets for themselves that then are approved by the Executive Vice President Safety, Environment and Asset Management at certain defined stages. The respective project’s GHG abatement plan helps to determine the nature of these targets, and we assess the effects of a project’s emissions alongside economic and technical design factors. We estimate the future GHG emissions of projects in two ways. We apply the performance standards, and we consider the GHG emissions from the use of the products that are to be manufactured. These assessments can lead to projects being stopped or designs being changed. We expect the performance standards to evolve as our portfolio changes in the energy transition. Management and Board reviews Management and the Board perform regular reviews of the risk of climate change and GHG emissions to ensure awareness of emerging issues that impact our strategy and to ensure the effectiveness of our responses in managing this risk at a more granular, operational level. For example, as part of the annual strategic planning cycle, the Executive Committee and the Board assess how climate and GHG emissions may affect the pace of the energy transition and the long-term implications for Shell’s current portfolio. Classifications of risks We identify and assess risks across the Group in terms of three distinct categories: ■ strategic risks: we consider current and future portfolio issues, examining parameters such as country concentration or exposure to higher-risk countries. We also consider long-range developments in order to test key assumptions or beliefs in relation to energy markets. ■ operational risks: we consider material operational exposures across Shell’s entire value chain which provides a more granular assessment of key risks that the organisation is facing. ■ conduct and culture risks: we consider alignment of our policies, practices and behaviours against our purpose and core values. The four sub-components of risk related to climate change and GHG emissions – commercial, regulatory, societal including litigation, and physical risk – are assessed using the above categories to ensure that we maintain strategic resilience, have robust day-to-day operational risk responses and that responses align with Shell’s purpose and core values. SHELL’S PROCESSES FOR MANAGING CLIMATE-RELATED RISKS Our climate-related risk management process is carried out at Group level, at business, function and asset level which includes projects. We apply the Shell Control Framework to ensure that we effectively manage our climate-related risks at all these levels. The framework includes: ■ mandatory risk standards and manuals; ■ project-level risk management processes; ■ management and Board review; ■ internal audits and investigations; and ■ annual attestation processes. Mandatory risk standards and manuals We have mandatory standards and manuals which establish the requirements on how to effectively manage material risks including the operation of appropriate controls. Our standards and manuals also provide guidance on how to monitor, communicate and report changes in the risk environment. These documents aim to: ■ ensure consistent management and assessment of climate risk across Shell; ■ clarify expectations for risk management and reporting, including roles and responsibilities of the risk owners; ■ clarify types of assurance activities that may be applicable; ■ strengthen decision-making by ensuring that businesses have better awareness and understanding of climate risks (including their likelihood and potential impact) and mitigation plans; and ■ enable integration of Shell’s reporting. We periodically review and, if necessary, update our standards and manuals in light of developments in risks associated with climate change. Our approach continues to evolve as we increase our understanding of changing policies and the differing pace of energy transition in different regions. Strategic Report
88 Shell Annual Report and Accounts 2021 In addition, at an operational level, each business and function regularly reviews its risk profile, risk responses and assurance activities throughout the year to ensure climate-related risks are managed effectively. These insights are used to provide the Executive Committee and Board with an update twice a year on the operational management of climate change and GHG emissions risks. During these updates, the Executive Committee and Board consider the significance of the climate change and GHG emissions risks relative to other risks on the Group risk profile and review whether our risk responses are effective in addressing the four sub- components of the climate change and GHG emissions risk. Where necessary, Board reviews are further supplemented by additional in-depth reviews with the relevant management teams. Our management reviews help us to update Shell’s forward-looking plans and guide our day-to-day operational decisions such as maintenance schedules and our risk response plans. Internal audits and investigations processes Shell’s Internal Audit and Investigations (SIAI) team provides independent and objective assurance and advises management and the Board on the adequacy and effectiveness of our risk management and internal controls. For example, in relation to our climate ambitions, SIAI conducted four GHG audits during 2021 to test whether controls are adequately designed and operating effectively to mitigate the identified risks. The controls tested covered GHG emissions measurement and reporting, abatement projects and GHG forecasts. In addition, a SIAI-led Shell Energy audit focused on the reported gas and electricity volumes used for net carbon intensity calculations and reporting. Annual attestation processes On an annual basis, each business director is required to provide an annual attestation of their business’ compliance with our Health, Safety, Security, Environment and Social Performance (HSSE & SP) Control Framework and to report this to Shell’s CEO. This includes the assessment of the effectiveness of the internal controls in managing climate-related risks. Project-level risk management in action During project development stages, we consider ways to reduce GHG emissions and whether to include them in the design. Measures considered and adopted in 2021 included: ■ flaring reduction: – Gbaran asset, Nigeria: improvement project including flare reduction and improved efficiency of power system; ■ CCS capabilities; ■ exclusion of high-intensity process equipment; ■ using renewable energy; and ■ electrification: – Timi, Malaysia: financial investment decision (FID) taken on fully electrified wellhead platform for gas production; – Linnorm, Norway: plan evolves full electrification of a gas production platform; currently past conceptual design phase and expected to take FID in 2022; and – F6 Vlap, Malaysia: conceptual planning completed, aimed at implementing an extension of existing platform with improved power production to reduce GHG intensity. The FID is expected in 2022. We also include considerations of potential physical climate change risks in the internal Design and Engineering Practice (DEP) requirements for new projects. Physical risk management in action In addition to the steps we are taking to manage climate-related risks and opportunities, we are also adapting to the changing physical risk environment. An example is: Port Fourchon Junction, USA, (comprising two Shell-operated ventures, with Shell interest of 75% in the Amberjack Pipeline Company and 71% in Mars Oil Pipeline Company). The Port Fourchon Junction facilities are located in the Mississippi Delta, one of the world’s most vulnerable low-elevation coastal zones. These facilities are highly exposed to storm surge and wave-induced inundation under hurricanes which regularly visit the Gulf of Mexico. Another important factor is that the area experiences one of the largest rates of subsidence in the world, which, combined with sea level rise, could increase the site vulnerability in the coming decades. In 2021, Shell assessed the present and future scenarios of subsidence and sea level rise under extreme metocean conditions induced by hurricanes and their impact on Port Fourchon Junction. This led to a new project involving infrastructure changes. In 2021, it was developed past the conceptual design phase and is expected to take FID in 2022. The scope should allow for continued safe operations and accessibility to the location under different extreme circumstances which involves relocation of assets and raising all equipment as per metocean experts’ recommendations. INTEGRATION OF THE CLIMATE-RELATED RISK MANAGEMENT PROCESS INTO SHELL’S OVERALL RISK MANAGEMENT As described above, our climate-related risk management process follows the approach set out by the Shell Control Framework, ensuring that it is integrated in the overall risk management processes of the Group. Climate-related risks are considered from a strategic and operational perspective to ensure we maintain a comprehensive view of the different types of climate risks we face and the different time horizons in which they may affect us. The monitoring and review of risks is a key risk management process in Shell. The Executive Committee and the Board regularly review climate- related risks against the Group’s operational and strategic risk profile. This allows management to take a holistic view and to optimise risk mitigation responses, to ensure that climate-related risk responses are properly integrated into the relevant businesses’ and functions’ activities. CLIMATE CHANGE AND ENERGY TRANSITION continued Strategic Report
89Shell Annual Report and Accounts 2021 CLIMATE-RELATED METRICS AND TARGETS METRICS USED BY SHELL TO ASSESS CLIMATE-RELATED RISKS AND OPPORTUNITIES IN LINE WITH ITS STRATEGY AND RISK MANAGEMENT PROCESS This section describes our energy product and carbon emissions performance and metrics linked to our material climate transition risks and opportunities. We must decarbonise our portfolio and operations in order to mitigate climate risks and seize opportunities in the energy transition. Key metrics we use to track progress against our energy transition strategy are the net carbon intensity of our portfolio and our absolute emissions. The other material climate-related risk relates to Shell’s physical risk exposure. Currently, this response is managed at an asset level. We are continuing to establish a structured process for managing the physical risk of climate change across the Group. The process may include consideration of additional metrics and targets to monitor physical risk exposure. Our overall climate target is to become a net-zero emissions energy business by 2050, in step with society. It includes net-zero emissions from our operations (Scope 1 and 2 emissions), as well as net-zero emissions from the end-use of all the energy products we sell (scope 3 emissions). We have set short, medium and long-term targets to track our performance against our overall climate target over time. We believe our total absolute emissions peaked in 2018 at 1.73 gigatonnes of carbon dioxide equivalent (GtCO₂e) and our overall climate target means we will have to bring that down to absolute net-zero emissions by 2050, in step with society. In October 2021, in support of our 2050 net-zero emissions target, we set a target to reduce Scope 1 and 2 absolute emissions from assets and activities under our operational control (including divestments) by 50% by 2030 compared with 2016 levels on a net basis. We monitor our progress against these targets using the key metrics described below. Strategic Report Net Carbon Intensity [A] Absolute emission Scope 1 & 2 [B] Scope 3 [D] Routine flaring Methane emissions [C] [A] Our total emissions (Scope 1, 2 and 3 equity boundary) peaked in 2018 at around 1.73 gigatonnes of carbon dioxide equivalent (GtCO₂e) per annum. [B] Operational control boundary. [C] Overall methane emissions intensity for facilities with marketing gas. [D] Indirect GHG emissions (Scope 3) based on the energy product sales included in Net Carbon Intensity (NCI) using equity boundary. [E] We aim to achieve these targets in step with society. Climate-related targets summary 2016 intensity 2.5% reduction 20% 45% [E] 3-4% by 2022 6-8% by 2023 9-12% by 2024 2016 absolute 18% reduction 50% 2016 absolute absolute emissions 0.2 million tonnes hydrocarbons flared 1,299 million tonnes CO₂e eliminated Net zero [E] intensity 0.06% below 0.2% 2021 ACTUAL PERFORMANCE 2025 2035 2050 REFERENCE YEAR AND TARGET TYPE 2022 – 2024 2030
90 Shell Annual Report and Accounts 2021 Net carbon intensity Shell’s net carbon intensity is the average intensity, weighted by sales volume, of the energy products sold by Shell. It is tracked, measured and reported using the Net Carbon Footprint (NCF) methodology. We have received third-party limited assurance on our carbon intensity, measured and reported using the Net Carbon Footprint methodology, for the period 2016 to 2021. CLIMATE CHANGE AND ENERGY TRANSITION continued Strategic Report Emissions from energy products included within the Net Carbon Footprint methodology Production Use of our energy productsProcessing Distribution and sales Own oil and gas production Sales Oil products Natural gas Liquefied natural gas (LNG) GTL Refining Renewable energy Sales Power Biofuels Sales Gas production Renewable raw materials Processing Power plant Scope includes Shell’s CO₂ sinks such as carbon capture and storage (CCS) and nature-based solutions (NBS) SalesProcessing, liquefaction, gas-to-liquids (GTL) Third-party products Third-party products Third-party biofuels Third-party crude oil Third-party gas Third-party power Emissions from bringing own products to marketa a Power distributiond d Emissions from bringing third-party products to marketb b Emissions from use of sold productsc c Scope of Net Carbon Intensity
91Shell Annual Report and Accounts 2021 Performance – net carbon intensity (NCI) In 2021, Shell’s NCI was 77 grams of carbon dioxide equivalent per megajoule of energy (gCO₂e/MJ), a 2.7% increase from the previous year and a 2.5% reduction compared with 2016, the reference year. The increase in Shell’s NCI in 2021 was largely due to the introduction of an improved approach for the estimation of the emissions intensity of power sold by Shell. The new approach is based on categorising power sales as certified renewable, own generation or power purchase agreement, or power purchased from the grid. Intensities are then assigned to each power sales category, allowing a better estimate of the overall intensity of power sold by Shell. NCI reference year: 2016 (equity control boundary) 2021 2020 2019 2016 NCI [E] gCO₂e/MJ 77 75 78 79 Estimated total energy delivered by Shell [A] trillion (10^12) MJ 17.89 18.40 21.05 20.93 Estimated total GHG emissions included in NCI (net) [B] million tonnes CO₂e 1,375 1,384 1,646 1,645 Carbon credits million tonnes CO₂e 5.1 3.9 2.2 0.0 Estimated total GHG emissions (gross) [C][D] million tonnes CO₂e 1,381 1,388 1,648 1,645 [A] The NCI calculation uses Shell’s energy product sales volume data, as disclosed in the Annual Report and Sustainability Report. This excludes certain contracts held for trading purposes and reported net rather than gross. Business-specific methodologies to net volumes have been applied in oil products and pipeline gas and power. Paper trades that do not result in physical product delivery are excluded. Retail sales volumes from markets where Shell operates under trademark licensing agreements are also excluded from the scope of Shell’s carbon intensity metric. [B] These numbers include well-to-wheel emissions associated with energy products sold by Shell, on an equity boundary; they also include the well-to-tank emissions associated with the manufacturing of energy products by others that are sold by Shell. Emissions associated with the manufacturing and use of non-energy products are excluded. [C] All figures are disclosed without significant decimal places, and hence include rounding. [D] While the NCI is an intensity measure and not an inventory of absolute emissions, a notional estimate of the amount of GHG emissions covered by the scope of the NCI calculation can be derived from the final NCI value for any year. Similarly, a fossil-equivalent estimate of the total amount of energy sold included in the calculation can also be determined. [E] Acquisitions and divestments are included in the actual performance tracking with the target and baseline year unchanged. Note that acquisition and divestments could have a material impact on meeting the targets. As we implement our Powering Progress strategy, we are increasing the share of lower-carbon products in our energy product sales, which should result in a reduction in our NCI. Our ability to change the emissions intensity of each energy product varies depending on the product type: ■ For hydrocarbon fuels, emissions from end-use by customers are by far the biggest contributors to the carbon intensity of the product. As a result, the emissions intensity of hydrocarbon fuels is expected to stay relatively unchanged over time. This is why we are focused on helping our customers decarbonise. ■ This contrasts with the emissions intensity of power, which can be highly variable depending on how it has been generated. To a lesser extent, there is also a contrast between hydrocarbon fuels and biofuels, which can vary significantly in intensity depending on the feedstock and production process used. ■ The proportion of our renewable power sales and the generation mix in countries where we sell power to the market both affect Shell’s overall power mix and its resulting emissions intensity. The biggest driver for reducing our NCI is increasing the share of lower-carbon products in our energy product sales. SCOPE 1, SCOPE 2, AND SCOPE 3 GREENHOUSE GAS (GHG) EMISSIONS, AND THE RELATED RISKS Shell’s target is to be a net-zero emissions energy business by 2050, in step with society. This means we must therefore report our performance against our operational Scope 1 and 2, and Scope 3 emissions. Scope 1, 2 and 3 emissions are among the metrics we use to mitigate climate risks and seize opportunities in the energy transition, as described in the section above. Shell’s absolute emissions in 2021 In 2021, our total combined Scope 1 and 2 absolute GHG emissions (from assets and activities under our operational control) were 68 million tonnes on a CO₂ equivalent basis, a 4% reduction compared with 2020, and an 18% reduction compared with 2016, the base year. Our Scope 3 emissions from energy products included in our net carbon intensity were 1,299 million tonnes CO₂e. Performance – absolute emissions Absolute emissions [D], [F] million tonnes of CO₂e Targets [E] Scope 2016 2019 2020 2021 Target 2030 Target 2050 Scope 1 [A] 72 70 63 60 50% reduction compared with 2016 levels on a net basis 0 Scope 2 [B] 11 10 8 8 0 Scope 3 [C] 1,545 1,551 1,305 1,299 No target 0 [A] Total direct (Scope 1) GHG emissions from assets and activities under our operational control. It includes emissions from production of energy and non-energy products. [B] Total indirect GHG emissions from imported energy (Scope 2) from assets and activities under our operational control using the market-based method. It includes imported energy used for production of energy and non-energy products. We have restated our 2020 emissions from 9 to 8 million tonnes CO₂e following a correction of an efficiency factor for steam at one of our assets and a revision to how internal energy transfers of steam and electricity were accounted for at several of our assets to remove double-counting between Scopes 1 and 2. [C] Indirect GHG emissions (Scope 3) based on the energy product sales included in Net Carbon Intensity (NCI) using equity boundary. The NCI calculation uses Shell’s energy product sales volume data, as disclosed in the Annual Report and Sustainability Report. This excludes certain contracts held for trading purposes and reported net rather than gross. Business-specific methodologies to net volumes have been applied in oil products and pipeline gas and power. Paper trades that do not result in physical product delivery are excluded. Retail sales volumes from markets where Shell operates under trademark licensing agreements are also excluded from the scope of Shell’s carbon intensity metric. [D] Carbon credits are not included in the total emissions. [E] Our 2030 and 2050 targets are on the net basis (i.e., including carbon credits). Acquisitions and divestments have been included in the actual performance tracking with the target unchanged. Note that acquisition and divestments could have a material impact on meeting the targets. [F] Oil and gas industry guidelines from the International Petroleum Industry Environmental Conservation Association (IPIECA) indicate that several sources of uncertainty can contribute to the overall uncertainty of a corporate emissions inventory. We have estimated the overall uncertainty for our direct GHG emissions (scope 1) to be around 4% and for our energy indirect GHG emissions (scope 2) to be around 6% for 2021 (same for location and market-based methods). IPIECA also note that due to the diversity of scope 3 emissions, sources and the fact that these emissions occur outside the company’s boundaries, the emissions estimates may be less accurate or may have high uncertainty. The Scope 3 emissions from the energy products we sell account for the majority of our total emissions. When we calculate our emissions, we include emissions not only from the products that we produce ourselves but also from the oil and gas that others produce and resell as products to our customers. Altogether, we sell more than three times more oil and gas products than the oil and gas we extract ourselves. Therefore, to account for Shell’s full effect, we have to include everything we sell in the measurement of our carbon emissions as shown in the charts on page 90. Strategic Report
92 Shell Annual Report and Accounts 2021 Drivers of absolute Scope 1 and 2 emissions change in 2021 Our direct GHG emissions (Scope 1) (consolidated using the operational control boundary) decreased from 63 million tonnes of carbon dioxide equivalent (CO₂e) in 2020 to 60 million tonnes CO₂e in 2021, driven by several factors including: ■ the shutdown of the Convent refinery, USA, in late 2020; ■ downtime at the Norco site, USA, due to impacts from Hurricane Ida; ■ divestments in 2020 and 2021 (e.g. the Martinez and Puget Sound refineries in the USA, and the Fredericia refinery in Denmark); ■ sustained emissions reductions (performance against our scorecard and additional reductions as discussed below (page 94); and ■ reductions in methane emissions. These decreases were partly offset by higher emissions due to the restart of the Prelude FLNG facility in Australia and increased flaring in facilities operated by Shell Nigeria Exploration and Production Company Limited (SNEPCo) in Nigeria. Total routine hydrocarbons flaring reduced from 0.3 to 0.2 million tonnes of hydrocarbon flared from 2020 to 2021. Around 60% of flaring in our Upstream and Integrated Gas facilities in 2021 occurred in assets operated by the Shell Petroleum Development Company of Nigeria Limited (SPDC) and SNEPCo. We will continue to work in close collaboration with joint-venture partners and the Federal Government of Nigeria to make progress towards the objective of ending the continuous flaring of associated gas. Our target to keep methane emissions intensity below 0.2% was met in 2021 with Shell’s overall methane emissions intensity at 0.06% for facilities with marketing gas and 0.01% for facilities without marketing gas. We believe our methane emissions are calculated using the best methods currently available. This target covers all Shell-operated oil and gas assets in our Upstream and Integrated Gas businesses. Methane emissions include those from unintentional leaks, venting and incomplete combustion, for example in flares and turbines. CLIMATE CHANGE AND ENERGY TRANSITION continued We undertake external verification of our GHG emissions annually. Our Scope 1 and 2 GHG emissions from assets and activities under our operational control and Scope 3 emissions included in our NCI have been verified to a level of limited assurance. Strategic Report 18% 25% 56% c 1% d b Downstreama Integrated Gas and Renewables and Energy Solutionsb a Scope 1 & 2 68m tonnes CO2e Scopes 1 & 2 – performance [A] [A] Total direct (Scope 1) and energy indirect (Scope 2) GHG emissions from assets and activities under operational control boundary. It includes emissions from production of energy and non-energy products. For Scope 2, we used the market-based method. Upstream c Otherd Scope 1 and Scope 2 GHG emissions changes from 2020 to 2021 million tonnes carbon dioxide equivalent (CO₂e) 70 60 65 55 Acquisitions Reduction activities and purchased renewable electricity [C] [D] Emissions [A] [B] Change in output Divestments and other reasons 2020 2021 a d e 71 (4.0) 2.70.0 a b c d e (2.2) c b 68 75 [A] Total Scope 1 and Scope 2 emissions, rounded to the closes million tonnes. Scope 2 emissions were calculated using the market-based method. [B] We have restated our 2020 emissions from 9 to 8 million tonnes CO₂e following a correction of an efficiency factor for steam at one of our assets and a revision to how internal energy transfers of steam and electricity were accounted for at several of our assets to remove double-counting between Scopes 1 and 2. [C] In addition to reductions from GHG abatement and energy efficiency projects, this category also includes reductions from permanent shutdown of Convent and Tabangao refineries and the impact of transformational activities at our Shell Energy and Chemicals Park in Singapore. [D] Excludes 1.05 million tonnes of CO₂ captured and sequestered by our Quest CCS project in Canada in 2021. Share of energy delivered per energy product type [A]-[F] 2021202020192016 1% 21% 19% 12% 47% 1% 25% 18% 12% 45% 1% 17% 18% 9% 56% 1% 24% 14% 7% 54%a b c d e [A] Percentage of delivered energy may not add up to 100% because of rounding. [B] Total volume of energy products sold by Shell, aggregated on an energy basis, with electricity represented as fossil equivalents. This value is derived from energy product sales figures disclosed by Shell in the Annual Report, Form 20-F and the Sustainability Report. [C] Lower heating values are used for the energy content of the different products and a fossil-equivalence approach is used to account for electrical energy, so that it is assessed on the same basis as our other energy products. [D] The NCI calculation uses Shell’s energy product sales volume data, as disclosed in the Annual Report and Sustainability Report. This excludes certain contracts held for trading purposes and reported net rather than gross. Business specific methodologies to net volumes have been applied in oil products and pipeline gas and power. Paper trades that do not result in physical product delivery are excluded. Retail sales volumes from markets where Shell operates under trademark licensing agreements are also excluded from the scope of Shelĺ s carbon intensity metric. [E] In 2021, emissions included in carbon intensity of power have been calculated using the market-based method. [F] The carbon intensity of biofuels provided in the graph “Share of energy delivered per energy product type” reflects the global average for biofuels sold by Shell for 2021. a b c d e Oil products and gas-to-liquids (GTL) (carbon intensity in 2021 was 91 gCO₂e/MJ) Liquefied natural gas (LNG) (carbon intensity in 2021 was 70 gCO₂e/MJ) Gas (carbon intensity in 2021 was 66 gCO₂e/MJ) Power (carbon intensity in 2021 was 66 gCO₂e/MJ) Biofuels (carbon intensity in 2021 was 41 gCO₂e/MJ)
93Shell Annual Report and Accounts 2021 Our indirect GHG emissions associated with imported energy (Scope 2) (consolidated using the operational control boundary) were 8 million tonnes CO₂e in 2021, (using the market-based method), the same as in 2020. Drivers of absolute Scope 3 emissions change in 2021 Emissions associated with the use of our energy products, Scope 3 emissions, account for the vast majority of our carbon emissions related to energy products. Our total Scope 3 emissions from energy products are largely unchanged from last year. The decrease in 2020 from 2019 mainly relates to a decrease in demand for oil products given market conditions in 2020, and a decrease related to volumes associated with additional contracts being classified as held for trading purposes with effect from January 2020. Our strategy is based on working with our customers, sector-by-sector, to address the emissions from the use of our products and to help them find ways to reduce their emissions and overall carbon footprint to net zero by 2050. TARGETS USED BY SHELL TO MANAGE CLIMATE-RELATED RISKS AND OPPORTUNITIES AND PERFORMANCE AGAINST TARGETS Shell’s material climate-related risks and opportunities are set out in the “Climate-related risks and opportunities identified by Shell over the short, medium and long term” section. Our response to the transition risk focuses on decarbonising our value chain. Our climate targets are focused on reducing our net carbon intensity as well as our absolute emissions. NCI target-setting Tackling climate change is an urgent challenge. But only a transformation of the global economy and the energy system that supports it will stop the world adding to the total amount of greenhouse gases in the atmosphere, achieving what is known as net-zero emissions. That is why, for our part, Shell has set a target to become a net-zero emissions energy business by 2050, in step with society’s progress in achieving the goal of the Paris Agreement on climate change. We believe our targets support the more ambitious goal of the Paris Agreement: to limit the increase in the global average temperature to 1.5°C above pre-industrial levels. Our net-zero target is aligned with the findings of the Intergovernmental Panel on Climate Change (IPCC), which concluded that the world must reach net-zero carbon emissions by around 2050 to limit global warming to 1.5°C and avoid the worst effects of climate change. As there is no established standard for aligning an energy supplier’s decarbonisation targets with the temperature goal of the Paris Agreement, we have developed our own approach to demonstrate that our carbon intensity targets are aligned with the 1.5°C goal. We set our targets using scenarios taken from a database developed for the IPCC Special Report on Global Warming of 1.5°C. We started with the complete range of IPCC 1.5°C scenarios, then chose scenarios that focused on earlier action and placed less reliance on the use of carbon sinks. We then calculated the carbon intensity of each of the selected scenarios and, after removing outlying values, used the resulting range of intensities to produce the final 1.5°C pathways used to set our targets. To become a net-zero emissions energy business, we must reduce emissions from our operations, and from the fuels and other energy products such as electricity that we sell to our customers. We must also capture and store remaining emissions using either technology or natural carbon sinks. Shell will work with our customers to help them accelerate their transition by providing low- and zero-carbon energy products and services. If they are not able to accelerate their transition, we will help our customers in other ways by providing high-quality, nature-based solutions to offset any unavoidable emissions. We know that even though we offer this service, our customers may choose to source offsets from other companies. Today, it is not possible for energy companies and their customers to jointly account for actions to reduce emissions. We will work with partners towards changing accounting and reporting protocols and developing new systems for suppliers and users of energy to exchange information about steps they are taking to reduce their emissions. These changes will take time to put into practice, and we reflect this in our targets which before 2035 include only mitigation actions directly involving Shell. Working to reduce our absolute Scope 1 and 2 emissions 72 70 63 60 4-6 4-6 3-5 3-6 2-7 4 11 10 8 8 Portfolio changes Efficiency improvements Energy and chemicals park transformation Use of renewable power CCUS NBS2016A 2019A 20302020A 2021A 68 41 83 80 71 -50% Scope 1a a Scope 2b b Scope 1-2 emissions in million tonnes per annum [A],[B] [A] This chart assumes no adjustments to the base year [B] Operational control boundary Strategic Report
94 Shell Annual Report and Accounts 2021 CLIMATE CHANGE AND ENERGY TRANSITION continued Linking Shell’s emissions targets to remuneration policies We have established remuneration policies which are designed to support us in achieving our short-term climate targets: ■ remuneration linked to net carbon intensity targets; ■ remuneration included in the 2021 annual scorecard against Scope 1 and 2 GHG intensity targets; and ■ remuneration included in the 2021 annual scorecard linked to sustained absolute emission reductions from GHG abatement projects. See also “Directors’ Remuneration Report on page 167. Remuneration linked to net carbon intensity targets We have linked our target to reduce the carbon intensity of our energy products to our 2021 LTIP awards for Executive Directors and senior executives and our Performance Share Plan awards made to around 16,500 employees globally. 2021 equity control basis 2021 Target 2021 Performance 2021 Status NCI reduction against 2016 reference year value of 79 grams of carbon dioxide equivalent per megajoule (gCO₂e/MJ) 2-3% 77 achieved The reduction of Shell’s NCI from 79 gCO₂e/MJ in 2016 to 77gCO₂e/MJ in 2021 means that we have achieved our first short-term target of a 2-3% reduction in NCI by the end of 2021. The reduction of Shell’s NCI over this period has largely been driven by a reduction in oil product sales combined with growth in power sales. 2021 Target 2021 Performance 2021 Status Growing a material power business New market entries for direct power sales to end customers 2 1 not achieved Secure renewable power generation capacity options Options created for generation capacity 5-10 GW 25.6 GW achieved Post-FID capacity 2-4 GW 2.6 GW achieved Investment in energy access customers $200m $69m not achieved Commercialise advanced biofuels technology Technologies at TRL8 or Shell investment in a commercial scale advanced biofuels project 1 2 achieved Develop emissions sinks FID on NBS origination projects verified by recognised carbon credit standards 4-8 9 achieved FID on Carbon capture, utalisiation and storage 1 1 achieved Remuneration included in 2021 annual scorecard against Scope 1 and 2 GHG intensity targets Our annual bonus scorecard for senior management also affects remuneration for almost all of Shell’s employees. Our 2021 scorecard included three GHG intensity metrics covering over 75% of Scope 1 and 2 GHG emissions under operational control. They are summarised below. 2021 Scorecard: Scope 1 and 2 GHG intensity targets – operational control 2021 Target 2021 Performance 2021 Status Upstream and Integrated Gas tonnes CO₂e/tonne of oil and gas available for sale (excluding Prelude floating liquefied natural gas (FLNG) facility) [A] 0.152 0.17 not achieved Refining tonnes of CO₂e as per Solomon’s Utilised Equivalent Distillation Capacity (UEDC™) [A] 1.03 1.05 not achieved Chemicals tonnes CO₂e/tonne of high value chemicals [A] 0.97 0.95 achieved [A] Acquisitions and divestments are included in the actual performance tracking with the target unchanged. Note that acquisition and divestments could have a material impact on meeting the targets set for the scorecard. We successfully reduced our chemicals emissions intensity to below target intensity, from 0.98 in 2020 to 0.95 in 2021. This was in part driven by sustained good reliability at our Bukom chemical plant in Singapore. Upstream and Integrated Gas emissions intensity increased from 0.16 in 2020 to 0.17 in 2021. This was partly due to below-plan production at several of our assets. The intensity number for 2021 excludes the Prelude floating liquefied natural gas (FLNG) facility. Refining emissions intensity remained unchanged at 1.05 in 2020 and 2021. The Refining GHG emission intensity was below target partly due to the impact of the February winter freeze and Hurricane Ida on our refineries in the USA. We are taking steps to continue working on measures to drive reductions in GHG intensity. Remuneration included in 2021 annual scorecard linked to sustained absolute emissions reductions from GHG abatement projects There was one main absolute target linked to remuneration. This was set out in our 2021 annual scorecard which included a target of 224 thousand tonnes of carbon dioxide equivalent (ktCO₂e) sustained emissions reductions from GHG abatement projects. This was included in our annual scorecard to further emphasise the importance of achieving progress in the energy transition in our own operations. See also “Annual Report on Remuneration” on page 171. Strategic Report
95Shell Annual Report and Accounts 2021 ■ emissions from capital goods, defined by the GHG Protocol as including fixed assets or property, plant and equipment (PP&E), and other goods and services not related to purchased energy feedstocks sourced from third parties or energy products manufactured by third parties and sold by Shell. The NCI calculation uses Shell’s energy product sales volume data, as disclosed in the Annual Report and Sustainability Report. This excludes certain sales volumes such as: ■ certain contracts held for trading purposes reported net rather than gross. Business-specific methodologies to net volumes have been applied in oil products and pipeline gas and power. Paper trades that do not result in physical product delivery are excluded; and ■ retail sales volumes from markets where Shell operates under trademark licensing agreements. Important notes on the Net Carbon Footprint methodology 1. The Net Carbon Footprint is not a mathematical derivation of total emissions divided by total energy, nor is it an inventory of absolute emissions. 2. It is a weighted average of the life-cycle CO₂ intensities of different energy products, normalising them to the same point relative to their final end-use. The use of a consistent functional unit, grams of carbon dioxide equivalent per megajoule (gCO₂e/MJ), allows like-for-like comparisons and the aggregation of individual life-cycle intensities for a range of energy products including renewables. For further information see our detailed NCF methodology documentation. Basis of preparation – absolute Scope 1, 2 and 3 emissions We follow the GHG Protocol’s Corporate Accounting and Reporting Standard, which defines three scopes of GHG emissions: ■ Scope 1: direct GHG emissions from sources that are owned or controlled by Shell. ■ Scope 2: indirect GHG emissions from generation of purchased energy consumed by Shell. ■ Scope 3: other indirect GHG emissions, including emissions associated with the use of energy products sold by Shell. GHG emissions comprise carbon dioxide (CO₂), methane (CH₄), nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulphur hexafluoride and nitrogen trifluoride, with carbon dioxide and methane being the most significant contributors. Our GHG inventory was prepared in line with the requirement outlined in the ISO 14064-1:2018 Specification with Guidance at the Organisational Level for Quantification and Reporting of Greenhouse Gas Emissions and Removals and the GHG Protocol’s Corporate Accounting and Reporting Standard. In line with external standards, Shell aggregates its emissions of greenhouse gases into tonnes of CO₂ equivalent by applying global warming potential (GWP) factors to each greenhouse gas. The GWP factors used for converting the mass of individual gases to their CO₂ equivalents are shown in the consolidated statement of GHG emissions. These factors are taken from the Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report (AR4) over a 100-year time horizon, in line with the UK Government GHG Conversion Factors for Company Reporting. 2021 scorecard: Scope 1 sustained emissions reductions – operational control 2021 Target 2021 Performance 2021 Status Sustained emissions reductions from delivered GHG abatement projects in ktCO₂e 224 279 achieved We have exceeded this target with 279 ktCO₂e of sustained emissions reductions, by implementing projects across a range of assets that we operate. We have also delivered around 3.6 million tonnes of other GHG reductions (not included in the scorecard). These reductions include GHG abatement projects and emissions reductions from permanent shutdowns and conversions of our facilities. Examples include flaring reduction and energy efficiency projects. The above reductions do not include 1.05 million tonnes of CO₂ captured and sequestered by our Quest CCS project in Canada in 2021. Basis of preparation – net carbon intensity Shell’s net carbon intensity (NCI) provides an annual measure of the life-cycle emissions intensity of the portfolio of energy products sold. The intended use of the NCI metric is to track progress in reducing the overall carbon intensity of the energy products sold by Shell, as described in Shell’s climate target. The NCI is calculated on a life-cycle basis and as such includes GHG emissions – on an equity basis – from several sources, including: ■ direct GHG emissions from Shell operations; ■ indirect GHG emissions from generation of energy consumed by Shell; and ■ indirect GHG emissions from the use of the products we sell. Emissions from other parts of the product life cycle are also included, such as those from the extraction, transport and processing of crude oil, gas or other feedstocks and the distribution of products to our customers. Also included are emissions from parts of this life cycle not owned by Shell, such as the extraction of oil and gas processed by Shell but not produced by Shell; or from the production of oil products and electricity marketed by Shell that have not been processed or generated at a Shell facility. Emissions offset through various measures, such as by working with nature to create carbon sinks – including forests and wetlands – or mitigated by using CCS technology are also taken into account. Refer to scope of NCI on page 90 for details of the supply chains and steps in the product life cycles that are included in the Net Carbon Footprint methodology. The following GHG emissions are not included in the net carbon intensity (NCI): ■ emissions from production, processing, use and end-of-life treatment of non-energy products, such as chemicals and lubricants; ■ emissions from third-party processing of sold intermediate products, such as the manufacture of plastics from feedstocks sold by Shell; ■ emissions associated with the construction and decommissioning of production and manufacturing facilities; ■ emissions associated with the production of fuels purchased to generate energy on site at a Shell facility; ■ other indirect emissions from waste generated in operations, business travel, employee commuting, transmission and distribution losses associated with imported electricity, franchises and investments; Strategic Report
96 Shell Annual Report and Accounts 2021 GHG emissions were aggregated using a bottom-up approach: emission source -> asset -> operating unit -> business -> Group. GHG emissions in this Report include emissions from Upstream, Integrated Gas, Renewables and Energy Solutions, Downstream, Projects & Technology businesses and functions (mainly offices). All operated assets were included in the GHG inventory in the reporting period. Basis of preparation – Scope 1 emissions Sources included in Scope 1 emissions comprised: ■ combustion of carbon-containing fuels in stationary equipment (e.g., boilers, gas turbines) for energy generation; ■ combustion of carbon-containing fuels in mobile equipment (e.g., trucks, vessels, mobile rigs); ■ flares; ■ venting and emissions from industrial processes (e.g., hydrogen plants, catalytic cracking units); and ■ fugitive emissions, including piping and equipment leaks and non-routine events. Scope 1 emissions – exclusions Carbon dioxide emissions from biogenic sources (for example, biofuels, biomass) were excluded from our Scope 1 emissions; instead, they were captured separately. Methane and nitrous oxide emissions from biogenic sources were included in our Scope 1 emissions. Captured carbon dioxide that was subsequently sold or otherwise transferred to third parties was excluded from our Scope 1 emissions. Carbon dioxide captured and sequestered using CCS technologies was excluded from our Scope 1 emissions. But the emissions from operating CCS were included in our Scope 1 and 2 emissions. Carbon offset credits were excluded from our Scope 1 GHG emissions. No material sources were excluded from the Scope 1 inventory. Basis of preparation – Scope 2 emissions Sources included in Scope 2 emissions comprised indirect emissions from purchased and consumed electricity, steam and heat. We did not identify any assets with imported cooling or compressed air used for energy purposes. Scope 2 emissions were calculated using the market- and location-based methods separately as defined by the GHG Protocol Scope 2 Guidance. No material sources were excluded from our inventory. Basis of preparation – Scope 3 emissions This report provides Scope 3 emissions included in our net carbon intensity (NCI). They were consolidated using the equity boundary approach. Under this approach, we reported Shell share of emissions from energy products sold by Shell, including those sourced from third parties. Scope 3 categories included in the total number in this Report include following: Scope 3, category 1: purchased goods and services This category includes well-to-tank emissions from purchased third-party unfinished and finished energy products excluding electricity (which was reported separately under Category 3: Fuel and energy-related activities (not included in Scope 1 or Scope 2)). Emissions in this category were estimated using well-to-tank emission factors for crude oil, natural gas, refined oil products (such as gasoline, and diesel), LNG and biofuels. Because the emission factors includes transport, we did not estimate emissions from transport of purchased third-party products separately. Emissions from purchased non-energy products were not included in this Report. Scope 3, category 3: fuel and energy-related activities (not included in Scope 1 and 2) This category includes well-to-wire emissions from purchased third-party electricity sold by Shell, calculated using the market-based method. Emissions were not adjusted for any potential double-counting of sold natural gas that may have been used for generating this electricity. This category does not include: ■ indirect emissions from generation of imported energy (steam, heat or electricity consumed by our assets). These emissions were reported separately as Scope 2 emissions; and ■ well-to-tank emissions from purchased electricity, steam and heat consumed by our assets (i.e. Scope 3 emissions from extraction, refining and transport of primary fuels before their use in the generation of electricity or steam). Scope 3, category 9: downstream transport and distribution This category includes estimated emissions from transport and distribution of energy products produced or refined by Shell. It does not include the emissions associated with transporting third-party products, which are included in Scope 3, Category 1. In order to avoid double counting the emissions from transport, Scope 1 and 2 emissions from transport included in our equity emissions were subtracted from the total in this category. Scope 3, category 11: use of sold products This category includes estimated emissions from the use-phase of sold energy products, such as LNG, GTL, pipeline gas, refined oil products and biofuels. The emissions consist of two separate sub-categories: products manufactured and sold by Shell and third-party products sold by Shell. This category does not include non-energy products that may have been combusted during the use-phase (for example, lubricants). Biogenic CO₂ emissions from combustion of sold biofuels Biogenic CO₂ from combustion of sold biofuels were estimated and reported separately outside of scopes. Methane and nitrous oxide have been included in Scope 3, Category 11 in line with the ISO 14064-1:2018 and GHG Protocol requirements. We did not estimate CO₂ from combustion of biogenic emissions in other Scope 3 categories. It is assumed that the presence of biogenic emissions in other categories is negligible at present. Other Scope 3 categories As noted above, this Report only covers Scope 3 GHG emissions included in our net carbon intensity metric. Other Scope 3 GHG emissions can be found on our website: www.shell.com/ghg. CLIMATE CHANGE AND ENERGY TRANSITION continued Strategic Report
97Shell Annual Report and Accounts 2021 The activity data used to calculate GHG intensity ratios at a portfolio level shown in the table above is reported on an operational control basis. As a result, it is not directly comparable with the production data reported elsewhere in this Report, which is reported on a financial control basis. The table below shows the numbers used in the calculation of the intensity: Inputs used for calculating the GHG emissions intensity ratio 2021 2020 2019 A 8.1 Scope 1 – Direct GHG emissions [A] 60 63 70 B 8.2 Scope 2 – Energy Indirect GHG emissions [A] 8 8 10 C=A+B Total Scope 1 and 2 GHG emissions [A] 68 71 80 D 6.5 Total oil and gas production available for sale [B] 128 149 166 E 6.6 Refinery crude and feedstock processed [B] 84 99 124 F 6.3 Chemicals total production [B] 25 26 24 G 6.4 LNG production [B] 10 8 9 H 6.6 GTL production [B] 6 6 6 I=D+E+F+G+H Total Upstream, Integrated Gas and Downstream activity [B] 253 288 329 J=C/I GHG intensity ratio [C] 0.27 0.25 0.24 [A] In million tonnes CO₂ equivalent. [B] In million metric tonnes of production. [C] In tonnes of CO₂ equivalent per tonne of production. Energy use in our operations The energy consumption data provided below comprise own energy, generated and consumed by our facilities, and supplied energy (electricity, steam and heat) purchased by our facilities for our own use. Energy consumption data reflect primary (thermal) energy (e.g. the energy content of fuels used to generate electricity, steam, heat, mechanical energy etc.). This includes energy from renewable and non-renewable sources. Own energy generated was calculated by multiplying the volumes of fuels consumed for energy purposes by their respective lower heating values. Own energy generated that was exported to third-party assets or to the power grid is excluded. Thermal energy for purchased and consumed electricity was calculated using actual electricity purchased multiplied by country-specific electricity generation efficiency factors (from IEA statistics). Thermal energy for purchased and consumed steam and heat was calculated from actual steam/heat purchased multiplied by a supplier-specific conversion efficiency, or a generic efficiency factor where supplier-specific data were not available. OTHER REGULATORY DISCLOSURES GHG EMISSIONS AND ENERGY CONSUMPTION DATA – INFORMATION PROVIDED IN ACCORDANCE WITH UK REGULATIONS Data in this section are consolidated using the operational control approach. Under this approach, we account for 100% of the GHG emissions and energy consumption in respect of activities where we are the operator, irrespective of our ownership percentage. Reporting on this operational control basis differs from that applied for financial reporting purposes in the “Consolidated Financial Statements”. We acknowledge the strong preference of the UK’s Financial Reporting Council (FRC) for companies to report the GHG emissions and energy consumption data using the financial consolidation boundary and are working on including the data and information on this boundary in our Annual Report in the future. See Basis of preparation – absolute emissions on page 95. Greenhouse gas emissions in million tonnes of CO₂ equivalent 2021 2020 2019 Total global direct (Scope 1) [A] 60 63 70 UK including offshore area [B] 1.71 2 2.1 Market-based Total global energy indirect (Scope 2) [C] 8 8 10 UK including offshore area 0 0 0 Location-based Total global energy indirect (Scope 2) [D] 9 10 11 UK including offshore area 0.05 0.06 0.06 Intensity ratio in tonnes per tonne Intensity ratio of all facilities [E] 0.27 0.25 0.24 [A] Emissions from the combustion of fuel and the operation of our facilities globally, calculated using global warming potentials from the IPCC’s Fourth Assessment Report. [B] Emissions from the combustion of fuels and the operation of our facilities in the UK and its offshore area, calculated using global warming potentials from the IPCC’s Fourth Assessment Report. [C] Emissions from the purchase of electricity, heat, steam and cooling for our own use globally, calculated using a market-based method as defined by the GHG Protocol Corporate Accounting and Reporting Standard. We have restated our 2020 emissions from 9 to 8 million tonnes CO₂e following a correction of an efficiency factor for steam at one of our assets and a revision to how internal energy transfers of steam and electricity were accounted for at several of our assets to remove double-counting between Scopes 1 and 2. [D] Emissions from the purchase of electricity, heat, steam and cooling for our own use globally, calculated using a location-based method as defined by the GHG Protocol Corporate Accounting and Reporting Standard. We have restated our 2020 emissions from 11 to 10 million tonnes CO₂e following a correction of an efficiency factor for steam at one of our assets and a revision to how internal energy transfers of steam and electricity were accounted for at several of our assets to remove double-counting between Scopes 1 and 2. [E] In tonnes of total direct and energy indirect GHG emissions per tonne of crude oil and feedstocks processed and petrochemicals produced in downstream manufacturing, oil and gas available for sale, LNG and GTL production in Integrated Gas and Upstream. For an additional breakdown by segment, see Scope 1 and 2 GHG intensity by segment section below. Strategic Report
98 Shell Annual Report and Accounts 2021 CLIMATE CHANGE AND ENERGY TRANSITION continued Our energy consumption decreased from 241 billion kilowatt-hours (kWh) in 2020 to 223 billion kWh in 2021, in line with the decrease in our Scope 1 and 2 GHG emissions. Around 1% of the energy we used in 2021 for our operations came from low-carbon and renewable sources. Energy consumption in billion kilowatt-hours 2021 2020 [A] 2019 Own energy generated and consumed Total energy generated and consumed 189 205 220 UK including offshore area 6.2 7.6 7.6 Purchased and consumed energy Total purchased and consumed energy 33 36 44 UK including offshore area 0.2 0.2 0.2 Energy consumption Total energy consumed 223 241 264 UK including offshore area 6.4 7.8 7.8 [A] We have restated our 2020 energy use figures following a correction of an efficiency factor for steam at one of our assets and a revision to how internal energy transfers of steam and electricity were accounted for at several of our assets to remove double-counting between Scopes 1 and 2. In 2021, we implemented a variety of measures to reduce the energy use and increase the energy efficiency of our operations. Examples of some of the principal measures taken in 2021 are listed below (with estimated total savings of around 675 million kWh in 2021): ■ At our Scotford upgrader facility in Canada, we completed several projects to minimise energy use and improve efficiency, for example by installing new equipment and making changes to how some equipment operates. ■ At our Gannet asset in the UK, we completed a project to enhance the efficiency of the fuel gas compressors by fine-tuning their performance to the specific needs of the platform. ■ At our Jurong Island site in Singapore, we installed a second stage flash vessel to recover the heat for reuse in other equipment, and completed a project to minimise power consumption by one of the incinerators. ■ At our Rheinland site in Germany, we completed several projects to reduce energy use and improve efficiency, for example, by installing more efficient equipment and changing maintenance schedules to improve efficiency. ■ At our Bukom site in Singapore, we completed a project to reduce the consumption of natural gas in flare purge ■ At our Scotford refinery and chemical site in Canada, we completed several projects to reduce energy use and improve efficiency, for example, by enabling the reduction of steam usage. ■ At our QGC operations in Australia, we implemented a project to reduce power requirements for gas compression. Examples of some of the principal measures taken in 2020 are listed below (with estimated total savings of around 385 million kWh in 2020): ■ At our Clipper facility in the UK, we completed a project to optimise the use of compressors. ■ At our Bukom facility in Singapore, we completed two projects to minimise energy loss from steam. ■ At our Scotford upgrader facility in Canada, we completed several projects to minimise energy use and improve efficiency, for example by removing equipment from service or replacing it with more efficient equipment. ■ At our Geismar facility in the USA, we improved flare staging and temperature control which resulted in lower levels of natural gas consumption. ■ At our Mobile facility in the USA, we installed new equipment to increase heat transfer between heat exchangers to improve the energy efficiency of the units. ■ At our GTL facility in Qatar, we completed several projects to reduce energy use and improve efficiency, for example by minimising the generation of excess steam and converting excess energy into electricity for export to the public grid. ■ In Brazil, we reduced fuel usage of vessels by optimising how they operate in dynamic position, stand-by and navigation modes. The targets in this “Climate change and energy transition” section, including those relating to the net carbon intensity targets, are forward- looking targets based on management’s current expectations and certain material assumptions and, accordingly, involve risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied herein. EU TAXONOMY REGULATION The EU Taxonomy Regulation, adopted by the European Union in 2020, is designed to encourage investment in an environmentally sustainable economy by creating uniform definitions of sustainability for investors. Although as a UK company Shell is not currently subject to the regulation, we have prepared a voluntary disclosure in accordance with its requirements. For further information, see “Supplementary Information – EU Taxonomy Disclosure” on pages 302-304. Strategic Report
99Shell Annual Report and Accounts 2021 Our commitment to contribute to sustainable development has been part of the Shell General Business Principles since 1997. These principles, together with our Code of Conduct, apply to the way we do business and to our conduct with the communities where we operate. We have worked to embed this sustainability commitment into our strategy, our business processes and decision-making. We aim to provide more and cleaner energy solutions in a responsible manner – in a way that balances short- and long-term interests, and that integrates economic, environmental and social considerations. Our strategy Today, we continue to build on these foundations while driving change across the organisation to help society meet its most pressing challenges, including those related to climate change, the environment, diversity and inclusion, and human rights. We seek the views of various groups and individuals about the role of an organisation like Shell in addressing these challenges. Our efforts are informed by major international agreements and initiatives, such as the Paris Agreement and the UN’s Sustainable Development Goals. In February 2021, we announced Powering Progress, our strategy to accelerate the transition of our business to net-zero emissions, in step with society. Powering Progress is designed to integrate sustainability with our business strategy. Powering Progress has four main goals in support of our purpose, to power progress together by providing more and cleaner energy solutions: ■ generating shareholder value: increasing value through a dynamic portfolio and disciplined capital allocation; ■ achieving net-zero emissions: working with our customers and across sectors to accelerate the transition to net-zero emissions; ■ powering lives: powering lives through our products and activities, and by supporting an inclusive society; and ■ respecting nature: protecting the environment, reducing waste and making a positive contribution to biodiversity. Powering Progress is underpinned by our focus on safety and our core values of honesty, integrity and respect for people. This means we have a commitment to do business in an ethical and transparent way. For more information on our Powering Progress strategy, see page 12. OUR APPROACH TO SUSTAINABILITY ENVIRONMENT AND SOCIETY Strategic Report
100 Shell Annual Report and Accounts 2021 ENVIRONMENT AND SOCIETY continued Sustainability reporting boundary and guidelines Data in this section are reported on a 100% basis in respect of activities where a Shell company is the operator (unless noted otherwise). Reporting on an operational control basis differs from that applied for financial reporting purposes in the “Consolidated Financial Statements” on page 233. Additional data on our 2021 environmental and social performance are expected to be published in the Shell Sustainability Report in April 2022. We use certain guidelines to inform our reporting on sustainability issues: As a member of the World Business Council for Sustainable Development, we support the organisation’s updated criteria for membership from 2022, which include requirements for corporate transparency. ■ We report in line with guidelines developed by IPIECA, the global oil and gas association for advancing environmental and social performance across the energy transition. ■ In January 2021, we agreed to adopt the Stakeholder Capitalism Metrics, a set of environmental, social and governance metrics released by the World Economic Forum and its International Business Council. ■ We map our disclosures against the Sustainability Accounting Standards Board’s (SASB) Oil & Gas – Exploration & Production Standard. ■ In the “Climate change and energy transition” section of this Report, we set out our climate-related financial disclosures consistent with all of the recommendations and recommended disclosures of the Task Force on Climate-related Financial Disclosures (TCFD). IMPACT OF THE COVID-19 PANDEMIC – HELPING COLLEAGUES, CUSTOMERS AND COMMUNITIES The COVID-19 pandemic continues to have a serious impact on people’s health and livelihoods in most parts of the world, including communities where we work. Shell is working hard to assist in the global fight against the virus, and to support recovery efforts. See our website shell.com for information on the steps we took to provide support to our staff and others. UNITED NATIONS SUSTAINABLE DEVELOPMENT GOALS The UN’s 17 Sustainable Development Goals (SDGs) seek to address the world’s biggest challenges, including ending poverty, improving health and education, making cities sustainable and tackling climate change. Governments are responsible for prioritising and implementing approaches that meet the SDGs, but achieving these tasks will require unprecedented collaboration and collective action across businesses, governments and civil society. We will play our part in helping governments and societies to achieve the SDGs. The goals were one of the considerations in the development of our Powering Progress strategy. The actions we take as part of our Powering Progress strategy can help directly contribute to 13 of the SDGs, while indirectly contributing to others. See our website shell.com for information on how Shell is contributing to the SDGs. BOARD OVERSIGHT FOR SUSTAINABILITY We describe Shell’s overall governance framework on page 135. It provides information on the roles of the Board, its committees, and the Executive Committee. The Safety, Environment and Sustainability Committee (SESCo) advises the Board on safety, the environment including climate change and broader sustainability. More information on SESCo’s role and activities in 2021 is provided on pages 151-152. The Annual Report on Remuneration (see page 174) provides details of how the Shell scorecard captures key performance indicators for safety, environment and climate. SHELL GENERAL BUSINESS PRINCIPLES The Shell General Business Principles set out our responsibilities to shareholders, customers, employees, business partners and society. They set the standards for how we conduct business with integrity, care and respect for people, while seeking to protect the environment and establish mutually beneficial relationships with communities. All ventures that a Shell company operates must conduct their activities in line with our business principles. HSSE & SP CONTROL FRAMEWORK In Shell, health, safety, security, environment, and social performance (HSSE & SP) are vitally important to generating value. They are indispensable elements of our organisation. The Shell HSSE & SP Control Framework (CF) consists of mandatory standards and manuals, which align with the Shell Commitment and Policy on HSSE & SP. Guidance documents, assurance protocols, and training materials support implementation of the standards and manuals. The HSSE & SP CF applies to every Shell entity and Shell-operated venture, including all employees and contract staff. The HSSE & SP CF defines requirements and accountabilities at each organisational level and sets out processes and procedures. We aim to ensure that all significant HSSE & SP risks associated with our business activities are assessed and managed to minimise them as far as reasonably practicable. Our HSSE & SP functions provide expert advice and support businesses to improve HSSE & SP performance. We aim to minimise the environmental impact of new projects and existing operations. Shell conducts an environmental, social and health impact assessment for every major project. We engage with local communities and non-governmental organisations (NGOs) in order to understand and respond to their concerns in a timely and suitable manner. Shell staff and contractors worked hard to assist in the global fight against the virus, and to support recovery efforts. Strategic Report
101Shell Annual Report and Accounts 2021 such a review is not conducted, we periodically evaluate HSSE & SP risks faced by the ventures that we do not operate. If a joint venture does not meet our HSSE & SP expectations, we seek to improve performance by working with our partners to develop and implement remedial action plans. From August 2021, we integrated the Process Safety and HSSE & SP Assurance team and the related HSSE & SP assurance programme into the Shell Internal Audit & Investigations (SIAI) team to form a single independent assurance organisation within Shell. Within SIAI, the HSSE & SP and Asset Management Assurance team continues to provide assurance to the Board on the effectiveness of the HSSE & SP CF as outlined above. Shell aims to work with suppliers that behave in a safe, economically, environmentally and socially responsible manner. Our approach to suppliers is set out in our Shell General Business Principles and Shell Supplier Principles. These cover expectations in areas such as business integrity, health and safety, environment, and human rights. Assurance The Process Safety and HSSE & SP Assurance team provides assurance to the Board on the effectiveness of the HSSE & SP CF through an audit programme. The full Shell portfolio comprises about 200 organisational groups covered by this programme. Audits are performed with a frequency of between three and five years, depending on the overall risk and complexity of a particular facility or organisational group. The Board approves an annual audit plan. On average, the assurance team conducts about 50 audits on a variety of subject areas per year. The scope of the audits is designed to test risk areas as defined in the HSSE & SP CF. This includes the overall HSSE & SP management system and specific requirements for areas such as personal safety, environment and contractor management. Based on audit outcomes, the audit frequency for an entity may be increased. The relevant business documents the audit findings, records any action items and tracks them to completion. We expect joint ventures not operated by Shell to apply standards and principles substantially equivalent to our own. We support these joint ventures in implementing such standards and principles. We also offer to help them review the effectiveness of their implementation. Even if Strategic Report Health Process Safety Personal SafetyHSSE & SP Management System Environment The HSSE & SP Control Framework defines mandatory standards, requirements and accountabilities. The framework applies to Shell entities and Shell-operated ventures, including employees and contractor staff. Contractor HSSE Management Transport – Purpose of the manual – Accountabilities and responsibilities – Scope – Requirements to be met Mandatory manuals describe: Social Performance Resources Product Stewardship Projects Security Shell Commitment and Policy on Health, Security, Safety, the Environment and Social Performance HSSE & SP Control Framework
102 Shell Annual Report and Accounts 2021 Divestments Responsible divestments are a key part of transitioning our portfolio to deliver our Powering Progress strategy. When considering divestments, we collaborate with in-house and external experts, where appropriate, to conduct checks and examine key attributes of potential buyers. These attributes may include their financial strength; operating culture; health, safety, security and environment (HSSE) policies; and approach to ethics and compliance. We also consider risk- and people-management processes and standards; community liaison practices; and social performance programmes. Applicable attributes are assessed against Shell’s policies and the requirements of relevant local regulations. Divestments are often subject to the approval of regulatory authorities, which may in part depend on potential buyers’ HSSE capacity, compliance record, and asset- stewardship capabilities. SAFETY Shell’s Powering Progress strategy is underpinned by our focus on safety. We aim to do no harm to people and to have no leaks across our operations. We call this our Goal Zero ambition. We seek to improve safety by focusing on the three areas where the safety risks associated with our activities are highest: personal, process and transport. We strive to reduce risks and to minimise the potential impact of any incident, with a particular emphasis on the risks with the most serious consequences if something goes wrong. In 2021, we introduced a new measure to report on our personal safety performance, known as Serious Injury and Fatality Frequency (SIF-F). This new measure is one example of how we have updated our thinking about safety, how we learn from incidents with potential to cause life-altering injuries, and how leaders should respond. In 2020, we started a multi-year process of refreshing our approach to safety for all employees and contractors. Our updated approach to safety is rooted in a consistent focus on human performance, by which we mean the way people, culture, equipment, work systems and processes all interact. The majority of our fatalities over the last five years were down to the interaction between these elements. We aim to better understand the gap between how we anticipate work will be done safely and how the work is actually carried out. We continue to work to prevent incidents by maintaining safety barriers and providing training. We acknowledge that people make mistakes and not all incidents may be preventable. We continue to focus more on installing adequate controls to create capacity to fail safely. With that, we believe that we will enhance our safeguards and reduce the likelihood of serious injuries. We recognise that people are key to executing complex tasks and to finding solutions to problems. We aim to apply a learner mindset, by which we mean the belief that we can always improve, enhance individual capabilities, learn from mistakes and successes, and speak up without being punished. We seek to create conditions that encourage employees and contractors to share ideas and concerns without fear of rejection or punishment. We work with the large number of our contractors and suppliers so they understand our safety requirements. Together we seek to improve safety performance by building skills and expertise, and by creating an inclusive and safe work environment. We strive to help improve safety throughout the energy industry by sharing our safety standards and experience with other operators, contractors and professional organisations, such as the Energy Institute, the London-based global professional body for the energy sector; IPIECA, the global oil and gas association for advancing environmental and social performance across the energy transition; and IOGP, the international association of the upstream oil and gas industry. Shell also continues to use technology and digital solutions to help keep people and our operations safe. Drones, remote sensing technologies, robots and other technologies, such as augmented reality, help us keep people out of harm’s way. For example, we use drones and robots to conduct inspections, reducing the need for human inspectors to enter hazardous environments. We also use various technologies and devices to help frontline employees stay safe and react quickly should an incident occur. Personal safety We continue to strengthen the safety culture and leadership among our employees and contractor staff. This aligns with our focus on caring for people. We expect everyone to consider two aspects of their tasks: the hazards that could potentially cause serious harm, and the effectiveness of the barriers in place to avoid serious harm if something does happen. We have ongoing safety awareness programmes, and hold an annual global Safety Day to give employees and contractors time to reflect on how to prevent incidents and how we can work together to improve performance. In September, during Safety Day 2021, we began the transition to a new set of nine industry Life-Saving Rules which came into effect from January 2022. All our staff and contractors were given time to reflect on how these rules apply to everyday activities, and how to put them into practice applying the human performance and learner mindset guidelines. Introducing the industry Life-Saving Rules has been an opportunity to strengthen the way we learn from adverse incidents and to simplify and standardise processes and procedures. Safety Day marked the start of a series of engagements. We encouraged team leaders to hold additional conversations with their team to help further understanding of the nine industry Life-Saving Rules and together create the conditions to enable these rules to be followed. This is particularly important with the new line of fire rule. This states that people must ensure that they and others are out of the way of potential pressure releases, vehicles that might move, or objects that could fall, drop or move. Analysis of safety incidents at Shell-operated ventures showed that many of our most serious events related to the line of fire rule. By the end of 2021, more than 90,000 of our employees and contractors had already completed the mandatory updated training for the Life-Saving Rules. See our website shell.com for more information on Life-Saving Rules guidance for contractors. ENVIRONMENT AND SOCIETY continued Strategic Report
103Shell Annual Report and Accounts 2021 Process safety Process safety management is about keeping hazardous substances inside pipes, tanks and vessels, and ensuring that well fluids are contained during well construction and well intervention so that they do not harm people or the environment. It starts at the design and construction stage of projects and continues throughout the life cycle of facilities to ensure they are safely operated, well maintained and regularly inspected. For example, we embedded safety in the design and construction of the Falcon Ethane Pipeline System in the USA, which was commissioned in 2021. We used pipe with thicker walls and buried it deeper than required by regulations. We used ultrasound and X-ray equipment to test welds before use. The pipeline is designed to withstand almost twice the normal operating pressure. Our global standards and operating procedures define our expectations for the controls and physical barriers required to reduce the risks of incidents. For example, offshore wells must be designed with at least two independent barriers in the direction of flow, in order to reduce the risk of an uncontrolled release of hydrocarbons. We regularly inspect, test and maintain these barriers to ensure they meet our standards. For example, at the West Delta Deep Marine joint venture assets (Shell interest 50%, not operated by Shell), off the coast of Egypt, more than 750 kilometres of hydrocarbon-carrying pipelines were inspected for their integrity using a technique based on screening pipelines by electro-magnetic waves. Since 2017, until end of 2021, 540 kilometres were confirmed safe. We expect to check the remaining 210 kilometres of concrete-coated pipe in 2022 using a method that helps to inspect pipelines by analysing their magnetic field. We strive to learn not only from leaks that happened, but also from potential events that were prevented by our barriers. Spending time monitoring and learning from high-potential events – avoided leaks which would have caused significant harm to assets and people – is necessary as our industry moves towards risk-based classification of leaks. In the event of a loss of containment such as a spill or a leak, our standards require the use of independent recovery measures to stop the release from becoming catastrophic. We have embedded a set of process safety fundamentals in order to strengthen barriers relating to critical safety tasks performed by frontline staff. These fundamentals provide guidelines for good operating practices to prevent unplanned releases. We routinely prepare and practise our emergency response to potential incidents such as a spill or a fire. This involves working closely with local services and regulatory agencies to jointly test our plans and procedures. These tests continually improve our readiness to respond. If an incident does occur, we have procedures to reduce the impact on people and the environment. In August and September 2021, Hurricane Ida posed a potential safety risk to millions of people across the Gulf Coast region. Thousands of Shell employees, contractors, and their families were affected. Hurricane Ida also threatened Shell’s onshore and offshore assets in the region. Years of planning and learning through exercises enabled Shell’s emergency response teams to efficiently take care of employees and minimise the disruption of our business. We conducted extensive training at our sites between May and July 2021, so that our teams were ready to react when the hurricane hit. Strategic Report Transitioning to industry Life-Saving Rules Despite an improving trend, we still experience serious injuries Chart data corresponds to Shell-operated ventures. Recordable fatalities, TRCF and SIF-F N um be r o f f at al itie s FA R, TR CF a nd S IF -F ra te s 0 5 10 15 20 25 30 35 40 No data prior to 2019 Fatalities: employees Fatalities: contractors Fatal accident rate (FAR) (100 million hours) TRCF (million hours) SIF-F (100 million hours) From To Prescriptive Do's and don'ts I statements that create ownership 80% of incidents are related to industry Life-Saving Rules risk areas 20% of fatalities since 2014 related to new line of fire rule ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ‘20 ‘21 0 1 2 3 4 5 6 8 7
104 Shell Annual Report and Accounts 2021 Shell helped with disaster response and recovery efforts in the aftermath of Hurricane Ida, playing our part in assisting employees and neighbours in the communities where we work. We supported employees and communities in the Gulf Coast region and also in Pennsylvania, New York and New Jersey. For example, we distributed assistance packages to more than 400 employees in need. We also established base camps in the Gulf Coast region at Shell’s Norco and Convent sites in Louisiana. These hosted more than 700 displaced individuals, employees required to remain on site, and electrical linemen working to restore power to communities. Shell had around 3,000 employees in the Gulf Coast region, and about 2,200 of them found themselves in an area that qualified as a natural disaster zone. Transport safety Transporting large numbers of people, products and equipment by road, rail, sea and air poses safety risks. We seek to reduce these risks by developing best-practice standards within Shell. We also work with specialist contractors, industry bodies, NGOs and governments to find ways of reducing transport safety risks. In 2021, Shell employees and contractors drove around 470 million kilometres on business in more than 50 countries. There were no fatalities related to road transport in activities under the operational control of a Shell company in 2021. By the end of December, we recorded more than 1.2 billion kilometres with no fatalities in almost two-and-a-half years. We continually take steps to improve our road safety performance. For example, we implement best practice, encourage safe behaviour, and call for safe vehicle design. We run road safety programmes including our online defensive driving course that teaches safe techniques and behaviours and is mandatory for all who drive on public roads while on Shell business. In 2021, around 11,000 Shell employees and contractors completed some form of in-vehicle or virtual defensive driving training. Falling asleep behind the wheel or being distracted while driving can lead to serious road accidents around the world. Our road transport fleets have begun deploying devices that detect signs of microsleeps, fatigue and distraction, and respond by warning drivers so they can take action to stay alert. This deployment started in 2020, at the Shell-operated QGC facility in Queensland, Australia, where we worked with four universities and eight contracting companies to evaluate fatigue detection devices and to find the one that performed best in testing. The basis for this project was a scientific study commissioned by Shell, BP, TotalEnergies, and Chevron to review more than 100 commercially available technological systems that purported to detect fatigue or distraction in drivers. We are adopting a phased approach to deploying the devices and ensuring drivers know how to use them. We will start in countries identified as high-risk locations: Australia, India, Malaysia, Mexico, Pakistan, Russia, South Africa, Thailand, Turkey and the Philippines. In 2021, the UN General Assembly’s status report on road safety globally recognised Shell as being among the very few private-sector companies that have funded road safety projects and activities. We believe that collaboration is key to achieving the UN’s target to halve global traffic deaths by 2030, based on their estimations for incidents between 2021 and 2020. This is considered part of Sustainable Development Goal 3: ensure healthy lives and promote well-being for all at all ages. We remain determined to play our part in helping to achieve this, including through organisations such as the Global Road Safety Partnership. Shell has been a founding member of this partnership between businesses, development agencies, governments and civil-society organisations which took on the role to create and support multi-sector road safety partnerships that are engaged with frontline good practice road safety interventions in countries and communities throughout the world. ENVIRONMENT AND SOCIETY continued In 2021, Shell employees and contractors drove around 470 million kilometres on business in more than 50 countries. Strategic Report
105Shell Annual Report and Accounts 2021 Contractor safety Executives from Shell and our major contractor companies have been collaborating on Shell’s contractor safety leadership (CSL) programme since 2014. The programme seeks to identify strategies and practical ways to improve a shared safety culture and achieve our Goal Zero ambition of no harm and no leaks. We have worked with contractors on standardisation and simplification, and collaborated to develop a contractor safety leadership initiative called Declared Future. We believe these efforts have helped to align our organisations at all levels and improve frontline safety. Our transition to the industry Life-Saving Rules also brings us closer to the standard shared by most of the main contractor companies in our CSL programme. This was something they had requested of us. Strategic Report Importance of contractor safety for Shell Shell’s strategy Powering Progress Underpinned by our core values of honesty, integrity and respect for people, and our focus on safety. GOAL ZERO. NO HARM. NO LEAKS. Contractor safety in Shell We want every contractor that works for us to go home safely every day 60% share of contractor exposure hours in Shell-operated ventures Majority of the high-risk work is performed by our contractors Shell supply chain management In partnership with our key contractors 24,000 global supplier/ contractor companies in 2021 $37.5 billion spent on goods and services in 2021 globally Shell-contractor safety leadership (CSL) 21 contractor companies in CSL programme 80m+ Exposure hours annually 500k+ direct employees (total for all CSL members)
106 Shell Annual Report and Accounts 2021 Safety performance Regrettably, in 2021, eight of our contractor colleagues in Shell-operated ventures lost their lives in the course of their work for Shell. So did a police officer who was with our colleagues in Nigeria. The Shell organisation feels these losses deeply. We are determined to learn from these incidents and spread the lessons from them throughout our organisation so we can do everything possible to prevent anything similar recurring. The fatal incidents were as follows: In Nigeria, six people working for an engineering contractor and a police officer lost their lives when gunmen attacked a convoy of buses transporting people to the Assa North Gas development project site. The Shell Petroleum Development Company of Nigeria (SPDC) worked with the contractor and supported the police during the investigation of the incident. In Pakistan, a contractor colleague died after a fire at a dealer-operated retail site. Another contractor lost his life when a wall fell over during demolition work at a retail site in Indonesia. Several industry safety leadership groups confirm that serious and high-potential incidents often have different root causes than most lower-consequence events. To improve insights from incident investigations and data analysis, we are changing how we report incidents. From 2021 onwards, we measure the number of serious injuries and fatalities per 100 million working hours, instead of the Total Recordable Case Frequency, which measured injuries per million working hours. The new measure, known as Serious Injury and Fatality Frequency (SIF-F), allows us to focus our investigations on the most serious incidents. The aim is to collect and analyse relevant, high-quality data that can help us improve our efforts to prevent serious injuries and fatalities. In 2021, the SIF-F was 6.9 injuries and illnesses per 100 million working hours, compared with 6.0 in 2020. There were 102 operational Tier 1 and 2 process safety events in 2021, compared with 103 in 2020. For reporting on process safety, in this Report, we combine Tier 1 and 2 events. A Tier 1 event is an unplanned or uncontrolled release of any material from a process, including non-toxic and non-flammable materials, with the greatest actual consequence resulting in harm to employees, contract staff or a neighbouring community, damage to equipment, or exceeding a defined threshold quantity. A Tier 2 process safety event is a release of lesser consequence. As part of Shell’s learner mindset approach, we investigate all serious incidents so we can understand the underlying causes, including technical, behavioural, organisational and human factors. We share what we learn widely, including with contractors. We implement mitigations at the site and in the country and business where the incident occurred. We seek to turn incident findings into improved standards or better ways of working that can be applied widely across similar facilities. Additional information on our 2021 safety performance is expected to be published in the Shell Sustainability Report in April 2022. ENVIRONMENT In 2021, as part of our Powering Progress strategy, we launched our Respecting Nature goal, which sets out our environmental ambitions around biodiversity, water, circular economy and waste, and air quality. Our Respecting Nature commitments step up our approach to managing the impacts of our operations on the environment. They also aim to extend our approach with our supply chain, for example, with commitments around plastics and circular economy. We adopted short-term goals and also set environmental ambitions for 2030 and later. We have been working to embed these new requirements into our systems and processes. Accountability for delivery of the Respecting Nature goal lies with our Executive Committee. We have restructured and resourced our organisation to add specialists on biodiversity and circularity and are building capability with the help of external partners. We have included our new commitments in our performance management and reporting systems and are defining the baselines for each of the commitments and setting 2022 targets across our businesses. We are working with external environmental partners to develop new approaches that aim to show the extent of the progress we are making towards our environmental goals. We will continue to seek opportunities to go further. Our environmental ambitions will be underpinned by collaboration with our supply chains and transparent reporting. Environmental standards Shell’s global environmental standards as set in our HSSE & SP Control Framework cover our environmental performance. They include details of how to manage emissions of greenhouse gases (GHG), consume energy more efficiently, reduce gas flaring and control air quality, prevent spills and leaks of hazardous materials, use less fresh water and conserve biodiversity. We seek to apply our global environmental standards wherever we operate. When planning new major projects, we conduct detailed environmental, social and health impact assessments. We help inform our approach by drawing on external standards and guidelines, such as those developed by the World Bank and the International Finance Corporation. The Shell HSSE & SP Standards require that we certify our major installations against an internationally recognised independent environmental management system standard if they have significant environmental risks. Major installations are crude oil and natural gas terminals, gas plants, manned offshore and onshore production platforms or flow stations, floating production and storage vessels, refineries, chemicals manufacturing facilities, mines or upgraders. For the purpose of this Report, we did not count each major installation in Upstream and Integrated Gas separately. They were aggregated into their respective operating unit or operating company, such as Shell Upstream UK or Nederlandse Aardolie Maatschappij (NAM), in line with the scope of their certifications. At the end of 2021, 98% of major installations within that scope and operated by Shell were certified against the ISO 14001:2015 Environmental Management System or were in compliance with equivalent environmental frameworks required by local regulations. At the end of 2021, there was one operating unit without active certification because of late changes with key auditing contractors and the impact of COVID-19. Actions have been taken to have their certification renewed in 2022. In addition, many installations that are not classified major, such as lubricant plants or Supply terminals, are also certified against ISO 14001 but are not included in the data above. The total also excludes major installations for which divestments were completed in 2021 or are expected to be completed in 2022. See also “Control Framework” on page 202 and “Climate change and energy transition” on page 77 for more information on how we manage our GHG emissions. ENVIRONMENT AND SOCIETY continued Strategic Report
107Shell Annual Report and Accounts 2021 Biodiversity We have adopted an ambition to have a positive impact on biodiversity. This involves three new commitments: ■ From 2021, our new projects in areas rich in biodiversity – critical habitats – will have a net-positive impact on biodiversity. ■ From 2021, our nature-based solutions projects, which protect, transform or restore land, will have a net-positive impact on biodiversity. ■ From 2022, we will replant forests, achieving net-zero deforestation from new activities, while maintaining biodiversity and conservation value. We aim to minimise the impact of our projects on biodiversity and ecosystems by applying the mitigation hierarchy. This is a decision-making framework that involves a sequence of four key actions: avoid, minimise, restore and offset. We assess the potential impact of projects on biodiversity as part of our Impact Assessment process. In 2003, we committed not to explore for, or develop, oil and gas resources in natural and mixed World Heritage Sites. If we decide to go ahead with a project that is in a critical habitat, we develop a biodiversity action plan. This sets out what we should do to follow the mitigation hierarchy. If there is an impact on biodiversity, the plan outlines the action required to achieve a net-positive outcome for biodiversity. For example, in Australia, the Shell-operated QGC natural gas project manages the 10,000-hectare Valkyrie property as part of its strategy to offset impacts on biodiversity. In 2021, QGC completed the final steps to secure further hectares of habitat for three threatened species: koala, south-eastern long-eared bat and greater glider. Circular economy and waste We are working to reduce waste, improve our waste management processes and apply the principles of a circular economy, where materials are recycled and reused, across our businesses and supply chains. Our ambition is to use resources and materials efficiently and to increase reuse and recycling. We are aiming for zero waste by reducing waste generated and increasing reuse and recycling in our businesses and supply chains. In 2021, we conducted pilot assessments to develop and test a methodology that we could use across a number of businesses in 2022 to gather options to set goals for 2023+ relating to circular economy and waste management. Some of our sites and businesses are already starting to take a more circular approach. For example, our Mobility business has made the commitment that all Shell-owned service stations will reduce, reuse and repurpose waste by 2025. By 2025, we also aim to remove unnecessary single-use plastic, such as bags, straws and cutlery from our service station shops. We will make it easier for customers to recycle and are looking for ways to repurpose plastic waste. We have also set commitments to work with our suppliers and contractors to help end plastic waste in the environment: ■ By 2030, we will increase the amount of recycled plastic in our packaging to 30% and ensure that the packaging we use for our products is reusable or recyclable. ■ We will increase the amount of recycled materials used to make our products, starting with plastics. Our ambition is to use 1 million tonnes of plastic waste a year in our global chemical plants by 2025. Water Managing our impacts on water and ensuring the availability of fresh water for our operations is a growing challenge in some parts of the world. Increasing demand for water resources, growing stakeholder expectations and concerns, and water-related legislation may reduce our access to water. We manage water use carefully, and tailor our use of fresh water to local conditions and requirements. We sometimes use alternatives to fresh water in our operations. These include water that has been recycled from our operations, processed sewage water and desalinated water. We require that all Shell facilities and projects are assessed to see what risks they might pose to water availability. In places where water is scarce, we develop water-management action plans for using less fresh water, increasing water recycling and closely monitoring water use. In 2021, we set a measurable target for fresh-water use: we will reduce the amount of fresh water consumed in our facilities. This will start with reducing our consumption of fresh water by 15% by 2025 compared with 2018 levels in water-stressed areas, which are places where there is high pressure on fresh-water resources. At the end of 2021, four of our major facilities were in areas where there is a high level of water stress, based on analysis using references such as the World Resources Institute’s Aqueduct Water Risk Atlas and information specific to the local environment. These four facilities are the Pearl GTL (gas-to-liquids) plant in Qatar, the Shell Energy and Chemicals Park in Singapore, the Shell Jurong Island chemical plant, also in Singapore, and the Tabangao Import Terminal in the Philippines. In 2021, these four facilities consumed 22 million cubic metres of fresh water, compared with their baseline of 25 million cubic metres in 2018. We have also stated that, by the end of 2022, we will have assessed options for further goals related to reducing our use of fresh water. In 2021, we conducted a pilot assessment of circular approaches towards fresh-water consumption. This helped us to develop a methodology that will be used to assess businesses’ performance in 2022. We believe that this will help deepen our understanding of how to improve water efficiency and help us set further goals by the end of 2022. The assessments involve desktop analysis and detailed site evaluations conducted with external organisations. In 2021, our overall intake of fresh water decreased to 166 million cubic metres, compared with 171 million cubic metres in 2020 mainly driven by the shutdown of the Shell Convent Refinery (USA) in December 2020. Around 90% of our intake of fresh water was used for manufacturing oil products and chemicals, with the rest mainly used for oil and gas production. Around 35% of our fresh-water intake was from public utilities, such as municipal water supplies. The rest was taken from surface water such as rivers and lakes (around 55%) and groundwater (around 10%). Additional information on our 2021 environmental performance is expected to be published in the Shell Sustainability Report in April 2022. Strategic Report
108 Shell Annual Report and Accounts 2021 Air quality We are helping to improve air quality by reducing emissions from our operations and providing cleaner ways to power transport and industry. We take steps to manage airborne pollutants in our oil and gas production and processing, such as nitrogen oxides, sulphur oxides and volatile organic compounds. See our website shell.com for more information about our approach to biodiversity, circular economy and plastic waste, and water. Respecting Nature Shell’s new commitments from 2021 Biodiversity ■ Our new projects in areas rich in biodiversity – critical habitats – will have a net positive impact on biodiversity, starting implementation in 2021. ■ Our nature-based solutions projects, which protect, transform or restore land, will have a net positive impact on biodiversity, starting implementation in 2021. ■ We will replant forests, achieving net-zero deforestation from new activities, while maintaining biodiversity and conservation value, starting implementation in 2022. Circular economy and waste We are aiming for zero waste by reducing waste generated and increasing reuse and recycling in our businesses and supply chains. We will set goals for waste reduction, reuse and recycling by the end of 2022. We will work with our suppliers and contractors to help end plastic waste in the environment: ■ By 2030, we will increase the amount of recycled plastic in our packaging to 30% and ensure that the packaging we use for our products is reusable or recyclable. ■ We will increase the amount of recycled materials used to make our products, starting with plastics. Our ambition is to use one million tonnes of plastic waste a year in our global chemicals plants by 2025. Water ■ We will reduce the amount of fresh water consumed in our facilities, starting by reducing fresh-water consumption by 15% by 2025 compared with 2018 levels in areas where there is high pressure on fresh-water resources. ■ 25 million cubic metres of fresh water were consumed by our facilities in highly water-stressed areas in 2018. ■ We will also assess options for further reduction goals by the end of 2022. Air quality We are helping to improve air quality by reducing emissions from our operations and providing cleaner ways to power transport and industry. Collaboration and reporting ■ Supply chain: We will include requirements in our purchasing policies to reflect our environmental framework, and take the energy efficiency, material efficiency and sustainability of products into consideration in our purchases. ■ External partnerships: We will ensure external partnerships inform key areas of development and delivery of our ambitions. ■ External reporting: We will transparently report performance in our annual Sustainability Report. SPILLS Large spills of crude oil, oil products and chemicals associated with our operations can harm the environment, and result in major clean-up costs, fines and other damages. They can also affect our licence to operate and harm our reputation. We have requirements and procedures designed to prevent spills. We design, operate and maintain our facilities with the intention of avoiding spills. To further reduce the risk of spills, Shell has routine programmes to reduce failures and maintain the reliability of facilities and pipelines. Our business units are responsible for organising and executing spill responses in line with Shell guidelines and relevant legal and regulatory requirements. Our offshore installations have spill response plans for when an incident occurs. These plans set out response strategies and techniques, available equipment, and trained personnel and contracts. We can engage specialist contracted services for oil spill response, including vessels, aircraft or other equipment and resources, if required, for large spills. We conduct regular exercises that seek to ensure these plans remain effective and fit for purpose. We have further developed our ability to respond to spills to water. We have a worldwide network of trained staff to help with this. We also have a global oil spill expertise centre, which tests local capability and maintains our ability to respond to a significant spill into a marine environment. We are involved in several industry consortia formed to improve well-containment capabilities. Shell Offshore Response Company LLC is a founding member of the Marine Well Containment Company, a non-profit industry consortium providing a well-containment response system for the Gulf of Mexico. Shell Response Limited was a founding member of the Subsea Well Response Project, an industry co-operative effort to enhance global well-containment capabilities, which has since become Oil Spill Response Limited, an industry consortium. We maintain site-specific emergency response plans in case there is an onshore spill. Like the offshore response plans, these are designed to meet Shell guidelines and relevant local legal and regulatory requirements. The onshore response plans also provide for the initial assessment of incidents and the mobilisation of resources to manage them. In the event of spills on land, businesses are supported by our global Soil & Groundwater team which reviews and implements appropriate remedies. The Soil & Groundwater team is engaged throughout the life cycle of our assets. For example, during acquisition and divestment of assets, the team conducts due diligence to identify land contamination liabilities. Through research and development initiatives, the team collaborates with regulators in developing, modifying, and applying sustainable remediation techniques. Spills still occur for reasons such as operational failure, accidents or unusual corrosion. In 2021, there were 42 operational spills of more than 100 kilograms compared with 70 in 2020. The weight of operational spills of oil and oil products in 2021 was 0.05 thousand tonnes, compared with 0.4 thousand tonnes in 2020. Spills in Nigeria In the Niger Delta, over the last 11 years, the total number of operational hydrocarbon spills and the volume of oil spilled from them into the environment have been significantly reduced. Most oil spills in the Niger Delta region continue to be caused by crude oil theft, the sabotage of oil and gas production facilities, and illegal oil refining, including the distribution of illegally refined products. ENVIRONMENT AND SOCIETY continued Strategic Report
109Shell Annual Report and Accounts 2021 In 2021, the Shell Petroleum Development Company of Nigeria Limited (SPDC) reported 10 operational spill incidents of more than 100 kilograms of crude oil, fewer than the 12 reported in 2020. The volume of around 0.03 thousand tonnes remained on the same level. SPDC has an ongoing work programme to appraise, maintain and replace key sections of pipelines and flow lines, in order to reduce the number of operational spills. Over the last 11 years, around 1,410 kilometres of pipelines and flow lines have been replaced. This work is organised through a pipeline and flow line integrity management system that proactively addresses pipeline integrity. It installs barriers where necessary, and recommends when and where pipeline sections should be replaced to prevent failures. In 2018, this integrity management system was enhanced to manage threats arising from frequent pipeline sabotage or vandalism. Spills caused by sabotage in 2021 In 2021, more than 90% of the oil spills of more than 100 kilograms from the SPDC joint venture’s facilities were caused by the illegal activities of third parties. In 2021, the volume of crude oil spills of more than 100 kilograms caused by sabotage was around 3.3 thousand tonnes (107 incidents), compared with around 1.5 thousand tonnes (122 incidents) in 2020. We believe that the number of incidents in 2021 continued to decrease because of improved security and surveillance. The doubling of the volume was mainly because of one incident which alone accounted for around 2.3 thousand tonnes of crude oil which was contained and could be recovered. SPDC continues to undertake initiatives to prevent and reduce spills caused by theft from or sabotage of its facilities in the Niger Delta. In 2021, SPDC continued on-ground surveillance of its areas of operation, including its pipeline network, to mitigate third-party interference and ensure that spills are detected and responded to as quickly as possible. There are daily overflights of the most vulnerable segments of the pipeline network to identify any new spills or illegal activity. SPDC has introduced anti-theft protection mechanisms for key infrastructure such as wellheads and manifolds. The programme to protect wellheads with steel cages continues to help deter theft. By the end of 2021, a total of 283 cages had been installed, including 62 that had been upgraded with CCTV. This compared with a total of 364 installed cages at the end of 2020. This year-on-year reduction was because of the 2021 divestment of the OML-17 licence. In 2021, 29 breaches were successful out of 1,700 registered attempts. Faster response and remediation Irrespective of the cause, SPDC works to clean up and remediate areas affected by spills originating from its facilities. In 2021, the time that SPDC needed to complete the recovery of free-phase oil – oil that forms a separate layer and is not mixed with water or soil – remained at around one week compared to 2020. This is the average time it takes to safely access a damaged site to start joint investigation visits with regulators, affected communities, and in some cases with NGOs, to clean up oil not mixed with water or soil. Clean-up activities include bio-remediation which stimulates micro- organisms that naturally break down and use carbon-rich oil as a source of food and energy, effectively removing it. Once clean-up and remediation operations are completed, the work is inspected and, if satisfactory, approved and certified by the Nigerian regulators. With operational spills, SPDC also pays compensation to affected people and communities. SPDC has been working with the International Union for Conservation of Nature (IUCN) since 2012 to enhance remediation techniques and protect biodiversity at sites affected by oil spills in SPDC’s areas of operation in the Niger Delta. Based on this collaboration, SPDC has launched further initiatives to help strengthen its remediation and restoration efforts. In 2021, SPDC, IUCN, the Nigerian Conservation Foundation, and Wetlands International worked together on the Niger Delta Biodiversity Technical Advisory Group, which continues to monitor biodiversity recovery at remediated sites. SPDC also works with a range of stakeholders in the Niger Delta to build greater trust in spill response and clean-up processes. Local communities participate in remediation work for operational spills. The restrictions of COVID-19 meant there were fewer opportunities to collaborate, but the engagement and partnership with communities continued. Various NGOs have sometimes gone on joint investigation visits with SPDC, government regulators, and members of affected communities to establish the cause and volume of oil spills. SPDC has implemented programmes to raise awareness of and counter the negative effects of crude oil theft and illegal oil refining. Examples include community-based pipeline surveillance, and promoting alternative livelihoods through Shell’s flagship youth entrepreneurship programme, Shell LiveWIRE. Bodo clean-up process In 2015, SPDC, on behalf of the SPDC joint venture and the Bodo community, signed a memorandum of understanding (MOU) granting SPDC access to begin cleaning up areas affected by two operational spills that occurred in 2008. The MOU also provided for the selection of two international contractors to conduct the clean-up under the oversight of an independent project director. The clean-up project was delayed in 2016 and for most of 2017 because of access challenges from the community. Engagement with the Bodo community and other stakeholders began in September 2015 and was managed by the Bodo Mediation Initiative. After two years of engagement, in September 2017, it was possible to start the first phase of clean-up and remediation activities. The clean-up consists of three phases: 1) removal of oil from shoreline surfaces and mud flat beds; 2) remediation of soil and sediments; and 3) planting mangroves and monitoring. The first phase was completed in August 2018. The contract procurement process for phase two was completed in 2019. Remediation activities in the field started in November 2019. During 2020, work had to be put on hold because of COVID-19 restrictions. By November 2020, controls were in place to mitigate impacts from COVID-19 for the workers on site and the remediation work resumed. In 2021, the remediation of the soil and sediments at the Bodo project site continued. By the end of 2021, remediation work was completed on more than 60% of around 1,000 hectares that have been designated for clean-up. Almost 2,000 community workers have been trained and engaged in the clean-up. Remediation is expected to be completed by the end of the second quarter of 2023. The planting of mangrove seedlings (phase 3) started in 2021. Around two million mangrove seedlings need to be planted and survive to 2025 to fulfil the project’s goal. By the end of 2021, about 300,000 seedlings had been planted. Strategic Report
110 Shell Annual Report and Accounts 2021 Ogoniland: commitment to the United Nations Environment Programme SPDC remains committed to the implementation of the 2011 United Nations Environment Programme (UNEP) Report on Ogoniland which assessed contamination from oil operations in the region and recommended actions to clean it up. Over the last 10 years, SPDC has acted on all and completed most of the UNEP recommendations that were specifically addressed to it as the operator of the joint venture. The clean-up efforts are led by the Hydrocarbon Pollution and Remediation Project (HYPREP), an agency established by the federal government. In 2018, HYPREP awarded contracts for the first set of remediation projects. In 2019, 21 contractors started operations on 21 lots which add up to 12 of the 67 polluted sites recorded in the UNEP report. Of those 67 sites, two are waste sites without hydrocarbon pollution. In January 2020, HYPREP awarded a further 29 contracts for remediation on 29 lots covering eight polluted sites. The contractors began remediation activities in the fourth quarter of 2020. In 2021, remediation work was completed on nine sites which have been certified by the National Oil Spill Detection and Response Agency (NOSDRA), the Nigerian government agency responsible for monitoring of and responding to oil spills. Remediation continues on 11 sites. Although remediation works continue to make progress, challenges remain. These include re-pollution, lack of contractor funding, land disputes, environmental issues such as flooding caused by excessive rainfall, and security issues in Ogoniland. The UNEP report recommended creating an Ogoni Trust Fund (OTF) with $1 billion capital, to be co-funded by the Nigerian government, the SPDC joint venture and other operators in the area. The SPDC joint venture remains fully committed to contributing $900 million to the fund as its share over five years. SPDC joint-venture partners contributed the first instalment of $180 million for the clean-up by July 2018, and released the second instalment of $180 million in 2019. HYPREP did not request the release of any funds in 2020. In 2021, HYPREP requested the release of funds for 2020 and 2021. The SPDC joint venture partners agreed to only pay the 2021 instalment of $180 million because of a delayed use of funds by HYPREP, which only spent around $70 million of the fund. The request for the 2021 payment is being processed. Once the payment is made the total contribution by the SPDC joint venture will be $540 million. The UNEP continues to monitor the progress of the clean-up through its observer status at HYPREP’s Governing Council and the Ogoni Trust Fund. UN agencies such as the United Nations Development Programme and the United Nations Institute for Training and Research provide services to HYPREP in the areas of livelihood programmes, training and project services. HYDRAULIC FRACTURING Onshore Operating Principles We use five aspirational operating principles which focus on safety, environmental safeguards, and engagement with nearby communities to address concerns and help develop local economies. We are working towards making all of our Shell-operated onshore projects where hydraulic fracturing is used to produce gas and oil from tight sandstone or shale, consistent with these principles. We consider each project – from the geology to the surrounding environment and communities – and design our activities using technology and innovative approaches best suited to local conditions. We also support government regulations consistent with these principles that are designed to reduce risks to the environment and keep those living near operations safe. We review the Onshore Operating Principles annually and update them as new technologies, challenges and regulatory requirements emerge. Water The availability and quality of water, local environmental conditions and regulatory requirements vary from basin to basin. We aim to minimise water usage in our shale assets by developing a water management strategy specific to the area. Depending on local hydro-geological conditions, our shale assets typically use a combination of fresh water, brackish groundwater, produced water and waste water. We work to limit, and ideally eliminate, our use of fresh water in drilling and hydraulic fracturing operations by increasing recycling capacity and using municipal water. Chemical additives are needed in hydraulic fracturing fluid to carry sand, reduce friction and prevent the growth of bacteria. Hydraulic fracturing involves pumping fluid that is typically 99.9% water and sand and around 0.1% chemical additives into tight sand or shale rock at high pressure. This creates threadlike fissures – typically the diameter of a human hair – in the rock, making space through which the hydrocarbons can flow more easily. Greenhouse gas Shell’s shale assets implement greenhouse gas management plans including robust leak detection and repair programmes using the latest technologies, such as infrared cameras and drones. We also seek to minimise routine gas flaring at shale assets. Shell sold its stake in the Permian Basin, USA, with effect from December 1, 2021. Between the beginning of 2017 and the end of 2021, we reduced our greenhouse gas and methane intensity of the Permian assets by around 80%. We also reduced flaring by more than 80%. At the same time, production increased at the Shell-operated assets by nearly 120%. Operational footprint Our Shales assets use technology, local knowledge and management strategies to minimise potential impacts such as high traffic volumes, noise, and effects on supplies of drinking water. Communities We build relationships and engage with a broad range of stakeholders across the entire project life cycle. Our stakeholders include residents, local communities – including indigenous populations – government officials, NGOs, civil-society groups, academia and industry. We focus our engagement on understanding local social and economic conditions and proactively identifying and responding to those concerns. See our website shell.com for more information on our Onshore Operating Principles. SEISMICITY Overall, we believe it is relatively unlikely that hydraulic fracturing or well operations for disposing of produced water will induce seismicity that is felt on the surface. We would also expect any such impact to be limited to a relatively small area. The geology of some places, though, does increase the risk of inducing seismicity that can be felt on the surface. Shell assesses the risk profile of each basin before entering and manages operations accordingly, often beyond regulatory requirements. We assess the subsurface formation and surface environment around our operations and have developed appropriate mitigation plans to follow if needed. See our website shell.com for more information about our induced seismicity management practices, such as the “Onshore Operating Principles in Action: Induced Seismicity Fact Sheet”. For information on the Groningen onshore gas field in the Netherlands, see “Upstream” on page 52. ENVIRONMENT AND SOCIETY continued Strategic Report
111Shell Annual Report and Accounts 2021 ENVIRONMENTAL COSTS We are subject to a variety of environmental laws, regulations and reporting requirements in the countries where we operate. Infringing any of these laws, regulations and requirements could harm our reputation and ability to do business, and result in significant costs, including clean-up costs, fines, sanctions and third-party claims. Ongoing operating expenses include the costs of preventing unauthorised discharges into the air and water, and the safe disposal and handling of waste. We place a premium on developing effective technologies that are also safe for the environment. But when operating at the forefront of technology, there is always the possibility that a new technology has environmental impacts that were not assessed, foreseen or determined to be harmful when originally implemented. While we believe we take reasonable precautions to limit these risks, we could be subject to additional remedial, environmental and litigation costs as a result of unknown and unforeseen impacts of operations on the environment. Although these costs have so far not been material to us, no assurance can be given that this will always be the case. SECURITY Our operations expose us to criminality, civil unrest, activism, terrorism, cyber-disruption and acts of war that could have a material adverse effect on our business (see “Risk factors” on page 28). We seek to obtain the best possible information to enable us to assess threats and risks. To help us understand the threats, we build strong and open relationships with government, law enforcement, armed forces, industry peers and specialist security information providers. On the basis of these threat assessments, we identify security risks to staff, assets including information technology equipment, and operations. We then seek to manage the risks so they are as low as reasonably practicable. Risk mitigation includes strengthening the security of sites, reducing our exposure to threats as appropriate, journey management, information risk management and cyber-defence operations, crisis management and business continuity measures. We conduct training and awareness campaigns for staff, and provide them with travel advice and access to 24/7 assistance while travelling. We consistently verify the identity of our employees and contract staff, we control physical access to our sites and activities, and we document access with digital tools. We take steps to have clear and planned responses to security incidents, so that we are able to react quickly and effectively if they occur. Shell is a member of the Voluntary Principles on Security and Human Rights initiative. This is a multi-stakeholder initiative of governments, extractive sector industries and NGOs that gives guidance on how to respect human rights while providing security for business operations. Shell implements this guidance across its companies, concentrating on countries where the risks of working with state and private security forces are greatest. The Board’s Safety, Environment and Sustainability Committee (SESCo) has oversight of Shell’s security risk management activities. In the Executive Committee, accountability for security matters sits with the Chief Human Resources and Corporate Officer. CONTRIBUTION TO SOCIETY Shell’s businesses are part of society and contribute to it by buying and selling goods and services in many countries. Our employees, suppliers and contractors are part of the local communities where Shell operates. In 2021, Shell paid $58.7 billion to governments (2020: $47.3 billion). We paid $6.0 billion in corporate income taxes and $6.6 billion in government royalties, and collected $46.1 billion in excise duties, sales taxes and similar levies on our fuel and other products on behalf of governments. In 2021, Shell spent $37.5 billion (2020: $39.3 billion) on goods and services from more than 24,000 suppliers globally. Social and economic impacts We are assessing our social and economic impacts in a number of countries and regions. To do this, we have enlisted the help of the company Oxford Economics using its Global Sustainability Model to assess social, environmental and economic impacts. In 2021, Shell published its first report based on 2019 social and economic performance data. It details the impacts of our activities in five countries: the Netherlands, UK, USA, Nigeria and India. These countries were chosen because we have significant and wide-ranging operations in them. The report provides performance data on Shell’s contribution to in-country gross domestic product, job numbers, tax payments to governments, and our spending on social and educational programmes. The report also provides details of our operations in each country and our procurement of goods and services. We intend to expand this work to include more European countries. Supply chain engagement Our suppliers are critical to our ability to run our businesses. They are involved in almost every step of our operations. They often play an important part in Shell having a positive impact on local communities and achieving business success. Shell aims to work with suppliers, including contractors, that behave in an economically, environmentally and socially responsible manner, as set out in our Shell General Business Principles and Shell Supplier Principles. The way we engage with our contractors and suppliers is based on our Shell Supplier Principles, which are embedded in contracts. They require contractors and suppliers: ■ to commit to protect the environment in compliance with all applicable environmental laws and regulations; ■ to use energy and natural resources efficiently; and ■ to continually look for ways to minimise waste, emissions and discharge from their operations, products and services. We also work with our partners and industry peers to include worker welfare in industry standards, guidance, and best practice. This helps raise expectations and levels of consistency across the industry. We achieve results in this area partly by participating in organisations such as: ■ the Building Responsibly group of engineering and construction companies working together to raise the bar in promoting the rights and welfare of workers across the industry; ■ the Joint Qualification System, an initiative of BP, Equinor, Shell and TotalEnergies, aimed at creating a collaborative approach to human rights supplier assessments; ■ the International Association of Oil and Gas Producers (IOGP); and ■ the IPIECA, the global oil and gas industry association for advancing environmental and social performance across the energy transition. We also work closely with our key contractors. As a result, 23 of our biggest contractors have signed up to the Building Responsibly principles, which cover more than 1 million workers. Strategic Report
112 Shell Annual Report and Accounts 2021 Helping our suppliers decarbonise We continually work with our suppliers to find ways to reduce greenhouse gas emissions across our supply chains. In 2020, Shell and 50 of our major suppliers piloted a new digital platform, the Shell Supplier Energy Transition Hub. This platform enables suppliers to set emission targets and track performance, share best practice and exchange emissions data with their own supply chains. In 2021, we rolled out the platform free of charge to the rest of our supply chain and any other interested companies. See our website shell.com for more information about how we engage with contractors and suppliers. NEIGHBOURING COMMUNITIES Engaging with communities is part of our approach to managing human rights and providing access to remedy. Shell’s HSSE & SP Control Framework helps to ensure that we operate responsibly and avoid or minimise the negative social impacts of our operations. The requirements set out in the framework also help us to maximise benefits arising from our presence, such as local employment and contractual opportunities. When we divest assets or exit areas, we use well-established processes, applied in a systematic way, to guide our assessment of risks in divestments. Our requirements set rules, supplemented by guidance, for how we engage with communities that may be affected by our operations. Major projects and facilities that Shell operates have a social performance plan setting out how to manage potential negative impacts and maximise benefits. These plans typically begin with defining the social environment, with a particular focus on people who may be especially vulnerable to the potential impacts of our operations. Another important component is an effective community feedback mechanism for listening and responding to questions and resolving complaints in a timely manner. We have specific requirements to avoid, minimise or mitigate potential impacts on the traditional lifestyles and cultural heritage of indigenous peoples. We also have specific requirements to avoid, minimise or mitigate their involuntary resettlement. We use our online community feedback tool, launched in 2020, to track and respond to all questions, complaints and feedback that we receive. It allows our network of about 100 community liaison officers (CLOs) to document feedback and outcomes. The CLOs act as a bridge between local communities and our businesses. In 2021, travel restrictions and lockdowns due to the COVID-19 pandemic continued to limit our face-to-face engagement with members of communities. In response, our CLOs moved engagements online to maintain relationships virtually. As part of our ongoing effort to improve community engagement, we developed an assessment tool in 2019, to measure the effectiveness of our community feedback mechanisms at 32 priority sites. The assessment is based on criteria set out in the UN Guiding Principles on Business and Human Rights. It has helped 18 priority sites to improve their community feedback mechanisms in the following areas: ■ promoting public access to and transparency of the sites’ community feedback mechanisms; ■ improving written procedures so they are better aligned with global good practice and more reflective of local circumstances; ■ providing clear steps for recognising alternative options for communities to seek remedy; and ■ respecting people’s anonymity and data privacy. By the end of 2021, 10 sites updated their community feedback mechanisms so procedures are better aligned with the UN Guiding Principles on Business and Human Rights. Five sites have improved access and transparency by publishing the procedures for their community feedback mechanisms. We are working to improve community feedback mechanisms at 20 sites. In 2020, we developed a guide to help sites improve the effectiveness of their community feedback mechanisms. In 2021, we simplified this guide so it could be applied to a wider range of operations. In 2022, we plan to improve the methods for tracking how feedback is resolved. See our website shell.com for more information about our work with communities. ENVIRONMENT AND SOCIETY continued Strategic Report
113Shell Annual Report and Accounts 2021 HUMAN RIGHTS Human rights are fundamental to Shell’s core values of honesty, integrity and respect for people. Respect for human rights is embedded in the Shell General Business Principles and our Code of Conduct. Our approach is informed by the UN Guiding Principles on Business and Human Rights. We work closely with other companies and organisations to improve how we apply these UN guiding principles. We focus on four priority areas where respect for human rights is critical to how we operate: communities, security, labour rights, and supply chain. For each of these areas, we have systems to identify potential impacts and to avoid and mitigate them. For example, Shell’s HSSE & SP Control Framework contains mandatory standards and manuals that set out how we identify, assess, and manage our impacts on communities where we operate, including any impact on human rights. Our joint-venture partners are expected to implement our control framework or an equivalent. The Shell Supplier Principles outline how we expect our contractors and suppliers to respect the human rights of their workforce, and to manage the social impacts of their activities on Shell’s neighbouring communities. In 2021, we published Shell’s Approach to Human Rights, which increases transparency by providing our staff and external stakeholders with important information about our approach and commitment to human rights. The publication includes Shell’s position on respecting and promoting worker welfare. It also contains information on how we provide access to remedy. In 2021, we launched an updated human rights training course which is mandatory for staff working in areas with the greatest risk of infringement, such as social performance, human resources, and contracting. We encourage all staff to do the course, regardless of their role, to build greater understanding of human rights across Shell. An internal Human Rights Working Group consisting of experts from different functions guides Shell businesses on the best ways to implement and review our approach to human rights. The group includes an external adviser to provide an outside view and help us to improve our approach. A steering committee composed of senior executives supports the work of the Human Rights Working Group. Our approach to due diligence is informed by the UN Guiding Principles on Business and Human Rights and is supported by experts working in our focus areas procurement, social performance, human resources, and security. Due diligence helps us to act on our commitment to respect human rights. For example, in our supply chains, where contractors and suppliers are considered to be at risk of having issues with labour rights, we engage with them to assess their management systems, before deciding whether to award a contract. Results of these supplier assessments are evaluated, and where gaps are found, we may work with suppliers and contractors to help them implement corrective actions. We may also conduct on-site audits or consider terminating contracts if serious or persistent shortcomings are found. The most common shortcomings found during our supplier assessments typically relate to policy gaps rather than performance in the following areas: ■ freely chosen employment; ■ avoiding child labour; ■ working hours, wages and benefits; ■ dormitory, housing and working conditions; ■ equal opportunities and freedom of association; and ■ supply chain and performance management. The Shell Supplier Principles include specific labour and human rights expectations for contractors and suppliers. Shell companies use a joint industry supplier capability assessment that is delivered in collaboration with other operators. This sharing mechanism is intended to support the improvement of working conditions in the participating companies’ supply chains. See our website shell.com for more information about our approach to human rights. Strategic Report
114 Shell Annual Report and Accounts 2021 OUR PEOPLE Performing competitively in the evolving energy system requires competent and empowered people working safely together across Shell. Our people are essential to the successful delivery of Shell’s strategy and to sustaining business performance over the long term. Strong engagement helps us to accelerate our people’s development, enhance our leadership capabilities and improve employee performance. DELIVERING ENERGY RESPONSIBLY AND SAFELY Strategic Report
115Shell Annual Report and Accounts 2021 EMPLOYEE OVERVIEW The employee numbers presented here are the full-time equivalent number of people employed by Shell on a full- or part-time basis, working in Shell subsidiaries, Shell-operated joint operations, seconded to non-Shell-operated joint operations, or joint ventures and associates. At December 31, 2021, there were a total of 82,000 employees at Shell. This total consisted of employees at Shell and employees at certain Upstream, Downstream and Renewables and Energy Solutions companies that operate more autonomously than other Shell subsidiaries and maintain their own HR systems. There were a total of 87,000 employees at December 31, 2020, and December 31, 2019. In August, we launched our new organisational structure as part of the Reshape initiative. This new structure was created with the aim of reducing costs and making us a more competitive organisation that is agile and better able to respond to customers. The Reshape initiative in 2021 involved job reductions in line with our expectation that around 8,000 jobs will be reduced by the end of 2022. As a result of different notice periods in various markets, people are continuing to leave until the end of 2022. In certain markets, we provided the opportunity for selected voluntary severance (SVS), in order to reduce the number of enforced redundancies. We have around 3,000 people that are leaving on SVS. We have sought at all times to conduct the job reductions process in accordance with our core values of honesty, integrity and respect for people. We have constantly sought to show care for anyone losing their role. Throughout the Reshape process, we have aimed to support those facing job reductions by helping them to find and engage with internal and external opportunities to reskill and upskill. We introduced a global minimum standard for outplacement. This ensured that all employees who were leaving Shell had access to an independent professional career coach who could offer individualised support. The proportion of voluntary resignations in Shell was 4.4% in 2021 compared with 2.6% in 2020. The rate is low across a range of industries. The table below shows actual employee numbers by geographical area. Note 27 to the “Consolidated Financial Statements” on page 280 provides the average number of employees by business segment. Actual number of employees by geographical area Thousand 2021 2020 2019 Europe 26 27 27 Asia 30 31 31 Oceania 2 3 2 Africa 4 4 4 North America 18 20 21 South America 1 2 2 Total 82 87 87 In 2021 Employees 82,000 employees at December 31, 2021 Regions >70 countries in which we operate Training 271,000 formal training days for employees and joint-venture partners Female employees 33% female employees Directors 50% women on the Board of Directors Executive Committee 25% women on the Executive Committee Senior leaders 29.5% women in senior leadership positions Experienced hires 1,292 experienced people joined Shell (34% female) Operations centre hires 2,742 recruited for Shell Business Operations centres (51% female) Graduate hires 155 graduate hires (47% female) [A] All metrics except the employees metric exclude the employees in certain Upstream, Renewables and Energy Solutions and Downstream companies that maintain their own HR systems. Strategic Report
116 Shell Annual Report and Accounts 2021 In 2021, a total of 271,000 formal training days were provided for employees and joint-venture partners, compared with 234,000 in 2020 and 373,000 in 2019. The increase was caused by the rise in the availability of virtual courses as we rapidly digitalised, enabling people to attend virtually. This allowed us to continue to invest in people and capabilities, while maintaining our focus on safety. We have migrated to virtual courses and their uptake has increased from 2020, when people were still new to the virtual ecosystem. In 2021, learners embraced the virtual courses. This shows in the increase in the number of completions and the corresponding rise in training person days (TPD) of 37,000 compared with 2020. EMPLOYEE COMMUNICATION AND INVOLVEMENT Management regularly engages with our employees, including internally elected employee representatives, through a range of formal and informal channels. These include webcasts and all-staff messages from our Chief Executive Officer (CEO) Ben van Beurden, senior leader webcasts, town halls, team meetings, virtual coffee/chai connects, interviews with Senior Management, and online publications via our intranet. In 2021 Board members had virtual staff engagements and visited some sites such as Qatar, Shell Pernis, and Pennsylvanian Chemicals park to have direct engagement with staff. For further information on stakeholder engagement, see “Governance” on pages 141-144. The Shell People Survey is one of the principal tools used to measure employee engagement, motivation, affiliation and commitment to Shell. It provides insights into employees’ views and has had a consistently high response rate. In 2021, the response rate was 83%, a decrease of 3.1 percentage points compared with 2020. This decrease was probably because of the timing of the survey, as many employees who were invited to take part were on a notice period before exiting Shell because of the Reshape reorganisation. Employees who are about to leave typically have a lower response rate than those who plan to stay with a company. The average employee engagement score was 75 points out of 100. This is a decrease of three points compared with 2020 but still reflects the resilience of our people in a year of change. This result gives Shell one of the leading employee engagement scores across a range of industries. The employee engagement score is based on a well-researched and validated model that combines satisfaction, motivation, affiliation, loyalty and dedication. We provide our people with what they need to work in our offices and other locations, with flexibility for staff based on their reasonable business and personal needs. We also seek to provide what they need if they are working remotely. We enable, develop and improve their leadership qualities through global learning programmes, short- and long-term international assignments, and offering the possibility of moving between roles in different parts of the organisation. We help to increase the appeal of working for Shell through flexible working options, supportive policies such as a global minimum maternity leave of 16 weeks, regular engagements between management and employees, and career development tools such as individual development plans, coaching and formal training. In 2021, we continued to support our people and assist in the fight against COVID-19. We continued our home-working ergonomics programme, providing funding for proper office equipment for home use for 5,000 employees in addition to the 50,000 we assisted in 2020. This included offering funding to new joiners for home-use office equipment. We also provided tips on setting up and maintaining good ergonomics, working with others virtually and maintaining productivity. Our Real Estate teams developed guidance on returning to site safely for all of our locations. During and before the pandemic, we invested in the mental well-being of our employees through programmes such as World Mental Health Day, I’m Not Okay and the One Thing Wall. We also provided resources for our employees under the Care-for-Self programme. Shell is one of more than 800 companies to have signed the Neptune Declaration, an international agreement sponsored by the Global Maritime Forum, promising to support seafarers during the COVID-19 pandemic. The support has included providing access to vaccines. DIVERSITY, EQUITY AND INCLUSION Our ambition is to become one of the most diverse and inclusive organisations in the world, a place where everyone – including employees, customers, partners and suppliers – feels valued and respected and has a strong sense of belonging. We believe that by achieving this ambition, we will contribute to a better and more equal world. We will also become a stronger organisation, with a richness of experience and views to guide us. Living by our values Our approach starts with living up to our core values of honesty, integrity and respect for people. These standards are set out in the Shell General Business Principles and our Code of Conduct. We want everyone to have a strong sense of belonging, irrespective of our differences. We launched two mandatory training courses for all staff in 2021: Respect in the Workplace and Conscious Inclusion. These will help us to continue to embed inclusive behaviours in our culture. Powering lives DE&I commitments We are focusing on removing barriers and creating equality of opportunity in four strategic priority areas: gender; race and ethnicity; lesbian, gay, bisexual and transgender (LGBT+); and enablement and disabilities inclusion, as set out in our powering lives commitments to diversity and inclusion. Shell is working towards achieving 35% representation of women in our senior leadership positions by 2025 and 40% by 2030. We aim to increase racial and ethnic representation across our workforce so that we better reflect the communities in which we work and live. At Shell, we seek to provide a safe, caring and inclusive environment for LGBT+ and PWD (people with disabilities) staff so that they can be themselves and reach their full potential. Gender Our CEO Ben van Beurden is a Catalyst CEO Champion for Change. Like more than 70 other CEOs he has made an organisational and personal commitment to accelerate the advancement of women, including women of colour, into senior leadership and board positions. Shell also endorsed the World Economic Forum Call to Action on closing the gender gap in the oil and gas sector. We aim to meet or exceed the target set by the external, UK-based Hampton-Alexander Review of having 33% female Board membership, progressing towards 50% or more representation. We have achieved this target. Currently six out of 12 of our Board members are women. In an industry where women have been traditionally underrepresented, three of our five largest energy-trading divisions are led by women. OUR PEOPLE continued Strategic Report
117Shell Annual Report and Accounts 2021 In October, Zoë Yujnovich was appointed Upstream Director, joining Jessica Uhl, the Chief Financial Officer as the second woman on the eight-person Executive Committee. In 2021, 47% of our graduate recruits were female, compared with 49% in 2020. As of December 31, 2021, the proportion of women in senior leadership positions was 29.5% (this value includes leavers still in the HR System). This was just short of our ambition to have 30% representation of women in our senior leadership positions by 2021, but it was also an increase of 1.7 percentage points compared with the end of 2020. “Senior leadership positions” comprises our top 1,250 leaders and is a Shell measure based on salary group levels and is distinct from the term “senior manager” in the statutory disclosures in the table below. Gender diversity data (at December 31, 2021) Gender diversity data Men Women Directors of the Company 6 50% 6 50% Senior managers [A] 619 71% 254 29% Employees (thousand) 55 67% 27 33% [A] Senior manager is defined in section 414C(9) of the Companies Act 2006 and, accordingly, the number disclosed comprises the Executive Committee members who were not Directors of the Company, and other directors of Shell subsidiaries. Race and ethnicity We are working to address racial inequity. We seek to ensure everyone at Shell has equal opportunities and feels included. In 2020, we created the Shell Diversity and Inclusion (D&I) Council for Race, supported by a 20-member Employee Advisory Board composed of members from a diverse mix of racial and ethnic backgrounds. Sponsored by our CEO Ben van Beurden, Integrated Gas, Renewables and Energy Solutions Director Wael Sawan and Legal Director Donny Ching, the council aims to advance diversity in our workforce so that it better reflects communities where we work and from which we draw talent. Externally, in the USA, we work closely with the civil rights organisation National Urban League. In the UK, Shell was one of the first signatories to the Race at Work Charter of the Business in The Community organisation. We are part of Black Representation in Marketing (BRiM), a UK initiative to improve the representation of black people in marketing. As of December 31, 2021, 8% of our Board members were from an ethnic minority. In the USA: ■ In 2021, 65% of our US employees were white; 33.2% were people of colour, with 13% Asian, 11.8% Hispanic/Latino, 8.4% black, and 1.8% in the Other category. ■ We are launching mandatory anti-racism training for all US staff. In the UK: ■ In 2021, 78.5% of our UK employees identified as white and 21.5% were from an ethnic minority background. Our ethnic minority employees identified as Asian (13.1%), black (3.4%), mixed (2.4%) or another ethnic background (2.6%). As ethnicity declaration is voluntary, our ethnicity declaration rate is not 100% and all calculations are based on a declaration rate of 81%. The 19% of our workforce who have not provided data or have chosen not to declare their ethnicity were not included in our calculations. ■ We have set a recruitment ambition to have 8% black representation in our graduate and experienced hires by 2025, to increase representation in line with UK society through actions such as mentoring and outreach. ■ We co-sponsored the UK 2021 Race at Work survey conducted by the membership organisation Business in the Community. ■ Shell in the UK was one of the first FTSE 100 companies to voluntarily publish ethnicity pay gap data in November 2020. In the Netherlands, we began implementing our first Ethnic Inclusion action plan and established an employee sounding board to support this process. We are focusing on the USA, UK and Netherlands because these are the Shell hubs where we see the most significant opportunities for representation and inclusion of minority staff. LGBT+ We are working to advance LGBT+ inclusion within Shell. We promote equal opportunity and create an environment where people feel included, regardless of sexual orientation or gender identity. Our approach reinforces respect for people and provides psychological safety for our LGBT+ employees in line with our core values. Most of our work around LGBT+ inclusion happens at a country level in line with local policies, laws and regulations. Shell is active in external organisations and activities that advance LGBT+ inclusion. We benchmark ourselves externally, with consistent top-tier results. In 2021, in the USA we earned a perfect score of 100 points in the Human Rights Campaign Foundation’s Corporate Equality Index, a recognition we have earned annually since 2016. Shell was rated as a top employer in the Workplace Pride Global Benchmark 2021 survey, with a score of 92.4%. We have also pledged support for the UN Standards of Conduct for Business that aim to eliminate discrimination against lesbian, gay, bisexual, transgender and intersex (LGBTI) people. Shell has a global LGBT+ forum consisting of LGBT+ colleagues and allies. The forum now has 14 chapters globally. The LGBT+ focus area is sponsored by Chief Financial Officer Jessica Uhl. Jessica Uhl was included in the OUTstanding 2021 Ally Executives Role Model List, which recognises business leaders who help create more inclusive workplaces. Two of our LGBT+ colleagues were featured in the OUTstanding 2021 LGBT+ Future Leaders List. Enablement and disability inclusion We are creating an environment where people with disabilities can excel. We provide support and make adjustments for people with disabilities during the recruitment process and throughout their careers with Shell. This includes equal access to valuable educational resources, training programmes, and emphasis on personal and professional development. In the UK, we partnered with PurpleSpace to launch a personal development programme called “Empowered and enABLED” to support employees with disabilities to build inner confidence, develop a sense of community and advocate for any adjustments or accommodations they require. In December 2021, we also launched a LinkedIn learning path called “Spotlight – Disability Inclusion: A Guide for Line Managers.” This collection of learning resources helps Shell line managers to become more confident about issues relating to disability inclusion. Our workplace accessibility (WPA) service currently serves 86 locations globally. Supported by functions such as Shell Health, HR, Real Estate and IT, WPA is designed to ensure that all employees have access to reasonable physical workplace or other adjustments so that they can work effectively and productively. We combined the home-working ergonomics programme with WPA to help all employees including those with disabilities to work from home effectively during the COVID-19 pandemic. Strategic Report
118 Shell Annual Report and Accounts 2021 To further support staff with disabilities, we have created internal employee resource groups, including the enABLE networks that support and highlight the work of disabled employees in Shell. First launched in the UK in 2005, we now have 14 enABLE networks globally. In 2021, we formed the Global enABLEMENT Coalition, an internal forum bringing together enABLE networks and functions to create an inclusive, accessible and psychologically safe workplace for people with disabilities. The Enablement and disability inclusion focus area is sponsored by Harry Brekelmans, Projects & Technology Director and Huibert Vigeveno, Downstream Director. Shell is a member of The Valuable 500, a global business group which seeks to eliminate the exclusion of disabled people and ensure that disability remains a priority for company leaders. Shell belongs to the Business Disability Forum. This is a membership organisation that brings business leaders, disabled people, and government together to understand how to improve the life opportunities and experiences of disabled people in employment, the economy and wider society. We belong to PurpleSpace, a networking and professional development hub for disabled employees, employee network leads and allies from all sectors and trades. Other diversity and inclusion targets: local national coverage We track local national coverage. This is the percentage of senior local nationals (those working in their respective base country and those expatriated) against the total number of senior leadership positions in their base country. Local national coverage (at December 31) [A] Number of selected key business countries December 31, 2021 December 31, 2020 December 31, 2019 Greater than 80% 13 10 12 Less than 80% 7 10 8 Total 20 20 20 [A] These numbers exclude those in companies with their own HR systems. CODE OF CONDUCT In line with the UN Global Compact Principle 10 (businesses should work against corruption in all its forms, including extortion and bribery), we maintain a global anti-bribery and corruption/anti-money laundering (ABC/AML) programme designed to prevent, detect, remediate and learn from potential violations. The programme is underpinned by our commitment to prohibit bribery, money laundering and tax evasion, and to conduct business in line with our Shell General Business Principles and Code of Conduct. We do not tolerate the direct or indirect offer, payment, solicitation or acceptance of bribes in any form. Facilitation payments are also prohibited. The Shell Code of Conduct includes specific guidance for Shell staff, (which comprises employees and contract staff), on requirements to avoid or declare actual, potential or perceived conflicts of interest, and on offering or accepting gifts and hospitality. Regular communications from our leaders emphasise the importance of these commitments and compliance with requirements. These are reinforced with both global and targeted messages to ensure that Shell staff are kept reminded of their obligations. To support the Code of Conduct, we have mandatory risk-based procedures and controls that address a range of compliance risks and ensure that we focus resources, reporting and attention appropriately. By making a commitment to our core values of honesty, integrity and respect for people, and by following the Code of Conduct, we protect Shell’s reputation. In 2021, the continuing COVID-19 pandemic brought additional focus on conduct risk, which arises from human behaviour, influenced by factors in the external environment. Our core values are undermined if decisions are taken which fall short of the expected standards of ethical behaviour and compliance. Our response to the pandemic remains to reiterate and emphasise that adherence to Shell’s compliance rules (including the Code of Conduct) remains essential to protecting our business and helping us to make the right decisions for the future. While maintaining this basic position, pragmatic, risk-based mitigations have been implemented where appropriate to increase response speed and efficiency without undermining the intended purpose of our controls. Our ethics and compliance requirements are articulated through our policies, standards and procedures and supported by the Ethical Decision-Making Framework, a tool to help staff think through and discuss, in a structured way, the legal, ethical and external consequences of decisions. They are communicated to Shell employees and contract staff and, where necessary and appropriate, to agents and business partners. We monitor and report internally on adherence to select ethics and compliance requirements, such as mandatory training completion and due diligence screening. We pay particular attention to our due diligence procedures when dealing with third parties. We also make our requirements clear to third parties through a variety of measures such as standard contract clauses. We offer a good practice anti-bribery and corruption e-learning course to third parties that may not have a training programme in place. We publish our Ethics and Compliance Manual on shell.com to demonstrate our commitment in this area. The Shell Ethics and Compliance Office helps the businesses and functions to implement the ABC/AML and other programmes, assess risks and monitors and reports on progress. Legal counsel provides legal advice globally and supports the implementation of programmes. The Shell Ethics and Compliance Office regularly reviews and revises all ethics and compliance programmes to ensure they remain up to date with applicable laws, regulations and best practices. This includes incorporating results from relevant internal audits, reviews and investigations, and periodically commissioning external reviews and benchmarking. We investigate all good-faith allegations of breaches of the Code of Conduct, however they are raised. We are committed to ensuring all such incidents are investigated by specialists in accordance with our Investigation Principles. Allegations may be raised confidentially and anonymously through several channels, including a Shell Global Helpline operated by an independent provider. Allegations of breaches of the Code of Conduct may be raised confidentially and anonymously through several channels, including the Shell Global Helpline, which is operated by an independent provider. In 2021, there were 1,479 entries to the Shell Global Helpline: 1,177 allegations and 302 inquiries. The Business Integrity Department is a specialist investigative unit within Shell Internal Audit that is responsible for managing the Shell Global Helpline and the Group level incident management procedures. The Board has delegated the oversight of the functioning of the Shell Global Helpline to the Audit Committee. The Audit Committee is also authorised to establish and monitor the implementation of procedures for the receipt, retention, proportionate and independent investigation and follow-up action of reported matters. OUR PEOPLE continued Strategic Report
119Shell Annual Report and Accounts 2021 Violation of the Code of Conduct or its policies can result in disciplinary action, up to and including contract termination or dismissal. In some cases, we may report a violation to the relevant authorities, which could lead to legal action, fines or imprisonment. Internal investigations confirmed 181 substantiated breaches of the Code of Conduct in 2021. As a result, we dismissed or terminated the contracts of a total of 67 employees and contract staff. EMPLOYEE SHARE PLANS We have a number of share plans designed to align employees’ interests with our performance through share ownership. For information on the share-based compensation plans for Executive Directors, see the “Directors’ Remuneration Report” on pages 166-170. PERFORMANCE SHARE PLAN, LONG-TERM INCENTIVE PLAN AND EXCHANGED AWARDS UNDER THE BG LONG-TERM INCENTIVE PLAN Under the Performance Share Plan (PSP), 50% of the award is linked to certain indicators described in “Performance indicators” on pages 36-37, averaged over the performance period. For 2018 to 2019, 12.5% of the award was linked to free cash flow (FCF) and the remaining 37.5% was linked to a comparative performance condition which involves a comparison with four of our main competitors over the performance period, based on three performance measures. For 2020, 11.25% of the award was linked to the FCF measure and 5% was linked to an energy transition measure. The remaining 33.75% was linked to the comparative performance condition. From 2021, 10% of the award is linked to the FCF measure and 10% is linked to an energy transition measure. The remaining 30% is linked to the comparative performance condition. Under the Long-term Incentive Plan (LTIP) awards made in 2018, 25% of the award is linked to the FCF measure and the remaining 75% is linked to the comparative performance conditions mentioned above. For 2019 and 2020, 22.5% of the award is linked to the FCF measure and 10% is linked to an energy transition measure. The remaining 67.5% is linked to the comparative performance condition mentioned above. From 2021, 20% of the award is linked to the FCF measure and 20% is linked to an energy transition measure. The remaining 60% is linked to the comparative performance condition. Separately, following the BG acquisition, certain employee share awards made in 2015 under BG’s Long-term Incentive Plan were automatically exchanged for equivalent awards over shares in the Company. The outstanding awards take the form of nil-cost options. Under all plans, all shares that vest are increased by an amount equal to the notional dividends accrued on those shares during the period from the award date to the vesting date. In certain circumstances, awards may be adjusted before delivery or subject to clawback after delivery. None of the awards result in beneficial ownership until the shares vest. See Note 22 to the “Consolidated Financial Statements” on page 274. RESTRICTED SHARE PLAN Under the Restricted Share Plan, awards are made on a highly selective basis to senior staff. Shares are awarded subject to a three-year retention period. All shares that vest are increased by an amount equal to the notional dividends accrued on those shares during the period from the award date to the vesting date. In certain circumstances, awards may be adjusted before delivery or subject to clawback after delivery. GLOBAL EMPLOYEE SHARE PURCHASE PLAN Eligible employees in participating countries may participate in the Global Employee Share Purchase Plan. This plan enables them to make contributions from net pay towards the purchase of the Company’s shares at a 15% discount to the market price, either at the start or at the end of an annual cycle, whichever date offers the lower market price. UK SHELL ALL EMPLOYEE SHARE OWNERSHIP PLAN Eligible employees of participating Shell companies in the UK may participate in the Shell All Employee Share Ownership Plan, under which monthly contributions from gross pay are made towards the purchase of the Company’s shares. For every six shares purchased by the employee, one matching share is provided at no cost to the employee. UK SHARESAVE SCHEME Eligible employees of participating Shell companies in the UK have been able to participate in the UK Sharesave Scheme. Options have been granted over the Company’s shares at market value on the invitation date. These options are normally exercisable after completion of a three-year or five-year contractual savings period. From 2017 no further grants were made under this plan. Separately, following the acquisition of BG, certain participants in the BG Sharesave Scheme chose to roll over their outstanding BG share options into options over the Company’s shares. The BG option price (at a discount of 20% to market value) was converted into an equivalent Company option price at a ratio agreed with HM Revenue and Customs. These options are normally exercisable after completion of a three-year contractual savings period. As of December 31, 2021, there are no outstanding UK Sharesave or BG Sharesave options. POWERING PROGRESS SHARE AWARD This was a one-off share award granted to all eligible employees of Shell on June 18, 2021. This award supports employee engagement in the Powering Progress strategy. These awards vest at the end of a one-year period. All shares that vest are increased by an amount equal to the notional dividends accrued on those shares during the period from the award date to the vesting date. Strategic Report signed on behalf of the Board /s/ Linda M. Coulter LINDA M. COULTER Company Secretary March 9, 2022 Strategic Report
GOVERNANCE Directors’ Report 121 The Board of Shell plc 129 Senior Management 131 Introduction from the Chair 134 Statement of compliance with the UK Corporate Governance Code 135 Governance framework 137 Board activities and evaluation 141 Understanding and engaging with our stakeholders 145 Workforce engagement 147 Nomination and Succession Committee 151 Safety, Environment and Sustainability Committee 153 Audit Committee Report 166 Directors’ Remuneration Report 171 Annual Report on Remuneration 189 Directors’ Remuneration Policy 198 Other Regulatory and Statutory Information 120 Shell Annual Report and Accounts 2021 Governance
121Shell Annual Report and Accounts 2021 THE BOARD OF SHELL PLC Career Sir Andrew Mackenzie was appointed Chair of the Board of Shell plc with effect from May 18, 2021. Sir Andrew joined BHP, the world’s largest mining company, in 2008, and served as Group CEO from 2013 to 2019, when he systematically simplified and strengthened the business, and created options for the future. He also made BHP the first miner to pledge to tackle emissions caused when customers use its products. From 2004 to 2007 at Rio Tinto, he was Head of Industrial Minerals, then Head of Industrial Minerals and Diamonds. Prior to this, Sir Andrew spent 22 years with BP, joining in 1982 in research and development, followed by international operations and technology roles across most business streams and functions – principally in exploration and production, and petrochemicals, including as Chief Reservoir Engineer and Chief Technology Officer. Latterly he was Group Vice President for Chemicals in the Americas, then Olefins and Polymers globally. From 2005 to 2013 Sir Andrew served as a Non-executive Director of Centrica. He has also served on many not-for-profit boards, including public policy think-tanks in the UK and Australia. He was knighted in 2020 for services to business, science, technology and UK-Australia relations. Relevant skills and experience Sir Andrew is a highly experienced leader who has managed major international FTSE 100 businesses, and has more than 30 years’ experience in the oil and gas, petrochemicals and minerals industry. Following early academic distinction, Sir Andrew made important contributions to geochemistry, including groundbreaking methods for oil exploration and recovery. He was recognised as “one of the world’s most influential earth scientists” and made a Fellow of the Royal Society in 2014. Having lived and worked on five continents, Sir Andrew has applied his deep understanding of the energy business and geopolitical outlook to create public-private partnerships and advise governments around the world. As an earth scientist, Sir Andrew has consistently pursued sustainable action on climate change in the interests of access to affordable energy and global development. Sir Andrew has brought the wealth of his experience and insights to Shell, where his expertise has been helping Shell navigate the energy transition. Sir Andrew is also a committed champion of gender balance, the rights of indigenous peoples, and of the power of large companies to support social change – all of which align closely with Shell’s purpose, strategy and values. In June 2021, Sir Andrew was appointed the chair of UK Research and Innovation. Sir Andrew has been tasked with driving forward the government’s ambitious research and innovation agenda. SIR ANDREW MACKENZIE Chair Tenure Chair – Nine months (appointed Chair May 18, 2021) On Board – one year and five months (appointed October 1, 2020) Board committee membership Chair of the Nomination and Succession Committee Outside interests/commitments Fellow of the Royal Society (FRS) Chair of UK Research and Innovation (UKRI) Age 65 Nationality British Career Euleen is an Associate of the Institute of Chartered Accountants in England and Wales, a Fellow of the Singapore Institute of Chartered Accountants, and has professional qualifications in banking and taxation. She has held various senior management positions within Standard Chartered Bank and was Chief Executive Officer of Standard Chartered Bank, Singapore, from 2001 until 2006. She is also a Fellow of the Singapore Institute of Directors. She has also held non-executive appointments on various boards including Aviva plc, MediaCorp Pte Ltd, Singapore Airlines Ltd, Singapore Exchange Ltd, Standard Chartered Bank Malaysia Berhad, Standard Chartered Bank Thai plc, CapitaLand Ltd, Temasek Trustees Pte Ltd, DBS Bank Ltd and DBS Group Holdings Ltd. She was previously Non-executive Chair of the Singapore International Foundation, and Chair of International Enterprise Singapore and the Accounting Standards Council, Singapore. Relevant skills and experience Euleen’s current roles as chair of the board of directors of various international organisations provide significant experience in the area of strategy development and international businesses. She is highly regarded both externally and within Shell as a champion of diversity. She consistently, but constructively challenges the Board and management to continue to progress in this area. Based in Singapore and having been Chair of the Risk Committee of the largest bank in Southeast Asia, Euleen is close to key emerging/growth markets for our business. Euleen’s risk management expertise has elevated the Board’s deep deliberations around risk governance, and her voice is regularly heard on discussions regarding appropriate risk appetite. Her extensive travel around the world through her various executive and non-executive roles, has equipped her with broad geopolitical insight and significant knowledge of operating in the Asian markets. Euleen uses her financial acumen and advocacy for diversity to pose probing and insightful questions, both in and beyond the boardroom. This contributes to well-rounded, incisive and inclusive Board discussions. EULEEN GOH Deputy Chair and Senior Independent Director Tenure Seven years and six months (appointed September 1, 2014). Euleen was appointed Deputy Chair and Senior Independent Director on May 20, 2020. Board committee membership Member of the Nomination and Succession Committee and member of the Remuneration Committee Outside interests/commitments Chair of SATS Ltd. Trustee of the Singapore Institute of International Affairs Endowment Fund. Chair of the Singapore Institute of Management Pte Ltd and Non-executive Director of Singapore Health Services Pte Ltd, both of which are not-for-profit organisations. Euleen was appointed as a Member of the Singapore Public Service Commission on April 1, 2021. Age 66 Nationality Singaporean G overnance
122 Shell Annual Report and Accounts 2021 Career Ben was Downstream Director from January to September 2013. Before that, he was Executive Vice President Chemicals from 2006 to 2012. In this period, he also served on the boards of a number of leading industry associations, including the International Council of Chemicals Associations and the European Chemical Industry Council. Previously, he held a number of operational and commercial roles in Upstream and Downstream, including Vice President Manufacturing Excellence. He joined Shell in 1983, after graduating with a master’s degree in chemical engineering from Delft University of Technology, the Netherlands. Relevant skills and experience Ben has more than 38 years’ experience of working for Shell. He has built a deep understanding of the industry and has proven management experience in technical and commercial roles. Ben has led Shell to build resilience and deliver strong financial results. In 2016, he steered the Company through the acquisition and integration of the BG Group, which accelerated Shell’s business strategy and led to a streamlining divestment programme of $30 billion of non-core assets. Under his leadership, Shell has positioned itself to help tackle climate change. Shell has set a target of becoming a net-zero emissions energy business by 2050, in step with society. In 2020, in the unprecedented circumstances of the COVID-19 pandemic, Shell took decisive action to maintain its financial resilience. Ben also led plans for a strategic reorganisation, which took effect in August 2021. This was aimed at setting Shell up to succeed in the energy transition by making the business nimbler and better able to respond to customers. In February 2021, Shell set out Powering Progress, a detailed strategy which describes our commitments under four goals: generating shareholder value, achieving net-zero emissions, powering lives and respecting nature. In November 2021, the Company announced a simplification of its structure. As a result, Ben has relocated to the UK. BEN VAN BEURDEN Chief Executive Officer Tenure Eight years and two months (appointed January 1, 2014) Board committee membership N/A Outside interests/commitments Ben joined the Supervisory Board of Daimler AG as a Non-executive Director in April 2021. Age 63 Nationality Dutch JESSICA UHL Chief Financial Officer Tenure Five years (appointed March 9, 2017) In November 2021, the Company announced a simplification of its structure. As a result, Jessica has relocated to the UK. However, due to family circumstances a long-term relocation to the UK is not sustainable and as a result Jessica will step down from her role on March 31, 2022. Jessica will be available to assist Sinead Gorman, who will become CFO effective April 1, 2022, and the Board with transition matters until June 30, 2022. She will then leave Shell. Board committee membership N/A Outside interests/commitments Jessica joined the Board of Goldman Sachs Group as Non-executive Director on July 1, 2021. Age 54 Nationality US citizen Career Jessica was Executive Vice President Finance (EVP) for the Integrated Gas business from January 2016 to March 2017. Previously, she was EVP Finance for Upstream Americas from 2014 to 2015, Vice President Finance for Upstream Americas Unconventionals from 2013 to 2014, VP Controller for Upstream and Projects & Technology from 2010 to 2012, VP Finance for the global Lubricants business from 2009 to 2010, and Head of External Reporting from 2007 to 2009. She joined Shell in 2004 in finance and business development, supporting the Renewables business. Before joining Shell, Jessica worked for Enron in the USA and Panama from 1997 to 2003 and for Citibank in San Francisco, USA, from 1990 to 1996. She obtained a BA from UC Berkeley in 1989 and an MBA at INSEAD in 1997. Relevant skills and experience Jessica is a highly regarded executive with a track record of delivering key business objectives, from cost leadership in complex operations to mergers and acquisitions. Jessica’s professional background combines an external perspective with more than 17 years of Shell experience. She has held finance leadership roles in Europe and the USA, in Shell’s Upstream, Integrated Gas and Downstream businesses, and in Projects & Technology and Corporate. Jessica was appointed CFO in the year following the BG acquisition, when Shell’s debt, gearing and development costs were high and when the oil price was still recovering from the lower levels of 2016. Jessica responded to these challenging conditions with enthusiasm, clarity and discipline and has overseen Shell’s delivery of industry-leading cash flow from operating activities. Jessica drove decisive counter measures to protect the long-term financial health of the organisation, strengthen its balance sheet and preserve cash while ensuring the safe continuity of the business. Jessica has also been a leading voice for transparency in the energy industry, including on taxes and climate change. Under her tenure, Shell has continued to expand and enhance disclosures related to climate change in line with the principles of the Task Force on Climate-Related Financial Disclosures. Under her guidance, from 2019, Shell began publishing an annual Tax Contribution Report. This includes country-by-country report data, a standard set by the Organisation for Economic Co-operation and Development (OECD). THE BOARD OF SHELL PLC continued Governance
123Shell Annual Report and Accounts 2021 Career Dick was President and Chief Executive Officer of Ahold Delhaize from 2016 to 2018. Prior to the merger between Ahold and Delhaize, he served as President and CEO of Royal Ahold from 2011 to 2016. From 2006 to 2011 he was a member of the Executive Board of Ahold and served as Chief Operating Officer of Ahold Europe from 2006 to 2011. Dick joined Ahold in 1998 as CEO of Ahold Czech Republic and was appointed President and CEO of Albert Heijn in 2000. In 2003, he also became President and CEO of Ahold’s Dutch businesses. Prior to joining Ahold, Dick spent more than 17 years in various retail positions, for SHV Holdings N.V. in the Netherlands and abroad, and for Unigro N.V. Relevant skills and experience Dick is a highly regarded, recently retired chief executive, who has a deep understanding of brands and consumers, and extensive knowledge of the US and European markets, from his time leading one of the world’s largest food retail groups. He brings a career’s worth of experience at the forefront of retailing and customer service, which extended in more recent years to e-commerce and the digital arena. This experience is most timely as Shell focuses on the growth of our marketing businesses and increasing consumer choices in energy products. Dick is a balanced leader with sound business judgement and a proven track record in strategic delivery, evidenced by the combination of Ahold and Delhaize. He also has a passion for sustainability and is well aware of the importance of the various stakeholder interests in this area. DICK BOER Independent Non-executive Director Tenure One year and nine months (appointed May 20, 2020) Board committee membership Member of the Audit Committee and member of the Nomination and Succession Committee Outside interests/commitments Non-executive Director of Nestlé and SHV Holdings; Chair of the Advisory Board for G-Star RAW; Chair of the Supervisory Board of Royal Concertgebouw; Chair of Rijksmuseum Fonds Age 64 Nationality Dutch Career Neil is a former FTSE 100 chief executive. After completing an engineering degree, Neil joined Johnson Matthey in 1980 where he held several senior management positions in the UK and the USA, before being appointed Chief Executive Officer in 2004. Since retiring from Johnson Matthey in 2014, Neil has focused his time on his non-executive roles. He was Chair of TT Electronics plc from 2015 until May 6, 2020. Relevant skills and experience Neil is highly experienced, has a broad industrial outlook and a highly commercial approach with a practical perspective on businesses. He brings a track record of strong operational exposure, familiarity with capital-intensive business and a first-class international perspective on driving value in complex environments. Neil was awarded an OBE for services to the chemical industry in 2016. Neil uses his current and past experience in non-executive positions to bring fresh insight and industry understanding to Board discussions. He has also provided valuable insight based on his former executive position and operational experience. Neil was appointed Chair of the Remuneration Committee on May 20, 2020. NEIL CARSON OBE Independent Non-executive Director Tenure Two years and nine months (appointed June 1, 2019) Board committee membership Chair of the Remuneration Committee and member of the Safety, Environment and Sustainability Committee Outside interests/commitments Non-executive Chair of Oxford Instruments plc Age 64 Nationality British G overnance
124 Shell Annual Report and Accounts 2021 Career Ann started her career with Sun Life of Canada in 1976 in Montreal, Canada. She joined M&G Group in 1981, where she served as Senior Vice President and Controller for both life and health, and property and casualty businesses throughout North America. She joined Swiss Re in 1996, after it acquired the M&G Group, and served as Chief Financial Officer from 2003 to 2007. From 2008 to 2009, she was interim Chief Financial Officer and an Executive Director of Northern Rock bank in the initial period following its nationalisation. Ann has also held several non-executive director positions at Prudential plc, British American Tobacco plc, UBS AG, and UBS Group AG. Ann served as a non-executive director of Rio Tinto plc and Rio Tinto Limited until May 2019, and she was also Senior Independent Director of Rio Tinto plc. In January 2021, Ann joined the Board of the newly formed Stellantis NV, and she chairs its Audit Committee. Relevant skills and experience Ann is a former CFO, a Fellow of the Institute of Chartered Professional Accountants, and has more than 25 years of experience in the financial services sector. She has worked her entire career in international business and has lived in or served on boards in nine countries. Ann makes significant contributions and adds exceptional value by bringing both her extensive experience and a global perspective to Board discussions. Ann’s long and varied international business career powered by her financial acumen is reflected in the insights and constructive challenges she brings to the boardroom. As Audit Committee Chair, Ann leverages her background to ensure robust discussions are consistently held as the Audit Committee delivers its remit. Career Jane was President and Chief Executive Officer of the North American operations of SICPA security inks from 2017 to 2021, when she assumed the role of Non-executive strategic director. From 2018 to 2021, Jane was a Non-executive Director of Atlas Air Worldwide Holdings Inc. In 2013 Jane established and led the Council on CyberSecurity, an independent, expert not-for-profit organisation with a global scope, committed to the security of an open internet. From 2015 to 2016 Jane held the role of Chief Executive Officer of the Center for Internet Security, an independent not-for-profit organisation that works to improve cyber security worldwide. Before this, from 2009 to 2013 Jane served as Deputy Secretary of the US Department of Homeland Security, functioning as the Chief Operating Officer for the third-largest US Federal department. From 2003 to 2009 she held various roles at the United Nations, including Acting Under-Secretary and Assistant Secretary-General for Peacekeeping, Field Support and Peacebuilding. She also served as Executive Vice President and Chief Operating Officer of the United Nations Foundation and Better World Fund. In recent years, Jane has returned to working with the United Nations, serving as a Special Adviser to the Secretary-General. Jane started her career in the US Army in 1978, serving in Berlin during the Cold War, on the US Central Command Staff during Operation Desert Storm, and on the National Security Council Staff under Presidents George H.W. Bush and William J. Clinton. After retiring from the Army in 1994, she joined the Carnegie Corporation as an Executive Director of its Commission on Preventing Deadly Conflict. Relevant skills and experience Jane is a proven and effective leader, who has held significant leadership roles in public service, the military and the private sector. She brings a wealth of expertise in matters of public policy, cyber security and risk management to our Board. She has also made significant contributions to strategic discussions and overseeing the day-to-day business and management of a significant public security department. Jane is an experienced board director, having served on the boards of large-market-capitalisation companies since 2016. These appointments have provided her with wide experience and given her business perspectives across different sectors and geographical regions. She has also served on various committees including those which focus on audit, environmental and sustainability, nomination and governance issues. JANE HOLL LUTE Independent Non-executive Director ANN GODBEHERE Independent Non-executive Director Tenure Nine months (appointed May 19, 2021) Board committee membership Member of the Audit Committee On March 9, 2022, the Board announced that Jane would step down from her role on the Audit Committee and had been appointed a member of the Safety, Environment and Sustainability Committee, with effect from the conclusion of the 2022 Annual General Meeting (AGM). Outside interests/commitments Non-executive Director of Marsh and McLennen and the Union Pacific Corporation Tenure Three years and nine months (appointed May 23, 2018) Board committee membership Chair of the Audit Committee and member of the Nomination and Succession Committee Outside interests/commitments Non-executive Director and audit committee chair of Stellantis N.V., Fellow of the Institute of Chartered Professional Accountants and a Fellow of the Certified General Accountants Association of Canada. Age 65 Nationality US citizen Age 66 Nationality Canadian and British THE BOARD OF SHELL PLC continued Governance
125Shell Annual Report and Accounts 2021 Career Catherine was Executive Vice President International at Nexen Inc. from January 2012 until her retirement in April 2013, where she was responsible for all oil and gas activities including exploration, production, development and project activities outside Canada. She joined Nexen in 2009 as Vice President Operational Services, Technology and Human Resources. Prior to joining Nexen Inc., she was Vice President Oil Sands at Husky Oil from 2007 to 2009 and Vice President Exploration & Production Services, from 2005 to 2007. She started her career with Schlumberger in 1986 and held key positions in various countries, including France, Italy, Nigeria, the UK and the USA, and was President of Schlumberger Canada Ltd for five years. Catherine has also held several non-executive director positions at SNC-Lavalin Group Inc, Statoil ASA and Precision Drilling Inc. Relevant skills and experience Catherine contributes through her knowledge of industry and the ease with which she engages with other Directors and managers in the boardroom. With over 30 years of oil and gas sector experience, she brings a geopolitical outlook and deep understanding of the industry. An engineer by training, she has also spent a significant part of her career working in senior human resources roles. The Board highly regards her perspectives on our industry and our most important asset, our people. Catherine has a strong track record of executing operational discipline with a focus on performance metrics and a continual drive for excellence. Her knowledge of the technology underpinning oil and gas operations, logistics, procurement and supply chains benefits the Board greatly as it considers various projects and investment or divestment proposals. She also uses her industry knowledge – combined with her commitment to the highest standards of corporate governance and safety, ethics and compliance – in her role as Chair of our Safety, Environment and Sustainability Committee, while using her human resources experience in her membership of the Remuneration Committee. CATHERINE J. HUGHES Independent Non-executive Director Tenure Four years and nine months (appointed June 1, 2017) Board committee membership Chair of the Safety, Environment and Sustainability Committee and member of the Remuneration Committee Outside interests/commitments – Age 59 Nationality Canadian and French Career Martina was Chief Financial Officer of Mastercard Inc. from 2007 to 2019. From 2002 to 2007 she was Senior Vice President, Corporate Treasurer at Tyco International Ltd. and from 2000 to 2002 she was Senior Vice President, Treasurer at Lucent Technologies. Prior to this, Martina spent 12 years with General Motors, undertaking a number of senior roles within their finance operations. Relevant skills and experience Originally from Germany, Martina has spent 30 years in the USA and is an experienced global executive. Her financial and operational leadership of technology-focused companies is extremely relevant as Shell explores new technology-enabled business models. Martina also brings diverse sector experience to the Board, most recently from operating at a large global organisation in the highly regulated finance industry. Martina is known for her straightforward and direct approach. She maintains the highest standards of leadership, strategic thinking and financial stewardship. She also has a strong track record as a mentor and in promoting diversity. Martina’s deep financial knowledge and unique perspective also enable her to make robust, demanding and constructive challenges to our investment considerations to help ensure that our projects are aligned with our strategic intent. MARTINA HUND-MEJEAN Independent Non-executive Director Tenure One year and nine months (appointed May 20, 2020) Board committee membership Member of the Audit Committee Outside interests/commitments Non-executive Director of Prudential Financial Inc., Colgate-Palmolive Company, and Truata Ltd. Age 61 Nationality German and US citizen G overnance
126 Shell Annual Report and Accounts 2021 Career Gerrit was an adviser to PricewaterhouseCoopers during 2007, Chair of the Trustees of the International Accounting Standards Board from 2007 to 2010, and an adviser to Permira from 2007 to 2008. He was Chief Economist of DSB Bank from July 2007 to January 2008, Chief Financial Officer from January 2008 to December 2008, and Chair of the Managing Board of ABN AMRO Bank N.V. from 2010 to 2016. He was Minister of Finance of the Netherlands, twice, from 1994 to 2002 and from 2003 to 2007. In between, he was Chair of the parliamentary party of the VVD. Prior to 1994, he was head of the Netherlands Bureau for Economic Policy Analysis, a professor at Vrije Universiteit Amsterdam, and held various positions at the Ministry of Finance and the Ministry of Economic Affairs. He studied general economics at Vrije Universiteit Amsterdam, from where he also received an honorary doctorate in economics. Relevant skills and experience An economist by background, Gerrit’s distinguished 12-year service as the Minister of Finance of the Netherlands, and his experience gained from his time with ABN AMRO Bank, bring a deep and valuable understanding of Dutch politics and financial markets to the Board. His international financial management expertise and strategic development experience also benefit the Audit Committee. A highly regarded and seasoned leader in both the public and private spheres, his significant experience in analysing financial commitments from a wider public stakeholder and a global business standpoint serves the Board well, particularly when considering investment proposals. Gerrit consistently and concisely articulates the logic and reasoning behind his views, which he regularly and directly provides to the benefit of the Board and management. His questions often trigger other analytical questions from fellow Directors, deepening and widening Board discussions. Career Bram has been a member of the group Board of Volkswagen AG, responsible for the Premium Car Group, CEO of Audi AG, Chair of Lamborghini and Ducati, responsible for the VW group Commercial Operations and Vice-Chair of Porsche Holding Salzburg. From 2011 to 2016 he was a Member of the Board of Volkswagen CV, Executive Vice President responsible for Global Marketing, Sales & Services, New Business Models. In 2017 he became a member of the Board of Audi AG. From 2006 to 2011 Bram was President & CEO of Daimler/Mercedes-Benz Italia & Holding S.p.A. From 2003 to 2006 he was President & CEO of DaimlerChrysler in the Netherlands. Prior to this, Bram held a number of Director and senior leadership roles within Mercedes-Benz in the Netherlands, having joined the business in 1987 on an executive management programme. Relevant skills and experience Bram has over 30 years’ experience working in the automotive industry at all levels of the business. He gained a wealth of knowledge on far-reaching cost optimisation programmes at Audi AG. These helped transform the car company into a provider of electric vehicles that could offer sustainable mobility and succeed in the energy transition. He is well placed to leverage this knowledge in the Shell boardroom as Shell navigates its own transformation and pathway through the energy transition. Bram has strong principles and regards integrity and compliance as the basis for doing business. His studies have encompassed innovation and organisational effectiveness, geopolitical environments, shareholder value, corporate social responsibility and risk management, in several countries, which are all highly valued management tools and are evident in the questions he raises in the boardroom. ABRAHAM SCHOT Independent Non-executive Director GERRIT ZALM Independent Non-executive Director Tenure One year and five months (appointed October 1, 2020) Board committee membership Member of the Safety, Environment and Sustainability Committee On March 9, 2022, the Board announced that Bram would be appointed a member of the Remuneration Committee, with effect from the conclusion of the 2022 Annual General Meeting (AGM). Outside interests/commitments The Board of Signify N.V. has proposed to its shareholders that Bram join its supervisory board. Signify shareholders are scheduled to vote on this proposal at its AGM scheduled to be held on May 17, 2022. Tenure Nine years and two months (appointed January 1, 2013) On March 9, 2022, the Board announced that Gerrit Zalm would not be seeking re-election at the 2022 AGM and would be stepping down from the Board of Shell plc. Board committee membership Member of the Audit Committee and member of the Remuneration Committee Outside interests/commitments Director of Moody’s Corporation Inc. and Danske Bank A/S Age 60 Nationality Dutch Age 69 Nationality Dutch THE BOARD OF SHELL PLC continued Governance
127Shell Annual Report and Accounts 2021 Career Linda was General Counsel of the Upstream Americas business and Head of Legal US, based in the USA, from 2014 to 2016. Previously, she was Group Chief Ethics and Compliance Officer, based in the Netherlands, from 2011 to 2014. Since joining Shell in 1995, she has also held a variety of legal positions in the Shell Oil Company in the USA, including Chemicals Legal Managing Counsel and other senior roles in employment, litigation, and commercial practice. Relevant skills and experience Linda is our Company Secretary and plays an important role as Shell’s General Counsel Corporate, overseeing corporate legal teams in Canada, the Netherlands, the UK and the USA. The various legal roles Linda has undertaken at our headquarters, and in supporting both the Upstream and Downstream businesses, have provided her with a strong understanding of our global operations and people. Her experience of engaging with the Board in previous roles, coupled with her broad understanding and engagement across Shell’s businesses and functions, helps to ensure that the right matters come to the Board at the right time. LINDA M. COULTER Company Secretary Tenure Five years and two months (appointed January 1, 2017) Age 54 Nationality US citizen RETIREMENTS IN 2021 CHARLES O. HOLLIDAY Retired: May 18, 2021. In line with best practice, Chad chose not to seek re-election at the 2021 AGM after 10 years of service, including six years as Chair of the Board. SIR NIGEL SHEINWALD Retired: May 18, 2021. In line with best practice, Sir Nigel chose not to seek re-election at the 2021 AGM following completion of his third three-year term and retired from the Board. G overnance
128 Shell Annual Report and Accounts 2021 DIRECTOR INDEPENDENCE All the Non-executive Directors are considered by the Board to be independent in character and judgement. The Chair is not subject to the Code’s independence test other than on appointment. ETHNIC DIVERSITY The Board is satisfied that it currently meets the recommendation from the Parker Review. Non-executive Director tenure (years)Gender diversity Non-executive Director sector experience Director nationality BOARD DIVERSITY ATTENDANCE The Board met 12 times during 2021. One meeting was held physically in The Hague, the Netherlands and one meeting was held in London, United Kingdom. The remainder were held via videoconference in the context of COVID-19 circumstances. Attendance during 2021 for all Board meetings is given in the table below [A]. [A] For attendance at Committee meetings during the year, please refer to individual Committee Reports. [B] Charles O. Holliday retired from the Board following the AGM in May 2021. [C] Jane Holl Lute joined the Board in May 2021. [D] Sir Nigel Sheinwald retired from the Board following the AGM in May 2021. [E] Jessica Uhl was unable to join an ad hoc Board meeting connected to the Simplification due to a family medical emergency. Board member Meetings attended Ben van Beurden 12/12 Dick Boer 12/12 Neil Carson 12/12 Ann Godbehere 12/12 Euleen Goh 12/12 Charles O. Holliday [B] 3/3 Jane Holl Lute [C] 9/9 Catherine J. Hughes 12/12 Martina Hund-Mejean 12/12 Sir Andrew Mackenzie 12/12 Bram Schot 12/12 Sir Nigel Sheinwald [D] 3/3 Jessica Uhl [E] 11/12 Gerrit Zalm 12/12 THE BOARD OF SHELL PLC continued Male Female 50% 50% Accounting and Finance Oil & gas, Extractives, Energy Strategy development Engineering, Industrial Consumer, Marketing Regulatory, Government affairs, Public policy 82% 73% 55% 91% 91% 55% German Dutch American Canadian Singaporean British 8% 8% 17% 17% 33% 17% 0-3 4-6 7-9 20% 20% 60% Governance
129Shell Annual Report and Accounts 2021 SENIOR MANAGEMENT The Senior Management of the Company comprises the Executive Directors, Ben van Beurden and Jessica Uhl, and those listed below. All are members of the Executive Committee (see “Governance Framework” on page 122). HARRY BREKELMANS Projects & Technology Director RONAN CASSIDY Chief Human Resources and Corporate Officer ED DANIELS Strategy, Sustainability and Corporate Relations Director DONNY CHING Legal Director Tenure Seven years and five months (appointed October 2014) Tenure Six years and two months (appointed January 2016) Tenure One month (appointed February 2022) Tenure Eight years and one month (appointed February 2014) Age 56 Nationality Dutch Age 55 Age 56 Nationality British Nationality British Age 57 Nationality Malaysian Career Harry was previously Executive Vice President Upstream International Operated, based in the Netherlands. He joined Shell in 1990 and has held various management positions in Exploration and Production, Internal Audit, and Group Strategy and Planning. From 2011 to 2013, he was Country Chair Russia and Executive Vice President for Russia and the Caspian region. In November 2021, Harry played a key role in the partnership of Shell with energy technology firm Baker Hughes Co., in an effort to help the partnership achieve their targets of net-zero carbon emissions. Career Ronan previously served as EVP HR for both the Downstream and Upstream International businesses in turn. He joined Shell in 1988 and has held various HR positions across the Shell value chain, including regional roles in Europe and NE Asia/China, and global roles in HR Strategy & Regional Coordination, Retail and LPG. Career Ed was previously Executive Vice President Strategy, Portfolio & Sustainability. He joined Shell in 1988 and has held roles in Shell’s Upstream, Integrated Gas, and Downstream businesses and our Projects & Technology organisation. He previously served as Shell’s UK Country Chair. Career Donny was previously General Counsel for Projects & Technology, based in the Netherlands. He joined Shell in 1988 based in Australia and then moved to Hong Kong and later to London. In 2008, he was appointed Head of Legal at Shell Singapore, having served as Associate General Counsel for Gas & Power in Asia-Pacific. G overnance
130 Shell Annual Report and Accounts 2021 HUIBERT VIGEVENO Downstream Director ZOË YUJNOVICH Upstream Director Tenure Two years and two months (appointed January 2020) Tenure Five months (appointed October 2021) Age 52 Nationality Dutch Age 46 Nationality Australian Career Huibert was previously Executive Vice President Global Commercial. He joined Shell in 1995 as a business analyst and led many Downstream businesses across Shell in Europe, Africa, North and South America as well as Asia. In 2009, Huibert was appointed Vice President Supply & Distribution, Europe and Africa. In 2012 he became Executive Chair of Shell in China, and in 2016 led the integration of BG Group. Career On October 25, 2021, Zoë succeeded Wael Sawan as Upstream Director and was appointed to the Executive Committee. Zoë has held various management positions in Downstream, Integrated Gas and Upstream. Most recently, she served as Executive Vice President Conventional Oil & Gas and was previously Chair and Executive Vice President Shell Australia Pty Ltd. She joined Shell from Rio Tinto in 2014 to lead the company’s Oil Sands business in Canada. 2021 LEAVERS MAARTEN WETSELAAR Integrated Gas, Renewables and Energy Solutions Director until October 2021 (appointed January 2016). WAEL SAWAN Integrated Gas, Renewables and Energy Solutions Director Tenure Two years and eight months (appointed July 2019) Age 47 Nationality Lebanese and Canadian Career On October 25, 2021, Wael succeeded Maarten Wetselaar as Integrated Gas, Renewables and Energy Solutions Director. Wael was previously the Upstream Director and a member of the Executive Committee. Before that, he was Executive Vice President Deep Water and a member of the Upstream Leadership Team. He joined Shell in 1997 and worked in a variety of roles in each of Shell’s core business units: Upstream, Integrated Gas and Downstream. SENIOR MANAGEMENT continued Governance
131Shell Annual Report and Accounts 2021 and Chemicals Park Rotterdam underline the importance of the Netherlands to Shell’s energy transition activities. So too does the fact that we are working towards final investment decisions on plans to build Europe’s biggest electrolyser in Rotterdam and to participate in the Porthos carbon capture and storage project. The last two years have been transformative – not just in the macroeconomic uncertainty around prices and demand for oil and gas products, but also in the ongoing impact on our ways of working, our people, our customers and their families. Throughout 2021, society continued to cope and live with COVID-19, with governments loosening and tightening restrictions based on local conditions. As vaccinations increased, workers in some regions started returning to offices. Various travel restrictions were lifted. But many of Shell’s office-based employees continued to work from home in 2021 and into 2022. Although our offices in some regions are returning to a new normal, many of our office-based staff have not worked together physically for almost two years. Health measures implemented at our sites have led to changes such as differing shift patterns and self-isolation. This can impact the time people are away from their families. Yet in this challenging environment, our people drove proposals to final investment decision across the business and safely delivered significant projects, such as the sale of our Permian assets, the divestment of the Deer Park refinery in Texas, USA, and Company simplification to name but a few. As Chad said last year, the list of what our people do, and continue to do, for Shell and for each other is extensive and in many instances humbling. The Board and I thank them for their continued commitment, perseverance and personal sacrifices. We are equally aware of the scale of the complex climate challenges confronting Shell and society. The answer, though, is not as simple as stopping the extraction of oil and gas and wholly shifting capital investment into other areas. The cash generated by Shell’s oil and gas operations provides returns to our investors, who can be global pension funds, governments, insurance companies and investment products through which the general public invest. Crucially, the cash flows from oil and gas also help fund Shell’s investments in lower-carbon energy businesses. These help Shell, our customers and entire sectors to cut emissions and accelerate the energy transition. The goal is a low-carbon world, not a single lower-carbon company. Achieving a low-carbon world requires governments, companies and society to work together to deliver change – to help people make the right choices, in a way that is affordable and inclusive. We believe that our Powering Progress strategy enables this. We think it allows Shell to successfully navigate the energy transition in step with society. We believe that the commitments Shell has made within its shareholder-approved energy transition strategy to drive this collective goal are market leading amongst the companies in our sector. I feel very honoured to have been appointed Chair at our 2021 AGM, particularly at such a pivotal time for Shell, the industry and wider society. It is also a great honour to succeed Chad Holliday, whose chairmanship I have much admired and who I know is warmly remembered not only for the Shell achievements he oversaw but also for his integrity and leadership. Before being appointed Chair, I was delighted to participate as a Non-executive Director in the shaping of the compelling Powering Progress strategy that Shell unveiled in February 2021. I believe Shell has an exceptional portfolio of future-facing assets and, working with Ben van Beurden and the Board, we will profitably accelerate Shell’s transition to a net-zero emissions energy business that continues to generate substantial value for shareholders, customers and communities alike. The recent simplification of Shell supports this value generation. The Board thanks our shareholders for the overwhelming support shown at the General Meeting in December 2021. This ultimately allowed us to establish a single line of shares to eliminate the complexity of Shell’s A/B share structure and to align Shell’s tax residence with its country of incorporation in the UK. On December 20, 2021, the Board formally approved the simplification, and on December 31, the Board approved the key steps required to move the Company’s tax residence to the UK. The Company’s name was changed on January 21, 2022, and the Company’s shares were assimilated into a single line of shares on January 29, 2022, completing the simplification. Shell is proud of its Anglo-Dutch heritage and will continue to be a significant employer with a major presence in the Netherlands. The Group’s Projects & Technology division, its global Upstream and Integrated Gas businesses and its renewable energies hub remain in The Hague. Shell’s growing presence in offshore wind and the recent decision to build a world-scale low-carbon biofuels plant at the Energy INTRODUCTION FROM THE CHAIR Sir Andrew Mackenzie Chair G overnance
132 Shell Annual Report and Accounts 2021 ENERGY TRANSITION STRATEGY In February 2021, Shell announced its intention to put its energy transition strategy to shareholders for an advisory vote every three years, with the first vote being at the 2021 AGM. This was an important step for Shell and the first time that an energy company asked shareholders to vote on its energy transition strategy. Shareholders endorsed the energy transition strategy, with 88.74% voting in favour of this resolution. The Board thanks our shareholders for their support. At the 2022 AGM, scheduled for May 24, 2022, shareholders will be asked to vote on our progress in respect of our energy transition. Shareholder support is important as our business changes and we work towards our target to become a net-zero emissions energy business by 2050, in step with society. BOARD LEADERSHIP AND SHELL’S PURPOSE The UK Corporate Governance Code (the “Code”) provides that the Board should promote the long-term sustainable success of Shell, generating value for shareholders and contributing to wider society. The Board believes that Shell’s efforts give it an effective framework to play its part in the energy transition as a growing, successful, commercial organisation. In the Board’s view, this framework will allow Shell to provide the energy solutions that consumers will want and buy in this period of uncertain change. The Board also thinks that Shell will be able to deliver against its recently published targets and reduce the carbon intensity of the energy products it sells. The purpose of Shell is set out in the early pages of this Annual Report. We will continue with the theme of communicating purpose throughout this Governance report. We will focus on how Shell’s governance operates in practice, and why we believe this is the best approach for us. The Governance report is structured around the key themes of the Code. Our narrative seeks to explain how governance supports and protects Shell and our stakeholders. Although Shell applies the principles and the spirit of the Code, there are instances where we adopt an approach slightly different from that suggested by some of the Code’s provisions. We explain these on page 134. In these instances, our governance processes are considered appropriate, given the specific circumstances and range of factors particular to Shell, such as its global nature, size, complexity and history. More detail on Shell’s compliance with the Code can be found on page 134. Last year, Chad highlighted the importance of our stakeholders and the greater level of external focus on these groups. We also expressed our enthusiasm for building on our engagement with our stakeholder groups in 2021. The use of technology to facilitate virtual engagements proved valuable, and continues to improve. But sadly the continued restrictions on social interaction and travel, combined with other notable projects needing the Board’s attention, meant that we did not make as much progress on this ambition as we had hoped. As a result, this is a focus area for 2022, as outlined in the outcomes of the Board evaluation on page 139. Information on how the Board discharges its duty in relation to key stakeholder interests, including those of our workforce, and an explanation of how it considered these when making principal decisions are set out on page 16. On page 137 we provide information about our Board activities and highlight which stakeholders we considered. Our workforce engagement methods remain unchanged from those previously disclosed. As we continue to implement the proposals from our Reshape reorganisation, we anticipate an enhanced level of workforce engagement, within the parameters of COVID-19 restrictions. We continue to believe that constructive relationships built on mutual respect and transparency help Shell attract and retain employees while supporting greater productivity and operational safety and efficiency. Ensuring that the employee voice is heard on relevant matters in the boardroom in practical ways is key to understanding the broader impact of business decisions, including with respect to organisational culture. The Board recognises the importance of culture and its link to delivering Shell’s purpose and strategy. Given our culture’s importance, it requires long-term commitment. The Board believes that our people and safety culture is strong, and takes pride in having such a culture. Shell’s culture reflects the values of the organisation – honesty, integrity and respect for people. These underpin all the work we do and are embedded in our strategy and purpose. The Board continues to increase its focus on Shell’s culture and in 2021 the Nomination and Succession Committee initiated an in-depth examination of Diversity, Equity & Inclusion (see page 147). DIVISION OF RESPONSIBILITIES More information on how the Board and its Committees support business operations is provided on page 135. Further detail is contained within the Terms of Reference for each Committee, which are provided on our website. Each year the Board committees’ Terms of Reference are reviewed and updated, as required. Maintaining independent judgement on the Board is a fundamental governance principle and one the Board supports. The Code provides circumstances that it considers are likely to impair, or could appear to impair, a Non-executive Director’s independence. One of these is tenure. On page 134 we note that for part of 2021 our previous Chair, Chad Holliday, exceeded the recommended term outlined in the Code. When this new provision was introduced, we provided a clear explanation to shareholders that we believed it was right for the Company to exceed this term in order to ensure smooth Board succession. The Board also disclosed when it expected Chad’s tenure to end. Director and Chair succession has been facilitated in line with the timeline that was communicated to shareholders. COMPOSITION, SUCCESSION AND EVALUATION For biographies of current Board members see pages 121-128. For how the Board, Committees and Directors appraised their performance see pages 137-140. At the 2021 AGM, shareholders appointed Jane Holl Lute as a Non- executive Director to the Board. After joining the Board, Jane was appointed to the Audit Committee. An overview of Jane’s induction programme can be found on page 149. Committee membership has been further reviewed during the year. The 2021 AGM was also Chad Holliday’s last day with Shell, after six years’ service as Chair and since joining the Board in September 2010. He left a distinguished legacy of strong, inclusive leadership, and the Board is deeply grateful for his tireless and dedicated commitment to Shell and its people over the years. An overview of the Chair succession process was provided in the 2020 Annual Report and a summary is included on page 150. INTRODUCTION FROM THE CHAIR continued Governance
133Shell Annual Report and Accounts 2021 As announced on March 1, 2022, Jessica Uhl will step down as Chief Financial Officer of Shell plc, effective March 31, 2022. Sinead Gorman is to be appointed Chief Financial Officer of Shell plc, effective April 1, 2022. The Board is immensely grateful to Jessica for her tremendous contribution to the company over many years, but particularly as CFO and especially during the past two years as we successfully tackled the many challenges presented by the pandemic. She has been instrumental in strengthening Shell’s financial position, putting in place measures to secure the company’s long-term health while delivering industry leading cash flows year on year. Jessica has been an exemplary ambassador for Shell and the company’s strength today is testament to her professionalism, resolve and values-driven leadership. AUDIT, RISK MANAGEMENT AND INTERNAL CONTROL The Audit Committee assists the Board in maintaining a sound system of risk management and internal control and oversight over Shell’s financial reporting. A variety of standing matters and more specific topics are discussed by the Audit Committee throughout the year. As part of the year-end reporting process, the Audit Committee advises the Board on the adequacy of the system of risk management and internal control, the appropriateness of the viability statement and going concern basis of accounting. The Audit Committee also advises on whether this Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for stakeholders to assess Shell’s position and performance, business model and strategy. More information on the Audit Committee’s activities, highlights and priorities can be found in its report on page 153. LOOKING AHEAD As we shared last year, Shell is at a point where it must transform itself. The steps of this transformation, will be intensely scrutinised by society and the environment in which we operate will continue to change rapidly. Not all of our stakeholders will be fully supportive of the decisions that we take, yet we must frame and implement our strategy with courage and commitment and a focus on the long-term success of the Company. This we will do with the humility to listen, learn and adapt. Shell’s Board and leadership must be steadfast, agile and sensitive to the opportunities, risks and rewards confronting the business. I, my fellow Directors on the Board, and our colleagues across the business, remain confident that Shell is up to the task. SIR ANDREW MACKENZIE Chair March 9, 2022 G overnance
134 Shell Annual Report and Accounts 2021 STATEMENT OF COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE The Board confirms that, throughout the year, the Company has applied the principles, both in spirit and in form, and complied with the provisions set out in the UK Corporate Governance Code issued by the Financial Reporting Council (FRC) in July 2018 (the “Code”), with the exception of provisions 5 and 19 noted below. A copy of the Code can be found on the FRC’s website: www.frc.org.uk. Shell’s governance arrangements have been considered alongside the Code. The information set out in the Directors’ report, including the Board committee reports on (pages 147 to 170) is intended to provide an explanation of how the Code’s principles were applied practically throughout the year. We also provided clear and meaningful explanation below where we believe stakeholders may benefit from more specific information on a particular Code provision 4. CHAIR TENURE (PROVISION 19) Charles O. Holliday (Chad) was appointed as Chair in 2015, after four and a half years as a Non-executive Director. In September 2019 he reached a tenure of nine years. Chad stood down from the Board at the 2021 AGM. The 2018 UK Corporate Governance Code introduced a new requirement that the Chair not remain in post beyond nine years of the date of their first appointment. As a result, for part of the year in review (from January 1 to May 18, 2021), Shell did not comply with this provision. But the Code also notes that to facilitate effective succession planning and development of a diverse Board this period can be extended, particularly where the Chair was an existing non-executive Director on appointment. Within the 2019 Annual Report we provided a thorough explanation of why Chad was to remain on the Board for longer than nine years as we transitioned to the (then) new Code requirement. We also said when his tenure would end. An explanation also featured on page 126 of the 2020 Annual Report. Following the 2021 AGM, Chad was succeeded by Sir Andrew Mackenzie, in line with the timeline Shell disclosed in 2020 (within the 2019 Annual report). WORKFORCE ENGAGEMENT (PROVISION 5) The size and diversity of our employee base and wider workforce have complicated the feasibility of implementing any of the three specific workforce engagement methods recommended in the Code. The Board believes that its current approach to workforce engagement continues to be pragmatic and effective, particularly when considered against the required coverage needed for a global organisation such as Shell. Elsewhere in this Annual Report, we explain how our people are essential to the successful delivery of the Shell strategy, and how the Board recognises the importance of understanding their views through engagement. In previous Annual Reports, we communicated the Board’s desire and intention to increase its direct engagements, when the Board, committees and individual Directors visit our sites across the world. The ongoing travel restrictions associated with the COVID-19 pandemic again limited our ability to do this in 2021. While some engagements could not be held physically, many were held virtually, and there were opportunities for the Board to speak with our stakeholders and obtain feedback. The Board also intends to keep the effectiveness of the engagements under review. Stakeholder engagement also continues to be enhanced in management reporting. More information on the current approach and a description of the channels used by the Board, its committees, and the Executive Committee are outlined in “Workforce engagement” on pages 145 to 146. AGM VOTING (PROVISION 4) At the 2021 AGM more than 20% of shareholders supported a resolution which the Board had recommended voting against. Provision 4 of the UK Governance Code requires certain actions to be undertaken if more than 20% of shareholders vote in a way which is different to what the Board recommended. There are three stages to these actions. First, explain when announcing the voting results what actions the company intends to take to consult shareholders to understand the reasons behind the voting result. Shell included this explanation with its voting results, published on May 18, 2021. Second, an update on the engagement with shareholders should be published no later than six months after the shareholder meeting. This statement was added to the Shell website in November 2021. Third, a final summary of the engagement and the actions taken should be included within the Annual Report. This information is provided on page 141. CORPORATE GOVERNANCE REQUIREMENTS OUTSIDE THE UK In addition to complying with applicable corporate governance requirements in the UK, the Company complies with the rules of Euronext Amsterdam as well as Dutch securities laws because of its listing on that exchange. The Company likewise adheres to US securities laws and the New York Stock Exchange (NYSE) rules and regulations because its securities are registered in the USA and listed on the NYSE. Governance
135Shell Annual Report and Accounts 2021 BOARD OF DIRECTORS Audit Committee ■ Carries out certain oversight functions on behalf of the Board; and ■ Assists the Board in fulfilling its responsibilities in relation to internal control and financial reporting. Nomination and Succession Committee ■ Leads the process for appointments to the Board; ■ Recommends Board appointments and re-appointments; ■ Reviews and makes recommendations on succession planning; and ■ Reviews and makes recommendations on corporate governance guidelines. Safety, Environment and Sustainability Committee ■ Carries out certain oversight functions on behalf of the Board; and ■ Advises the Board on safety, the environment including climate change, and Shell’s overall sustainability performance. Remuneration Committee ■ Determines and agrees with the Board the remuneration policy for the Chair, Executive Directors and Senior Management of the Company; ■ Within the terms of such agreed policy, determines individual remuneration packages for the Chair, and Executive Directors; and ■ Monitors and makes recommendations regarding the structures and levels of remuneration structures and levels for other senior executives, if appropriate. GOVERNANCE FRAMEWORK More information on the composition of each of the Board Committees, their roles and activities during the year is provided on the following pages: Audit Committee 153-165 Safety, Environment and Sustainability Committee 151-152 Nomination and Succession Committee 147-150 Remuneration Committee 166-170 Other ad-hoc Committees The Nigeria Special Litigation Committee is an ad-hoc Committee which was formed to monitor the status of the OPL-245 litigation and investigations. Its members are Euleen Goh (Chair), Sir Andrew Mackenzie and Ann Godbehere. The Company has a single-tier Board of Directors headed by a Chair, with executive management led by the Chief Executive Officer. The names of the Directors that held office during the year can be found on pages 121-128. Information on the Directors who are seeking appointment or reappointment is included in the Notice of Annual General Meeting. There is no fixed amount of times that the Board may meet in one year. During 2020, the Board met 12 times. During 2021, the Board also met 12 times and, as detailed throughout our Strategic Report, including the Section 172 statement and activities undertaken throughout the year, worked hard to promote the long-term sustainable success of the Company, generating value for shareholders and contributing to wider society. Further information on the Board’s work and assessments in relation to strategy, culture, engagement with stakeholders and its workforce can be found as follows: The Board’s responsibilities are governed by a formal schedule of matters reserved to it and include: ■ Approval of overall strategy and oversight of management; ■ Changes to the corporate and capital structure; ■ Approval of financial reporting and controls (including approval of the Annual Report and Accounts, approval of the Annual Report on Form 20-F, and interim dividends); ■ Oversight of risk management and internal control; ■ Approval of significant contracts; ■ Determining succession planning and new Board appointments; ■ Remuneration for the Chair and Executive Directors; and ■ Corporate governance matters. Board Committees G overnance
136 Shell Annual Report and Accounts 2021 Division of responsibilities The roles of the Chair, a non-executive role, and the CEO are separate and clearly defined. The Board has agreed on their respective responsibilities and set these out in writing. These are available on request from the Company Secretary. Chair ■ Responsible for ensuring that the Board and its Committees function effectively. One way in which this is achieved is by ensuring Directors receive accurate, timely and clear information; and ■ Responsible for making sure that there is an adequate induction and training programme followed by all Directors (see page 149 below), with assistance from the Company Secretary. Deputy Chair/Senior Independent Director ■ Sounding board for the Chair; ■ Serves as an intermediary for the other Directors and shareholders; and ■ Leads the annual appraisal of the Chair’s performance. Non-executive Directors ■ Appointed by the Board or by shareholders at general meetings and, in accordance with the Code, seek re-election by shareholders on an annual basis; ■ Letters of appointment refer to a specific term of office, the provisions of the Code and the Company’s Articles of Association; ■ Upon appointment, Non-executive Directors confirm they are able to allocate sufficient time to meet the expectations of the role. Appointments are subject to a minimum of three months’ notice of termination, and there is no compensation provision for early termination; ■ The Non-executive Directors bring a wide range and balance of skills and international business experience. Through their contribution to the Board and Board Committee meetings, respectively, they are expected to challenge and help develop proposals on strategy and bring independent judgement on issues of performance and risk; and ■ At every Board meeting, time is set aside for the Chair and Non-executive Directors to meet without the Executive Directors being present. The Non-executive Directors discuss, among other matters, the performance of individual Executive Directors. A number of Non-executive Directors also meet major shareholders over the course of the year. Chief Executive Officer ■ Has overall responsibility for the implementation, by the Executive Committee, of the overall strategy approved by the Board, the operational management of the Company and the business enterprise connected with it; and ■ Is supported in this by the Executive Committee that he chairs. ■ Articles of Association ■ Matters Reserved for the Board ■ Board Committee Terms of Reference ■ Modern Slavery Act Statement ■ Shell General Business Principles ■ Shell Code of Conduct ■ Code of Ethics for Executive Directors and Senior Financial Officers Executive Committee ■ Operates under the direction of the Chief Executive Officer (CEO) in support of his responsibility for the overall management of Shell’s business. The CEO 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; and ■ Executive Committee members are listed in the Senior Management biographies on page 129. GOVERNANCE DOCUMENTS AVAILABLE ON WWW.SHELL.COM/INVESTOR: BOARD OF DIRECTORS continued EXECUTIVE MANAGEMENT GOVERNANCE FRAMEWORK continued Governance
137Shell Annual Report and Accounts 2021 BOARD ACTIVITIES A rolling Board agenda is reviewed at Board meetings, enabling effective forward management of meetings and focused discussions. Forthcoming Board agenda items are categorised as: Strategy & Portfolio, Delivery & Performance, External Environment, Corporate & Miscellaneous or Standard items. Of the standard items, Board agendas regularly include reports from the Chief Executive Officer, the Chief Financial Officer and each Board committee. Core values moments and Shell Hero stories featured in early 2021 while updates continued throughout the year from various businesses and key functions, including Investor Relations; Health and Safety, Security and Environment; Information Technology; Human Resources; and Legal, as well as the Company Secretary. The Board also considers and approves the quarterly, half-year and full-year financial results, shareholder distributions and the associated announcements, and, at most meetings, considers investment, divestment and/or financing proposals. To enable purposeful debates and focus on particular aspects of agenda topics, including the impact on key stakeholders, Directors have an opportunity to specify information they require to be provided in advance of Board meetings. Finally, given the number of new Non-executive Directors over 2020 and 2021 in a continued virtual environment, virtual break-out sessions were built in to try to nurture relationship-building while promoting focused discussions on discrete topics. During the year, where possible, certain Non-executive Directors conducted site visits. These visits were predominantly virtual, as a result of continued COVID-19 restrictions. The visits were designed to provide Directors with a deeper insight into certain business operations. Directors also held various virtual workforce engagements, as well as virtual external stakeholder engagements. More detail on these can be found in the table below and on pages 138-139. Some of the activities and areas of Board focus over the year are summarised in the table below. The information below is not exhaustive. Information on other topics discussed by the Board and details of the resulting decisions are covered elsewhere, primarily in the Section 172 Statement contained in the Strategic Report on page 16. In some cases, a brief outline has been provided below, and page references are provided for additional and more comprehensive information. June strategy days As in 2020 and in lieu of the traditional physical June Strategy off-site meetings or Board’s Strategy Day, virtual meetings were held over the course of three days in June 2021. Effort was again invested into making the virtual sessions as engaging and interactive as possible, including break-out sessions and staff engagements. Directors shared the feedback obtained during the staff engagements on topics such as staff views on Shell strategy (including acceleration of Shell’s energy transition strategy), Project Reshape, pride in the Shell brand, diversity, and pride and concerns regarding Shell’s future. Strategy Day 2021 marked the start of the roll-out of Shell’s Powering Progress strategy. The agenda focused on implementing this strategy and the critical enablers. Delivering the Powering Progress strategy requires us to transform Shell. The challenge is to navigate how we move from the certainty of familiar and proven business models to the uncertainty of a new energy environment, which is still evolving at variable pace in different sectors and regions. The Board Strategy Day agenda was built on the theme of Powering Progress in an Accelerating World, explored the topics which pose strategic risk or opportunity for Shell. The Board also reviewed areas where the strategy is already in action as implementation is under way and new businesses are developing. The Board Strategy Days included discussions on various topics including: ■ energy transition and commitment to net zero emissions; ■ simplification of Shell’s equity capital and corporate structure; ■ review of Upstream strategy; ■ review of Power strategy; ■ update on Financial Framework and financing the energy transition; and ■ deep dive on electric vehicle charging. BOARD ACTIVITIES AND EVALUATION Topic Discussion/activity/updates included Examples of outcome/progress Stakeholders considered Board leadership and company purpose External business environment ■ Received updates on and discussed regional geopolitical issues. ■ Considered feedback from investor community on quarterly financial performance, including business segment results. ■ Considered how COVID-19 continued to impact on the business and how the workforce could be supported post-COVID-19. Strategy ■ Reviewed and discussed progress of strategy including management recommendations. ■ Assessment of the energy transition strategy after the Dutch Court’s ruling in the Milieudefensie case against Shell. ■ Alignment on outcomes from virtual Board Strategy Days. ■ Shell energy transition strategy and AGM vote. Country entries and exits ■ Considered entries into and exits from certain countries, based on an examination of proposals from management and businesses. ■ Approved proposals, after a review of the following in each relevant country: business situation; legal risks; reputation and investor considerations; country, regional and geopolitical landscape; and security situation. investor community employees/workforce/pensioners regulators/governments NGOs/civil society stakeholders/academia/think-tanks communities customers suppliers/strategic partners G overnance
138 Shell Annual Report and Accounts 2021 Topic Discussion/activity/updates included Examples of outcome/progress Stakeholders considered Culture Shell People Survey (2021 results) ■ In December 2021, the Board reviewed the results of the 2021 Shell People Survey. ■ Further discussion and review of this topic is scheduled for the early part of 2022. Staff updates ■ Received updates from management and Board Committees on Project Reshape including performance tracking. ■ Engagement through various sources such as Shell People Survey results, talent information, conduct and culture risk dashboard, Chief Ethics & Compliance Officer Report, cultural information embedded in investment proposals. ■ Obtained informal feedback on the post-Reshape environment and on topics such as health, safety and the environment. Board staff engagements ■ Directors participated in staff engagements by visiting sites. ■ Received updates from management on staff achievements and outstanding contributions made by our people supporting communities, promoting social justice or intervening in challenging circumstances to uphold ethics and compliance standards. ■ Gained first-hand insight into the development and culture of operations and maintenance teams, as well as staff perspectives on other matters of interest to our people. ■ Received practical examples of ways in which staff members were exhibiting Shell’s core values and contributing to society. Audit, risk and internal control Safety and Environment ■ Received regular updates from management on safety and environment performance. ■ Throughout the year under review, Directors shared personal anecdotes and reflections on topics related to core values and safety. ■ Received regular updates from the Safety, Environment and Sustainability Committee, including regarding site visits and engagement with stakeholders. ■ Provided with commentary and examples of how safety continues to be upheld as important by staff, especially in the context of continued restrictions as a result of COVID-19. ■ Gained perspective and brought diversity of thought to Board discussions by using learnings and insight gained outside Shell. ■ Provided with insights into the views and priorities of NGOs, communities and other stakeholders. Risk management and internal control ■ Reviewed risk reports, covering cyber-security risk, external trends, emerging risks, proposed changes to the Group’s strategic, operational and conduct and culture risk profiles. ■ Received updates on risk strategy, operational risks and culture and conduct risk. ■ Considered the effectiveness of the risk management and internal control system. The Board considered the effects of COVID-19 and the perceived impacts on the Group’s strategic, operational and conduct risk profiles. ■ Reflected on progress regarding risk management and controls, adoption of new technology, enhancements to management of climate risk and disclosures. Composition, succession and evaluation Succession planning ■ Received recommendations from the Nomination and Succession Committee (NOMCo) regarding succession plans and Board and committee composition, as well as the appointment of a new Chair of the Board. ■ Kept regularly informed about succession planning arrangements. ■ Approved recommendations regarding the appointment of new Directors. ■ Please see the “Nomination and Succession Committee” section for further details. Board and committee effectiveness reviews ■ Examined the internal evaluation reports after the assessment led by the NOMCo on the effectiveness and performance of the Board, its committees and the Chair. ■ Concluded that throughout the year, the Board, its committees and the Chair continued to operate effectively. ■ Reflected on progress made against the objectives it set itself for 2021 and made observations about the circumstances affecting this, such as the continued impact of COVID-19, significant projects and Board changes. ■ Please refer to Board evaluation on page 139 for further details. Board membership, other appointments ■ Reviewed Directors’ tenure, external commitments, conflicts of interests, composition/membership of Board committees and appointments. ■ Approved committee membership changes, approach to conflicts of interest and appointments to the Board, following recommendations made by the NOMCo. ■ Approved a renewal of the Directors’ terms and tenure, where relevant. ■ Please see “Nomination and Succession Committee” for further details. Talent overview and senior succession review ■ Noted senior succession strategy. ■ Enhanced insight into Shell talent and future leaders, assurance of robust succession and contingency plans. investor community employees/workforce/pensioners regulators/governments NGOs/civil society stakeholders/academia/think-tanks communities customers suppliers/strategic partners BOARD ACTIVITIES AND EVALUATION continued Governance
139Shell Annual Report and Accounts 2021 Topic Discussion/activity/updates included Examples of outcome/progress Stakeholders considered Remuneration Remuneration and reward matters ■ Oversight of matters reviewed and considered by the Remuneration Committee. ■ Received regulatory, political and investor insights and updates relating to reward matters. Governance matters Governance ■ Provided with emerging corporate governance developments and updates relating to ethics and compliance matters. ■ Modern Slavery Statement and assurance, and considered other regulatory and legislative requirements. ■ Provided with insight of consultations and projects relating to governance and legislative requirements and Shell’s participation. Ethics & Compliance ■ Reviewed the Chief Ethics & Compliance Officer’s Annual Report. ■ Engaged with external panel of independent experts in field of ethics and compliance. ■ Received insights from the panellists, including observations that Shell’s ethical processes were robust. Also received confirmation that interaction with Shell staff was positive and reflective of Shell’s values. investor community employees/workforce/pensioners regulators/governments NGOs/civil society stakeholders/academia/think-tanks communities customers suppliers/strategic partners BOARD EVALUATION Insight The feedback from the Board Directors was positive throughout their responses to the evaluation. Views were provided on what additional expertise or experience might benefit Board composition through the energy transition. These views were actively considered, along with other factors, in Nomination and Succession Committee discussions. Board dynamics – The Non-executive Directors’ engagement, support and challenge of management was rated very highly, with the quality of the interaction and the openness of the Executive team being commended. The Boardroom atmosphere was also highly rated. Board oversight – The Board’s oversight of the Powering Progress strategy was rated highly overall, as was the understanding of the capacity of the Company to deliver the strategy. Some recommendations for further enhancement were received in this area. Board oversight of monitoring various external forces was also highly rated, although the Board noted an appetite for improved oversight of new technologies and digitalisation. The Board viewed its oversight of various specific aspects of risk positively and suggested further enhancements to improve risk discussions between the Board and management. The Board’s oversight of the Company’s processes for managing and developing senior executive talent was rated very highly, with a focus on the work in progress on further improving the ethnic diversity of senior talent. Management and focus of meetings – Themes included: Board papers (a common topic for many corporates), which would still benefit from further simplification; and a desire to return to physical meetings when circumstances permit. The support available to the Board in terms of the induction/onboarding, Company Secretarial support and access to external advice was rated highly. Stakeholder oversight – The mechanisms by which the Board obtains insight into the views and needs of major investors and employees were highly rated. At the same time, it was again noted that mechanisms for obtaining views of customers, private/retail investors, communities and suppliers should be explored to see whether feasible and relevant enhancements could be made. The Board’s effectiveness in monitoring and assessing culture throughout the organisation was rated positively overall, although the Board indicated interest in further enhancing its oversight in this area, particularly as the Company transforms through the energy transition. Board evaluation [A] Lintstock, a London-based corporate advisory firm previously used by Shell for Board performance evaluations [B] Separate reports were provided for the responses from the Board and the Executive Committee. The reports in relation to the Audit Committee, Nomination and Succession Committee, Safety, Environment and Sustainability Committee and Remuneration Committee were sent to the respective committee chairs. The 2021 Board evaluation was facilitated internally, led by the Nomination and Succession Committee (NOMCo) and managed by the Company Secretary. ACTION PLAN AGREED NOMCo reviewed questionnaires for in-house Board and committee performance evaluation. Questionnaires made available for Directors and Executive Committee (EC) members to complete online via a secure web-based system operated by Lintstock [A]. Board reviewed evaluation reports of Board and each committee [B]. A separate report was also produced in relation to the evaluation of the Chair and made available to the Deputy Chair only. G overnance
140 Shell Annual Report and Accounts 2021 Delivery against the 2021 ambitions The COVID-19 pandemic continued to impact both the near- and long-term business outlook. Although government restrictions in many countries loosened as vaccinations increased, resulting in some regions starting to return to offices, international travel continued to present challenges well into the fourth quarter of 2021 and into 2022. Through the use of additional meetings, the Board balanced its focus on short-term operational matters and long-term strategy. However, delivery of some of the Board’s ambitions were affected by the need to focus attention and resources on other key events, such as the completion of Reshape, Shell’s company-wide reorganisation, and the simplification announced towards the end of 2021. The Board progressed and supported significant projects throughout the year. Some of these are discussed in more detail in the Section 172 statement on page 16. These efforts were made throughout 2021 alongside numerous sessions to monitor and support management in implementing strategy. Management sought the Board’s input and support on the proposed announcements for Strategy Day 2021, the presentations on stakeholder feedback from Strategy Day 2021, and the Board’s review, and approval of Shell’s energy transition strategy. The Board continued to monitor the Reshape reorganisation and had regular engagements on culture and workforce engagement through various sources. Because information on culture is dispersed across various reports and activities, and because of timeliness after launching Powering Progress and finalising Reshape, a discussion was originally planned for the latter part of 2021 to determine how best to address this topic in a unified and pragmatic way. Subsequently this was deferred to early 2022 because of the other pressing Board agenda topics that arose in the second half of 2021. Other 2021 ambitions were: Chair succession, which has received positive reviews from the Chair evaluation; and enhancements for the greater oversight of litigation, which were also implemented. Further optimisation of the Non-executive Director onboarding programme was largely completed (except for items still impacted by travel restrictions, such as sharing Board travel). The plan to enhance ongoing training and explore pragmatic ways to further improve Board materials was impacted by the prioritisation of resources towards other significant projects. Planned enhancements for 2022 The 2021 Board evaluation findings provided areas of focus or priorities for 2022. There was strong agreement between the Board and Executive Committee around: ■ building on the “monitoring execution and strategic implementation” focus area from the 2020 evaluation, (including ensuring continued alignment on the Financial Framework). Directors’ suggestions were relayed to appropriate individuals for incorporation into the Strategy Agenda for 2022; ■ clarifying the need for, and how best to obtain, wider external stakeholder views in feasible and relevant ways; and ■ enhancing the risk management dialogue between management and the Board. Powering Progress strategy/strategic direction/energy transition This is very important for the years ahead. The Board and Executive Committee will continue to oversee the strategic execution as a priority (particularly Powering Progress, and the net zero/Carbon Management Framework). External engagement Enhancing interactions and/or obtaining the views of relevant external stakeholders, including external experts, customers, partners and society, was highlighted within the evaluation. The Board began discussions on this objective at its February 2022 meeting, considering how it could best be accomplished, and the informational scope that would be most relevant from various stakeholder groups. The Board plans to explore this topic further in 2022. Financial framework Capital investment allocation and operating expense are key to achieving the Company’s 2030 net-zero goals and intermediate actions. Alignment on the distribution policy/strategy and on the long-term financial framework will also be areas of focus. Chair evaluation The Chair was very highly rated as having made a strong start under difficult circumstances, with the COVID-19 pandemic limiting opportunities for face-to-face interaction. It was noted that his relationship with the CEO is balanced and positive. Transparency and good alignment between the Chair and the Non-executive Directors was highlighted. Directors praised his clear communication skills, noting only minor areas for improvement. The Chair’s management of the individual input of Directors both inside and outside Board meetings was highly rated, and his availability to individual Directors was valued and appreciated. The Board also praised his ability to keep agendas focused with sufficient time for full discussion. The Deputy Chair communicated the feedback to the Chair, along with requests to: ■ consider feasible and reasonable improvements in reducing Board materials and meetings; and ■ continue to apply his industry experience and expertise as relevant in Board discussions, which adds strong contextual perspectives. The Chair fully accepted the feedback, agreed to reflect and act upon it, and offered additional development points not identified that he was working on. BOARD ACTIVITIES AND EVALUATION continued Governance
141Shell Annual Report and Accounts 2021 UNDERSTANDING AND ENGAGING WITH OUR STAKEHOLDERS The Board continues to value and recognise the importance of engagement and co-operation with our stakeholders. Time is dedicated to listening to different stakeholder views and our commitment to stakeholder engagement is built upon the understanding that knowledge-sharing, widening of experiences and adopting a learner mindset will help us achieve our commercial, environmental and social objectives. The Board’s and Shell’s commitment to public collaboration and stakeholder engagement has in the past been easier to demonstrate by looking at the number of physical events and engagements held in a particular year. In recent years, as we continue to be affected by the COVID-19 pandemic, we have had to be more creative and maximise virtual opportunities in order to obtain feedback on stakeholder issues and priorities. We continue to put the safety and health of our people, customers and other stakeholders first, along with the safe operations of our businesses. With that as our priority, we have endeavoured to engage in ways that are as effective and as safe as possible. The continued impact of COVID-19 has inevitably limited the engagements we planned for 2021. Many of our events have again been held virtually, with the Board prioritising the health and safety of our shareholders, employees and other stakeholders. Most recently, our General Meeting was held physically in the Netherlands but shareholders were urged to consider whether physically attending was in their and the public’s interest, with the meeting webcast being recommended as an alternative way to follow the proceedings. Any engagements, virtual or physical, always involved considering stakeholder interests, public health and safety, and the advice and law of local governments. The Board was disappointed that there have been relatively few possibilities to engage in person in 2021, having hoped for a significant improvement on the limited opportunities of 2020. We remain grateful for the opportunities that we have had and are thankful for the continued support of our stakeholders. We also look forward to future engagements in the year ahead, when it is safe and appropriate to hold them. The Directors have continued to consider stakeholders’ views in Board discussions and decision-making, as described on page 16. Engagement with our stakeholders goes beyond the Board and is continuous. Our broader businesses regularly engage with stakeholders throughout the year, and in the build-up to or during many Shell projects or activities. This engagement is often governed by formulated policies, control frameworks, regulation and legislation. It may differ by region. Site visits The Chair, certain Board committees and Non-executive Directors traditionally visit a number of Shell operations and overseas offices. The visits are designed to provide Directors with: ■ first-hand insights into portfolio positions; and ■ opportunities to engage directly with stakeholders including employees, partners, communities and NGOs. In previous years, and as part of the Board evaluation process, the Directors have reflected on the use of site visits for improving the Board’s oversight of risk and concluded that the best way to determine if risks are being properly managed is to visit sites and talk to local management. Similarly, some Directors have used site visits as a way to monitor and assess culture first-hand. They have commented on the difficulty of doing that this year. It was also noted that visits to key sites played an important part of the induction process for new Board members and provided good opportunities for Board members to get to know each other better. Alternative arrangements were made where feasible, and details of these are described below. Shareholders The Chair, the Deputy Chair and Senior Independent Director, the Chief Executive Officer, the Chief Financial Officer and the Executive Vice President Investor Relations each meet regularly with major shareholders and report the views of such shareholders to the Board. Committee chairs also seek engagement with shareholders on significant matters related to their areas of responsibility. Over the year and following his appointment as Chair, Sir Andrew Mackenzie met with 93 major shareholders, including at roadshows. Prior to his retirement from the Board and position as Chair, Chad Holliday met with 34 major shareholders, including at roadshows. The Remuneration Committee Chair met with 31 shareholders over the course of the year. A variety of topics were discussed. Shareholders can contact Shell directly via the “Contact us” section of the Shell website. This allows investors’ questions to be directed to the appropriate Shell team that can assist. Shareholders are also able to make use of our automated question response tool. Investors can also access information via the frequently asked questions section of the Shell website. The Shell website also provides contact details for our registrar, Equiniti, shareholder queries, our media team, requests for copies of the Annual Report, and general customer enquiries. The Company’s registrar operates an internet access facility for registered shareholders, providing details of their shareholdings. Facilities are also provided for shareholders to lodge proxy appointments electronically. The Corporate Nominee service, facilitated by Equiniti, provides a facility for investors to hold their shares in the Company in paperless form. Stakeholder engagement on AGM resolution In September 2021, after the second quarter results and the summer holiday period, the Chair, Chief Executive Officer and Chief Finance Officer hosted meetings with some of our large shareholders. These meetings covered many topics. Shareholders were asked for specific feedback on Shell’s energy transition strategy and the resolution submitted by the Follow This group. Shareholders who had voted for the Follow This resolution were asked about the rationale of supporting it while also voting in favour of Shell’s energy transition strategy. These shareholders were also asked what they would like to change in Shell’s energy transition strategy. In some instances, these discussions also included talk about the outcome of the Dutch court case. Many investors were complimentary about Shell’s energy transition strategy and the comprehensive targets we had set. Some shareholders said they were merely supporting a “climate-related” resolution, and so they could or probably had supported both Shell’s energy transition strategy and the Follow This resolution. Some investors mentioned that they would like to see targets for cutting absolute emissions rather than just reducing net carbon intensity. But many were understanding of why these had not been set. Some said Shell’s net-zero target needed to be clearer and not so dependent on customers reducing their emissions. All of the stakeholder feedback was added to the ongoing internal considerations of the Company’s climate targets, along with the outcome of the Dutch court case, the Powering Progress strategy and the commitments that Shell had made within its energy transition strategy. On October 28, 2021, Shell announced a new target to halve Scope 1 and 2 emissions under Shell’s operational control by 2030, compared with 2016 levels on a net basis. This is another strategic milestone on our path to becoming a net-zero emissions energy business by 2050, in step with society. G overnance
142 Shell Annual Report and Accounts 2021 Board governance event We previously reported our proposal for the next Board Engagement Day to be held in October 2021, circumstances permitting. Unfortunately, after the publication of the 2020 Annual Report and Accounts, and 20-F, the COVID-19 pandemic continued and was still causing concern in the autumn of 2021. The Board had to balance health and safety concerns with the value to Shell of stakeholder engagements, such as Board Engagement Day. As a result, there was no Board Engagement Day in 2021. The Board has sought to obtain feedback and be involved in discussions in other ways, in the absence of this particular event. These ways are described below and elsewhere in this Annual Report. Engagements in 2021 Information on engagements the Board has held during the year are summarised below. Information on engagement with other stakeholders including the workforce is provided on page 145. The way in which stakeholder interests were considered in principal decision-making by the Board in 2021 (Section 172 statement) can be found on pages 16. Further insight into our engagement with stakeholders can be found within our Sustainability Report, scheduled for publication in April 2022. Engagement before event Event/activity Director attendance Outcome/insight Strategy Day 2021 Presentation There was engagement with stakeholders and feedback was sought from them at the bi-annual Chair Roadshows, prior to Strategy Day 2021. The CEO and CFO hosted 2021 Strategy Day presentation webcasts which on February 11, 2021. The presentations set out Shell’s strategy to accelerate its transformation into a provider of net-zero emissions energy products and services, powered by growth in customer-facing businesses. It was also announced that a disciplined cash allocation framework and thorough approach to driving down carbon emissions would be pursued to deliver value for shareholders, customers and wider society. After the presentations, the CEO and CFO invited questions from the media and investors. The webcasts separated investor and media questions, enabling answers to be focused on specific stakeholders’ questions. CEO CFO Positive feedback was received. This included comments on the logic of the strategy which appeared to use Shell’s existing strengths. It was also noted that the strategy would support focusing on higher-margin elements in the value chain and emphasising capital discipline. Remuneration Roadshow – Q1 2021 Engagement Engagement was undertaken before the meetings so that the Directors were provided with understanding and insight on particular topics of interest. In March and April 2021, Neil Carson, Chair of the Remuneration Committee, presented 2020 remuneration outcomes and 2021 remuneration plans to investors. The presentation repeated previous comments in support of employees, customers and communities, and resilient financial performance and strategy to accelerate the transition to net zero. A summary of key Remuneration Committee decisions was also provided and included: ■ no 2020 annual bonus; ■ LTIP vesting outcome of 90% (45% of maximum) based on strong relative performance outcomes; ■ CEO single figure down 41% from 2019; ■ no salary increases for 2021; and ■ reduction of 2021 LTIP share awards to mitigate the risk of windfall gains (equivalent to a reduction of 50% of the fall in share price since the 2020 award). The CEO’s award was also reduced from 300% of base salary to 264.5% and the same approach was applied to the CFO. Shareholding policies and large personal shareholdings were discussed, noting that this continued to deliver strong alignment between management and shareholder interests. The Chair also announced that pay measures for management were consistent with the general employee population (except for the reduction to the 2021 share award, which was applied at Executive Director level). Remuneration Committee Chair Following the event, high levels of support were given to the Remuneration Committee and this was further demonstrated by the favourable voting outcome at the 2021 AGM. The Remuneration Committee was praised for how it had navigated a difficult year due to COVID-19. UNDERSTANDING AND ENGAGING WITH OUR STAKEHOLDERS continued Governance
143Shell Annual Report and Accounts 2021 Engagement before event Event/activity Director attendance Outcome/insight Annual ESG Update 2021 Discussions were held with the Chair of the Safety, Environment and Sustainability Committee ahead of the event to formulate the agenda and ensure that key areas of interest were covered. Presentations from the Chair of the Safety, Environment and Sustainability Committee and the CEO were given. The CEO and the CFO met the President of Ceres, a non-profit organisation, for discussions focusing on the Shell Energy Transition Strategy report. Discussions covered matters relating to Nigeria and the Powering Progress goals of respecting nature and powering lives. During these sessions the audience was encouraged to ask questions. The audience was informed that for any unanswered questions, representative from the Investor Relations team would follow-up after the event. CEO Chair of the Safety, Environment and Sustainability Committee Projects & Technology Director Legal Director Upstream Director Any questions requiring follow-up were picked up outside the presentations. In some cases, follow-up meetings were held with stakeholders and the Chair of Safety, Environment and Sustainability Committee. Plastic Waste - Safety, Environment and Sustainability Committee engagement with external organisation Discussion with the Chair of the Safety, Environment and Sustainability Committee on key topics for discussion. Wide-ranging discussion on the issue of plastic waste reaching the environment and solutions through partnerships to address this societal challenge. Safety, Environment and Sustainability Committee Greater insights into the role governments and businesses can play in partnership to address the issue of plastic waste. Shell’s Climate Targets - Safety, Environment and Sustainability Committee engagement with external stakeholders Discussion with the Chair of the Safety, Environment and Sustainability Committee and external stakeholders to develop the agenda and agree on the meeting format. Feedback on how Shell’s climate targets are perceived by external stakeholders and feedback on evolving societal expectations of business. Safety, Environment and Sustainability Committee Deeper understanding of how Shell is perceived and likely future stakeholder expectations. Shell Energy Transition Strategy 2021 Engagement took place with the shareholder organisation Climate Action 100+ and feedback was actively incorporated into the drafted report. A presentation and question and answer session were held in respect of the Shell Energy Transition Strategy. This particular engagement was provided for in advance of the 2021 Annual General Meeting (AGM), where the Energy Transition Strategy was being put to an advisory shareholder vote. CEO Chair Project & Technology Director Subsequent shareholder engagement sessions were held with CEO and Chair. The voting outcome at 2021 AGM was overwhelmingly supportive, with 88.74% of votes received in favour. Shell also formally commented on the Follow This shareholder resolution outcome and set a net absolute Scope 1 and 2 target by 2030 within its existing strategy. 2021 AGM The Board sought feedback from the investor community and other stakeholder groups prior to the AGM. Safety was prioritised ahead of the 2021 AGM, in the context of the continued COVID-19 pandemic and the ban on public gatherings in both the Netherlands and UK. Physical attendance was limited to the Chair, CEO, CFO and Company Secretary. Other Directors joined the meeting virtually, as did many of our shareholders. Board (both virtual and physical attendance) Resounding support from shareholders for the resolutions proposed by the Board, including the advisory vote on the Shell Energy Transition Strategy. Chair Roadshows and SID calls Over 100 meetings were held between the Chair of the Board and shareholders during 2021. A handful of engagements with key institutional investors were also undertaken as part of the appointment of the SID. The dialogue was typically strategic in nature and included ESG topics as well as energy transition and business outlook. The discussions predominately focused on the selection process for a new Chair and how to ensure that the new Chair was aligned with Shell’s Powering Progress strategy outlined in February 2021. Chair Deputy Chair/SID Investors also had subsequent dialogue with Shell’s Investor Relations team. Access to and availability of management and the Board as well as the open and transparent approach in shareholder engagement was positively recognised by several institutional shareholders. Feedback from the meetings was positive. Shareholders were provided with insights and assurances associated with the process for selection of a new Chair. G overnance
144 Shell Annual Report and Accounts 2021 Engagement before event Event/activity Director attendance Outcome/insight The Institutional Investors Group on Climate Change (IIGCC) meetings We have a continuing dialogue with this group throughout the year. Moreover, meetings with the IIGCC are held with the CEO, and another with a member of the Executive Committee twice a year as part of our engagement and collaboration with the IIGCC and Climate Action 100+. In 2021, the Executive Committee member was Harry Brekelmans. The topics discussed were the energy transition, the Dutch court ruling, Shell’s energy transition strategy, the sectoral approach, and Shell’s industry association climate lobbying. CEO Projects and Technology Director We continue to value and appreciate the collaboration with Climate Action 100+ and their large institutional investor base. Shareholder engagement regarding the simplification Feedback was obtained from the investor community and other stakeholder groups about how best and most practically to support the needs of stakeholder engagement. This engagement provided those in attendance with an opportunity to put questions to the Board, ahead of the 2021 General Meeting. The webcast facilitated enhanced engagement with institutional investors and allowed more of them to participate compared with previous years. Board Resounding support from shareholders for the resolution proposed by the Board to amend the Articles. 2021 General Meeting Feedback was obtained from the investor community and other stakeholder groups about how best and most practically to support the needs of stakeholder engagement. Outbreaks of COVID-19 variants intensified following the publication of the Company’s Notice of Meeting. The meeting was held as a hybrid meeting meaning shareholders could attend and participate both in person and virtually. However, due to COVID-19 shareholders were encouraged to reflect on whether physical attendance at the meeting was in their best interests. Shareholders supported the amending of the Company’s new Articles and one of the steps required to simplify Shell’s share structure. Chair CEO Deputy Chair/SID Shareholders overwhelmingly supported the resolution proposed. Audit Committee visits Engagement prior to the visits helped to formulate the agenda and refine the areas of focus for the respective visits. The Audit Committee conducted two site visits to Shell’s Energy Transition Campus in Amsterdam and Shell’s Houston offices. These visits were conducted virtually because of continued COVID-19 travel restrictions. Further details are provided on page 153 of the Audit Committee Report. Audit Committee Committee members gained deeper insight into how the Company’s Powering Progress strategy is being implemented. The virtual visits also provided Committee members with opportunities to engage with a diverse range of the workforce. Director visits Discussions were held with the respective Directors ahead of the visit to formulate the agenda and encourage a natural, open dialogue in the group sessions. In September 2021, two Directors visited the Shell Energy and Chemicals Park Rotterdam (formerly the Pernis refinery) in the Netherlands. They were shown the site, and briefed about safety process measures, including those to protect against COVID-19. They had lunch with employees, allowing them to get staff feedback on businesses in the reorganised, post-Reshape Shell. The Board met staff virtually from Shell’s Pennsylvania Chemicals complex in the USA. During this session, the Board received an overview of Shell’s Chemicals strategy, industry outlook, plans to achieve goals and to support the customer experience. The Board also engaged in discussions on health, safety, security and the environment. Directors The Board gained an insight into the development and culture of the operations and maintenance teams. The use and impact of digitalisation tools were highlighted, and the future environmental capabilities of the site were discussed. UNDERSTANDING AND ENGAGING WITH OUR STAKEHOLDERS continued Governance
145Shell Annual Report and Accounts 2021 WORKFORCE ENGAGEMENT The Board recognises merit in the Code’s three mechanisms for engaging with the workforce. As with all the Code’s provisions, boards must consider the size and structure of their business, including its international scope, and select an approach that most practically delivers the underlying spirit and ambition of the Code, even if the chosen approach differs from what the Code outlines. The Code does note that alternative methods for workforce engagement are supported where an explanation is provided. The Code states that its use of the term “workforce” is not meant to align with legal definitions of workforce, employee, worker or similar terms. But for a global organisation bound by the laws of more than 70 countries, blurring the clearly prescribed legal definitions that affect complex issues (such as local health, safety, security and environment (HSSE) requirements, work contract terms, legal accountability, employment rights) or merging two definitions of the same term could have a notable impact on the business, its operations and its stakeholder relationships (including with suppliers). As a result, Shell considers its workforce to be employees of companies in the Shell Group. The Board also engages with others outside this group (for example, on site visits), and some of this engagement is shared on page 141. Although our reporting and formal engagement focuses predominantly on our employees, all individuals working on Shell sites (including Shell offices) are required to undertake certain Shell training (for example, on matters relating to HSSE and the Code of Conduct). Adhering to the Life-Saving Rules and the Code of Conduct compliance obligations is included within our contracts with suppliers. The Shell Global Helpline is available for all workers to report matters of concern. For many years, Shell has recognised the importance of engaging with its workforce. Engagement is especially important in maintaining strong business delivery in volatile times of change. We strive to maintain a dialogue between management and our workforce – both directly and where appropriate, through employee representative bodies. Management regularly engages with the workforce through a range of formal and informal channels, including via webcasts and emails from the Chief Executive Officer (CEO) and other senior executives, webcasts, town halls, team meetings, face-to-face gatherings (pre-COVID-19), interviews with Senior Management and online publications via our intranet. The Board considers effective engagement a key element of its understanding of the Company’s ability to create value, because it recognises that our people are our greatest asset. Workforce views can help inform the Board on matters such as operational effectiveness, Shell culture, diversity, equity and inclusion, identifying risk and developing and delivering strategy. Throughout 2021, the COVID-19 pandemic impacted how the Board engaged with the workforce. In most countries, employees were largely working from home in accordance with government rules and guidance, except for those operating vital assets. Face-to-face engagements could not be pursued because of travel bans. Board members did undertake virtual engagements, often around the time of scheduled Board discussions. Feedback from these video calls was shared with and discussed by the wider Board. Management also engaged extensively throughout the year, implementing a number of focused events to better understand how people were coping with the working environment caused by the COVID-19 pandemic, their mental well-being and what the business could do to better support them. In February 2021, the first strategy day for staff was held to engage on the new Powering Progress strategy. Engagement sessions were held on the strategic scenarios, the carbon reduction elements, and the Growth, Transition and Upstream pillars of our strategy. Management held several engagements on Reshape, the restructuring of our organisation. Reshape is focused on how we are organised (organisational structure), how we work (mindset and behaviours) and who we are (identity), underpinned by our values. At the end of 2021, several webcasts and walk-in sessions were held to engage with the workforce on the simplification for the future, including Shell’s move of official headquarters and tax residence, and its name change from Royal Dutch Shell plc to Shell plc. Information from these discussions was regularly provided to the Board. The Board considers the current workforce engagement approach effective. The information provided in the following table gives examples of various methods of Board engagement. Board’s direct engagements with the workforce (Because of COVID-19 restrictions in various countries, the engagement activities have mostly been held virtually.) Virtual informal engagement – Board Nomination and Succession Committee members meet with various senior leaders and high-potential individuals throughout the year. The Nomination and Succession Committee also received a detailed briefing alongside that given to the full Board on the results of the annual Shell People Survey, which was completed by around 83% of employees. Off-site visits Because of COVID-19 restrictions, site visits were limited in 2021. Although in some instances we were able to organise virtual visits and meetings, priority was given to running the business operations. People engagements during Board and/or meetings off-sites. Meeting talent/leadership teams. Company Chair engaging with various individuals. Through these more formal engagements, the Chair and other Non-executive Directors (either individually or with their committees) have deepened their understanding of how the Company’s purpose, strategy and values are embedded in particular businesses, sites and countries. This gives insight into progress made, risks and opportunities. The benefits are mutual. The Board obtains direct insight into local business operations and projects, and local strengths and challenges. Our people have a chance to better understand the Board and to provide direct feedback on topics of importance to them, their business or function and their location. Employee network and related sessions Conducted by Directors with, for example, Directors engaging with Shell’s lesbian, gay, bisexual and transgender (LGBT+) networks. In 2021, engagement took place with the Board and representatives from the LGBT+ network. There were discussions about the challenges facing the LGBT+ community and what type of support they could receive so everyone in Shell could perform at their best. Various members of the Board joined these discussions. Directors involved in these engagements noted the opportunity to enrich their understanding of the LGBT+ perspective within Shell, so they had better insights into the challenges and the employee experience in this area. G overnance
146 Shell Annual Report and Accounts 2021 Formal reports and information updates to the Board Shell People Survey (anonymous survey facilitated externally) The Board was provided with an update on the outcomes and employee engagement levels and the quality and resilience of leadership across Shell’s workforce. As well as a broad range of subjects, the Board was informed of principal metrics, with particular focus on rewards, working conditions/workload and reputation. A more in-depth review and discussion is scheduled for early 2022. The Board considers the Shell People Survey to be one of its principal tools for measuring employee engagement, motivation, affiliation and commitment to Shell. It provides insights into employee views and has a consistently high response rate. In 2021 the response rate was 83%, which remains high. The average employee engagement score was 75 points out of 100. This is a decrease of three points compared with 2020 but still reflects resilience of our people in a year of change. The Board also considers this engagement to understand, for example, how Shell is using the survey outcomes in: i) data analytics, for example, to identify potential correlative relationships between employee engagement and safety or ethics and compliance incidents; and ii) strengthening Company culture and values. Senior Succession and Resourcing Review The annual Senior Succession and Resourcing Review focused on the strength of senior leadership and plans for its development and succession, while highlighting the breadth, depth and diversity of its pipeline, the developing profile of the leadership cadre, and recruitment and attrition levels. The Nomination and Succession Committee noted the effectiveness of succession planning, the impact of its associated execution, and the professional, data-driven, integrated approach to leadership and leadership development. It welcomed the continued focus on performance management, proactive management of Shell’s talent pipeline, and the focus on advancing Shell’s diversity agenda with increased attention on gender, race, LGBT+ and disabilities. This year’s insights provided a deeper understanding of the interplay between culture, identity, leadership talent and employee engagement across Shell. Assessment of key trends and material incidents Presented by Chief Ethics and Compliance Officer. This is based on the established channels for staff and others to file complaints or report on suspected breaches in relation to the Shell General Business Principles (SGBP), the Code of Conduct or any breaches of law or regulations, including accounting control and auditing concerns. The update covers Shell employees and our wider stakeholder base. The Board (also via the Audit Committee and SESCo) obtains insight into incidents and reporting levels and remediation. These provide indicators of conduct risks and, together with the related Board reports noted below, suggest the strength of embedding and awareness of the Code of Conduct and SGBP obligations and employees’ comfort levels in raising incidents. Risks The Board reviews reports on strategic risks annually, and considers reports on operational risks twice a year. These reports assess current business activities against risk appetite. Organisational culture As part of the Reshape restructuring, the Board has been discussing the Powering Progress strategy, including powering lives. The Board also focused on diversity, equity and inclusion commitments and the launch of new organisation after Reshape. There was also engagement on the safety refresh, with the launch of the alignment with the International Association of Oil and Gas Producers (IOGP) life-saving rules. There were also discussions on psychological safety, to further improve the learner mindset and our organisational culture. The Audit Committee also reviewed the Conduct and Culture Risk Report, which included a refreshed dashboard of risk appetite measures aligned with Shell’s core values of honesty, integrity and respect for people. Elements measured by the dashboard include: the number of terminations as a result of formally investigated Code of Conduct violations; the number of overdues on mandatory Ethics and Compliance training; anonymous reporting rates on our Global Helpline; and a selection of Shell People Survey scores. Qualitative assessments of insider threats and our approach to caring for our people were also covered. Chief Ethics and Compliance Officer Report Data and insights include information from the Global Helpline, the Shell Ethics and Compliance organisation and the Shell People Survey. SESCo continues to strongly support the work of the Chief Ethics and Compliance Officer, including the efforts to ensure a safe working environment where staff feel confident to raise any concerns in good faith. The Audit Committee is kept updated when matters highlighted through the Global Helpline are investigated. The Audit Committee is also informed about the associated remediation. For more information see page 162 of the Audit Committee Report. Assurance activities Assurance activities, including items raised by businesses and functions (through the Group Assurance Letters process) and assurance (from Internal Audit, HSSE, Ethics and Compliance, Reserves Assurance and Reporting), provide additional evidence to the Board of the commitment to high standards of risk management and internal control. The assurance activities ensure that work can be done safely, within regulatory frameworks. The information provided within these reports further supports the Board’s annual review of the effectiveness of the Group’s system of risk management and internal control and feeds into the Group scorecard, against which staff bonuses are calculated. The Shell Control Framework Significant HSSE, Ethics and Compliance, and more broadly, business control incidents are brought to the attention of Senior Management and the Board through regular reporting. The Board discussed how the organisation could learn more from incidents and how the business could drive safety performance. The Board shared and discussed examples based on personal experience of how to promote a strong safety culture. WORKFORCE ENGAGEMENT continued Governance
147Shell Annual Report and Accounts 2021 NOMINATION AND SUCCESSION COMMITTEE TALENT MANAGEMENT AND SUCCESSION The Committee is fully engaged with the end-to-end talent management and senior succession planning approach that is deployed within Shell. It plays a key role in senior succession and resourcing. Retaining in-depth knowledge of the individuals within the talent pipeline is a Committee priority. The Committee makes time to personally meet and engage with numerous individuals within the pipeline. The Committee’s oversight and input extend from recruitment to leadership identification and from leadership development to leadership appointment, all of which are underpinned by clearly articulated talent priorities and a commitment to advancing diversity, equity and inclusion across Shell. The Committee manages Board and Senior Management succession under a structured, proactive methodology. The processes have clear and agreed selection principles for short-, medium- and long-term succession and are aligned with Shell’s strategic priorities. Focus areas for 2021 ■ Discussions about Non-executive Director and Executive Committee succession ■ Discussions on talent engagements with key staff and succession candidates ■ In-depth examinations of the Shell People Strategy and culture, with an increased focus on diversity, equity and inclusion and end-to-end talent management Priorities for 2022 ■ Non-executive Director and Executive Committee succession ■ Continued talent engagements with key staff and succession candidates ■ Maintain proactive oversight over Shell’s ambition to become one of the most diverse and inclusive organisations in the world COMMITTEE MEMBERSHIP AND ATTENDANCE FOR 2021 Sir Andrew Mackenzie Dick Boer Euleen Goh Ann Godbehere Committee member Member since Maximum possible meetings Number of meetings attended % of meetings attended Sir Andrew Mackenzie (Chair of the Committee from May 18, 2021) Oct 1, 2020 5 5 100% Dick Boer May 19, 2021 3 3 100% Ann Godbehere October 27, 2021 1 1 100% Euleen Goh July 1, 2019 5 5 100% Chad Holliday [A] May 19, 2015 2 2 100% Sir Nigel Sheinwald [A] May 20, 2020 2 2 100% [A] Chad Holliday and Sir Nigel Sheinwald retired from the Board following the 2021 Annual General Meeting, held on May 18, 2021. SIR ANDREW MACKENZIE Chair of the Nomination and Succession Committee PURPOSE The Nomination and Succession Committee (the “Committee”) leads the process for appointments to the Board and Senior Management [A] positions, ensures plans are in place for orderly, well-planned succession, and oversees the development of a diverse succession pipeline of candidates. It also reviews the Company’s policy and strategy on diversity, equity and inclusion (DE&I), and monitors the effectiveness of these initiatives. It makes recommendations to the Board on corporate governance guidelines, as referred to in the Chair’s statement. [A] “Senior Management” refers to the Executive Committee and the Company Secretary. G overnance
148 For Non-executive Director succession, the Committee continues to follow its Principles for the Strategic Composition of the Board, adding factors as they evolve. These principles function much like a policy and include both quantitative and qualitative principles, considering: ■ the overall aspired Board composition and diversity of gender, race and ethnicity, nationality, background, experience and desired skill sets that align with the Company’s strategy and purpose; and ■ the values, attitudes, and behaviours expected of Directors. For Senior Management succession, the selection principles include process-specific elements, such as a clear and proactive approach to identifying and developing succession candidates. The principles also outline the long-term structured nature of the succession planning process. There is also great focus on ensuring that the principles reflect the leadership qualities required for future business success and that they advance the progress of diversity in all its forms. Senior Management principles feature in the Committee’s review of the succession plans which occurs in every Committee meeting. Using the principles, the Committee implements any changes through a well-defined and diligent process with overall Board engagement. The Committee agrees candidate profiles and meets prospective candidates well ahead of any selection decision being necessary. It also engages the Board early in the process to ensure all Directors have an opportunity to meet and assess prospective candidates. Consequently, some of the leaders whom the Committee and Board have engaged with extensively in the past are now members of the Board or the Executive Committee. In 2021, the Committee undertook its annual in-depth look at the succession plans for Senior Management across Shell and reviewed the talent pipeline in line with the business outlook. The engagement focused on the organisational health of our workforce following Project Reshape; the introduction of a single integrated and global Diversity, Equity & Inclusion plan aligned to our strategy and purpose, the depth and breadth of the senior executive leadership pipeline including good progress in enhancing diversity, the skills, behaviours and development support required for future success, and an evolving outlook on senior executive roles. Following the Committee’s review, the findings were reported to the Board. DIVERSITY OF LEADERSHIP The Committee recognises that continuing to improve all types of diversity at each level of the Shell Group is crucial. Shell aims to be an inclusive workplace where everyone feels valued and respected and has a strong sense of belonging. The Committee’s review of diversity objectives and strategies for the Shell Group as a whole also monitors the impact of diversity and inclusion initiatives. In February 2021, Shell published its aspirations for diversity, equity and inclusion as part of its strategic update. The focus will continue to be on gender and nationality diversity, and is broadening and deepening to the areas of race and ethnicity, enablement and LGBT+. When looking at our progress against our ambitions, female representation has steadily improved in recent years. Among experienced recruitment in 2021, Shell companies recruited 34% females, and among graduates 47%. Female representation in the top 1,250 roles (“Senior Leadership” positions) has strengthened by 1.7 percentage points during 2021 to 29.5%, and we continue to progress towards our aim of achieving 35% female senior leadership representation by 2025. Nationality diversity, such as Asian and American talent, continues to be managed in accordance with the business outlook and we have a strong focus on progressing race and ethnic minority representation, beginning in the UK and the USA and followed by the Netherlands. The representation of people of colour among Shell’s senior leaders in the USA has been actively tracked for many years. It stood at 26.1% at the end of 2021, compared with 17.3% in 2016. In the UK, race and ethnicity representation among senior leaders was 16.5% [A]. [A] As ethnicity declaration is voluntary, our ethnicity declaration rate is not 100% and all calculations are based on a declaration rate of 81%. The 19% of our workforce who have not provided data or chosen not to declare their ethnicity were not included in our calculations. Senior Leadership is a Shell-specific measure and different from that which we are required to report under the Code, being female representation in Senior Management and their direct reports, where the percentage is 28.4%. Although the Committee monitors Shell’s organisational diversity, equity and inclusion strategies and initiatives, it also holds itself accountable for the Board’s own diversity and inclusion. By the end of 2020, the Board’s diverse composition met the Hampton Alexander and Parker Reviews’ objectives by reflecting 38.46% female representation with one person meeting BAME criteria. Gender representation was down slightly from May 2020 (when the Board’s composition included 42% female representation) as a result of the departure of three Non-executive Directors (one female, two males) and the appointment later in the year of four new Non-executive Directors (one female, three males). However, following the 2021 AGM, for the first time in Shell’s history, the Board reached gender parity with 50% female representation. More information on diversity, equity and inclusion in Shell is provided in the Our people section on page 114. The People Strategy and culture and identity During the year, the Committee initiated an in-depth examination into our approach on diversity, equity and inclusion. This will follow the format of the examination of the Shell People Strategy that the Committee undertook in 2020, which placed particular emphasis on our aspired culture and identity. Powering Lives is a foundational element of our Powering Progress strategy. The Committee will be conducting further engagements in 2022 to maintain proactive oversight over Shells ambition to become one of the most diverse and inclusive organisations in the world, where everyone feels valued, respected, with a focus on four areas of gender, race and ethnicity, LGBT+ and disability. Committee activity In addition to its considerations regarding succession, the Committee made recommendations on corporate governance guidelines, monitored compliance with corporate governance requirements and made recommendations on corporate governance-related disclosures. The Committee continues to monitor and review this area, considering whether and how current Company governance matters should be strengthened. Further insight on some of the Committee’s areas of consideration in 2021 is provided below. NOMINATION AND SUCCESSION COMMITTEE continued Governance
149Shell Annual Report and Accounts 2021 Succession [A] Topic of discussion/example of Board activity Recommendation ■ Appointment of Sir Andrew Mackenzie and Jane Holl Lute to the Board. ■ Changes to the composition of the Board committees. Review and oversight ■ Shell Senior Succession and Resourcing Review and ongoing succession planning. Oversight ■ Shell diversity, equity and inclusion. ■ End-to-end talent management in Shell. Engagement ■ Talent engagements. Governance Topic of discussion/example of Board activity Governing the Board and its committees ■ Reviewed its Terms of Reference, and the terms of reference for other Board committees and the matters reserved to the Board. Regulation, legislation and other governance-related guidance ■ Key governance matters affecting the Company’s external reporting. ■ Other governance and regulatory changes agreed or proposed and their impact or potential impact on the Company, its processes and its reporting. Shell plc matters ■ Considered any potential conflicts of interest and the independence of the Non-executive Directors. ■ Review of additional external appointments requested by Directors, with specific focus on the time allocated to all commitments. For Executive Directors, the benefit/relevance to the business of the Director undertaking the additional role is also a key consideration. ■ Determined the process for the 2021 internal Board Evaluation. Board membership and other appointments Topic of discussion/example of Board activity Directors’ tenure, external commitments, conflicts of interests and succession planning ■ Non-executive Director appointments and changes to Committee membership. Talent overview and senior succession review Topic of discussion/example of Board activity Shell Senior Succession and Resourcing Review covering Executive Director and Executive Committee (EC) succession, EC direct reports, the senior executive group and the overall talent pipeline ■ Enhanced insight on Shell talent and future leaders. ■ Assurance of robust succession and contingency plans. [A] The Committee was assisted during the year by Russell Reynolds Associates (“Russell Reynolds”), an external global search company whose main role was to propose suitable candidates. Russell Reynolds does not have any connection with the Company other than that of search consultants. The Chair does not participate in discussions regarding his own succession. Russell Reynolds is a signatory to The Voluntary Code of Conduct for Executive Search Firms, which aims to improve board diversity. Director induction and training After being appointed to the Board, Directors receive a comprehensive induction tailored to their individual needs. This normally includes site visits and 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 that Shell faces. Existing Directors are also able to join these visits to keep abreast of business developments and progress. With the abnormal COVID-19 circumstances in 2020 and 2021, the induction programme was quickly adapted to a completely virtual induction. Onboarding is phased and prioritised based on forthcoming Board agenda items to help ensure the new Non-executive Directors hit the ground running. In 2020 and 2021, digital onboarding books were provided for each new Non-executive Director. These onboarding books complemented the existing digital Directors’ Handbook and featured: ■ overviews of scheduled briefing meetings customised to the Non-executive Directors’ needs and linked to upcoming Board agenda items; ■ hyperlinks to key Shell publications (external and internal); ■ lists of common Shell acronyms; ■ key current materials on: – Shell’s safety and core values; – Board governance; – Group strategy and portfolio; – key businesses and functions; and – climate change and energy transition; ■ biographies of key executives. ■ Other elements of the onboarding programme for Non-executive Directors included: – arranging briefing meetings with key executives (both business and functional) customised to Non-executive Directors’ needs and phased based on forthcoming Board agenda items; – where feasible, pairing up new Non-executive Directors in onboarding briefings to optimise learning while also providing opportunities for collegial relationship-building and increasing efficiencies for the executives; and – where possible, arranging virtual site visits (either specifically for onboarding or by inviting the new Directors to committees’ virtual site visits). Supported by the benefits of the global vaccination programme, we are now seeing COVID-19-related restrictions starting to ease in many countries. As a result, we envisage Directors being able to increase their face-to-face engagement with our teams at our sites in 2022 and to enhance ongoing Director training. G overnance
150 Shell Annual Report and Accounts 2021 CHAIR SUCCESSION Message from Euleen Goh In early 2018, the process of selecting the next Chair of the Board of Shell plc (at the time known as Royal Dutch Shell plc) began in response to the proposed limit on Chair tenure, outlined in the then draft version of the Code. The Nomination and Succession Committee (NOMCo) created a subcommittee, drew up a potential succession timeline, and initiated an internal and external search process. Hans Wijers, the Senior Independent Director at the time, led the subcommittee and the search process. Chad Holliday, the current Chair, was not a member of the subcommittee. My predecessor Gerard Kleisterlee took over from Hans in May 2018 and refined the selection criteria and succession timeline. The subcommittee agreed what qualities the successful candidate should have, and determined the functional focus elements of the new Chair’s role. Accordingly, the subcommittee considered and interviewed multiple candidates. After Gerard retired from the Board at the 2020 AGM, I assumed leadership of the subcommittee and we further reviewed the required qualities and functional focus elements of the role in the context of the current environment. The subcommittee also examined the main trends and factors affecting the long-term success and future viability of Shell, and the organisation’s strategic priorities, consulting on these with the wider Board. One-on-one discussions were held with each Board member. The review and the discussions helped us to refine our search process with a clear and updated understanding of the qualities, skills and attributes that the future Chair should possess. We engaged with some of our larger investors, as appropriate, seeking input on the skills, attributes and sector knowledge that they considered important for the Chair candidate profile. These discussions were very valuable. They helped inform our search and selection of the most appropriate individual for the role. After this thorough and robust search process, the Board agreed unanimously at its March 2021 meeting that Sir Andrew Mackenzie should be appointed Chair of the Board with effect from the conclusion of Shell’s 2021 Annual General Meeting, which was held on May 18, 2021. When reviewing candidates, our preferred qualities and functional focus elements included a strong requirement for a candidate who has experience in leading large, complex, international organisations. The candidate would have had significant experience in capital discipline. He/she should have an ability to balance the transformational changes that Shell needs to make against the timing of these changes as it navigates the energy transition. The successful candidate should have demonstrated sustainable actions with respect to the climate change agenda. An understanding of the energy market was essential, without it being necessary for the candidate to have spent their entire career working in the oil and gas sector. In Andrew we believe that we have found the required qualities and more. Andrew is a lifelong learner with a collaborative, agile mindset and he is a champion of good governance. His strategic vision has helped operations and companies under his leadership to transform. His leadership performance in the areas of environmental, social and governance (ESG) and climate action are outstanding. He was recently knighted by the Queen of the United Kingdom for his services to business, science and technology. Andrew firmly believes that business can be a force for good, for shareholders and society alike. Since joining the Board in October 2020, Andrew has dedicated significant time to familiarising himself with the business, the people, and the Powering Progress strategy which he and the Board fully support and are committed to delivering together with management. His broad experience, strategic vision, scientific curiosity and commercial acumen made him the ideal candidate to lead the Board of Shell plc. NOMINATION AND SUCCESSION COMMITTEE continued Governance
151Shell Annual Report and Accounts 2021 SAFETY, ENVIRONMENT AND SUSTAINABILITY COMMITTEE PURPOSE The Safety, Environment and Sustainability Committee (SESCo) assists the Board in reviewing the policies, practices, targets and performance of Shell, primarily with respect to safety, environment including climate change, and broader sustainability. OVERVIEW The Committee meets regularly to review and discuss a wide range of important topics. These include the safe condition and responsible operation of Shell’s assets and facilities, environmental protection and greenhouse gas emissions, any major incidents that impact or had the potential to impact safety, environmental performance, and progress towards meeting Shell’s energy transition targets. The Committee also endorses the annual Shell assurance plan for Health, Security, Safety, Environment and Social Performance (HSSE & SP) and Asset Management, and reviews the execution of the plan and audit outcomes. The Committee assesses Shell’s overall sustainability performance and provides input to Shell’s annual reporting and disclosures on sustainability. It also advises the Remuneration Committee on metrics relating to safety and energy transition that apply to the Executive Committee annual scorecard and Long-term Incentive Plan. “SESCo focused on Shell’s safety and environmental performance and assurance programme in 2021, as well as targets for the energy transition and sustainability elements of Shell’s Powering Progress strategy.” CATHERINE J. HUGHES Chair of the Safety, Environment and Sustainability Committee Focus areas for 2021 ■ Safety and environmental performance ■ Assurance programme ■ Shell’s climate targets ■ Non-financial elements of Shell’s strategy ■ Sustainability metrics for remuneration Priorities for 2022 ■ Process safety and personal safety ■ Environmental performance ■ Emerging safety and non-financial risks ■ Progress against energy transition targets ■ Broader sustainability performance COMMITTEE MEMBERSHIP AND ATTENDANCE FOR 2021 Catherine J. Hughes Neil Carson OBE Bram Schot Committee Member Member since Maximum possible meetings Number of meetings attended % of meetings attended Catherine J. Hughes (Chair of the Committee since May 19, 2021) November 1, 2017 5 5 100% Neil Carson OBE June 1, 2019 5 5 100% Bram Schot October 1, 2020 5 5 100% Sir Nigel Sheinwald (Chair of the Committee until May 18, 2021) [A] July 1, 2012 2 2 100% Ann Godbehere [B] May 20, 2020 4 4 100% [A] Sir Nigel Sheinwald retired from the Board following the 2021 Annual General Meeting, held on May 18, 2021. [B] Ann Godbehere stepped down from her role on the Committee on October 27, 2021 when she became a member of the Nomination and Succession Committee. G overnance
152 Shell Annual Report and Accounts 2021 The Committee reviews and considers external stakeholder perspectives in relation to Shell’s business, and how Shell addresses issues of public concern that could affect its reputation and licence to operate. In line with the strategic importance of the Committee’s agenda, the Chair of the Board of Directors and the Chief Executive Officer of Shell plc regularly attend Committee meetings for discussions on specific topics. Shell’s Chief Executive Officer and the Executive Committee hold overall accountability for sustainability within Shell. In February 2022, Shell announced a newly created role of Strategy, Sustainability and Corporate Relations Director. The new director is a member of Shell’s Executive Committee. ACTIVITIES During 2021, the Committee focused on the areas of greatest operational and strategic importance to Shell, in line with its Terms of Reference. This allowed the Committee to oversee effectively and thoroughly the practices and performance of the Company with respect to safety, environment including climate change, and broader sustainability. The topics discussed in particular depth by the Committee included personal and process safety, a range of environmental topics, Shell’s energy transition targets, and remuneration metrics. The Committee also reviewed in detail Shell companies’ operations and the challenges faced in Nigeria. The Committee supported and contributed to the announcement of Shell’s Powering Progress strategy in 2021. This included a series of targets and commitments under the goals of achieving net-zero emissions, respecting nature, and powering lives. The Committee believes the Powering Progress strategy further demonstrates Shell’s determination to play its full role in the energy transition. The Committee has conducted in-depth discussions with senior management about how Shell’s energy transition targets for the near-term, medium-term and longer-term will be met through a combination of developing low-carbon energy businesses, transforming existing assets to energy and chemicals parks, carbon abatement programmes, portfolio actions, the use of nature-based solutions, and the development of carbon capture, utilisation, and storage (CCUS). Following the Committee’s review of remuneration with management, the safety and energy transition metrics have been further enhanced for the 2022 Executive Committee annual scorecard and the 2022-24 Long-Term Incentive Plan in order to drive further performance improvements. Together with the Audit Committee, the Committee reviewed the controls and procedures for managing contracting and procurement activities. The Committee Chair held several meetings with senior leaders to discuss specific topics, including reducing carbon emissions and enhanced assurance protocols. Committee members also held a series of individual engagements with business directors to discuss their reflections on emerging risks. The Committee also reviewed wider matters of public concern during 2021 such as plastic waste, methane emissions, human rights, diversity and inclusion, and access to energy in low- and middle-income countries. The Committee engaged with external stakeholders on the topic of plastic waste and undertook a feedback session on how Shell’s energy transition strategy and targets are perceived. The Committee continued to closely monitor and strongly support Shell’s response to the COVID-19 pandemic in 2021 in terms of care for staff and the safe management of operations. For further details on SESCo and how Shell manages sustainability see www.shell.com SITE VISITS The Committee postponed its planned site visits for 2021 because of the COVID-19 pandemic. The Committee instead conducted a virtual site visit to the Qatar Gas-to-Liquids facility via videoconference. The visit focused on safety and environmental performance and broader sustainability issues. The Committee Chair also held a follow-up engagement with the Rheinland Refinery in Germany to review safety performance and progress with the planned transformation of the site into an energy and chemicals park. Activities performed Frequency Review Shell’s practices and performance relating to safety, including the safe condition and responsible operation of Shell’s assets (Shell-operated ventures and non-Shell-operated ventures), with a focus on both employees and contractors Review Shell’s practices and performance relating to environment, including in particular environmental protection and greenhouse gas emissions Review any major incidents that impact, or had the potential to impact, Shell’s safety and environmental performance Review progress towards meeting Shell’s Powering Progress ambitions, including its near-term and longer term energy transition targets for net carbon intensity and becoming a net-zero emissions energy business, in step with society Endorse Shell’s annual assurance plan for Health, Security, Safety, Environment and Social Performance (HSSE & SP) and Asset Management Review execution of Shell’s HSSE & SP assurance plan and audit outcomes, and review relevant findings from Shell’s broader internal audit programme Assess Shell’s overall sustainability performance and provide input to Shell’s annual reporting and disclosures regarding sustainability Review how Shell addresses other major issues of public concern that could affect Shell’s reputation and licence to operate Review and consider external stakeholder perspectives in relation to Shell’s business Advise the Remuneration Committee on metrics relating to safety and energy transition Committee Activity Key: Annually Periodically Most meetings Every meeting As necessary SAFETY, ENVIRONMENT AND SUSTAINABILITY COMMITTEE continued Governance
153Shell Annual Report and Accounts 2021 AUDIT COMMITTEE REPORT Dear Shareholders, I am pleased to present our Audit Committee Report for 2021. I begin this report by welcoming Jane Holl Lute to the Audit Committee (AC). Jane joined the AC in July 2021 and her insights are a valuable addition to the AC. The primary role of the AC is to assist the Board in fulfilling its oversight responsibilities in areas such as the integrity of financial reporting, the effectiveness of the risk management framework and system of internal controls as well as consideration of ethics and compliance matters. We are responsible for assessing the quality of the audit performed by, and the independence and objectivity of, the external auditor. The AC also makes a recommendation to the Board on the appointment or reappointment of the external auditor. In addition, we oversee the work and quality of the internal audit function. The AC’s work programme over the course of a year focuses on a variety of matters that involve either a high degree of judgement and/or are significant to Shell’s consolidated financial statements. Topics addressed during 2021 included the potential impact of climate change on Shell’s consolidated financial statements, redundancy and restructuring charges related to Reshape, deferred taxes and tax exposures, significant portfolio acquisitions and divestments, third-party credit exposure, litigation, including the Dutch climate court case ruling, discount rates used for impairment testing, decommissioning and other provisions, impairment trigger assessments, charges and reversals, accounting for complex contracts, dividend distribution capacity and marked-to-market derivatives accounting. The AC reviewed with management areas which required significant judgement, the sources of estimation uncertainty and other key assumptions in light of economic and market uncertainty, climate risk and the energy transition, and evolving stakeholder expectations. In addition, the AC discussed with management the robustness of the risk and internal control management framework, results of internal control testing performed throughout the year and remediation activities. These discussions also covered how risks to controls stemming from the organisational restructuring aspects of Reshape were managed. The AC also received briefings from the Chief Internal Auditor on the effectiveness of Shell’s risk management and internal control system and on the outcomes of significant audits and notable control matters. The impacts of climate change and the energy transition touch on many aspects of the AC’s work. The AC’s focus areas for 2021 included a number of discussions on the financial statement impacts of climate change and energy transition and the increasing calls for expanded climate-related information. Non-financial reporting was one such topic and included discussions on planned enhanced disclosures related to climate change reporting and other ESG information. The AC reviewed the pricing methodology for oil and gas and discussed with management how the impact of climate change was reflected in the methodology. This topic provided greater insights to the AC as to how macroeconomic conditions, major trends in the industry, and geopolitical factors, including carbon pricing and long-term demand for oil and gas, are considered in developing the outlook for commodity prices and refining margin assumptions, which are important considerations in business planning, asset impairment analyses, and investment and divestment decisions. Further, the quarterly reports reviewed by the AC from Ernst and Young LLP (EY), our external auditor, and the Chief Internal Auditor, also included specific steps they have taken to incorporate climate change considerations into all facets of their work. The AC reviewed the additional disclosures in relation to the potential financial impacts of climate change. The AC, recognising the evolving nature of climate change risks and responses, concluded that climate change has been appropriately considered by management in key judgements and estimates and agreed with the disclosure made by management. “The primary role of the AC is to assist the Board in fulfilling its oversight responsibilities in areas such as the integrity of financial reporting, the effectiveness of the risk management framework and system of internal controls as well as consideration of ethics and compliance matters.” G overnance
154 Shell Annual Report and Accounts 2021 COMMITTEE MEMBERSHIP AND ATTENDANCE FOR 2021 Ann Godbehere Dick Boer Martina Hund-Mejean Gerrit Zalm Jane Holl Lute During 2021, the members and meeting attendance of the AC were as follows: Committee Member Member since Maximum possible meetings Number of meetings attended [A] % of meetings attended Ann Godbehere (Chair) May 23, 2018 6 6 100% Dick Boer May 20, 2020 6 6 100% Jane Holl Lute [B] July 28, 2021 2 2 100% Martina Hund- Mejean May 20, 2020 6 6 100% Gerrit Zalm March 8, 2017 6 6 100% [A] In addition to the six meetings, the AC conducted three deep-dive sessions and two virtual site visits as part of its activities. [B] Ms Lute was appointed to the Board with effect May 19, 2021 and the AC with effect from July 28, 2021. The AC reviewed the governance and controls related to Renewables and Energy Solutions (R&ES) new business models and ventures and was briefed on the new proposed business re-segmentation for 2022. Other focus topics for 2021 included pensions, trading and supply, and contracting and procurement, all of which represent significant financial activities and obligations. As part of its oversight of compliance with applicable legal and regulatory requirements, including monitoring ethics and compliance risks, the AC discussed with the Chief Ethics and Compliance Officer activities undertaken in the ethics and compliance programme related to conduct risks stemming from the continued effects of COVID-19 as well as Reshape, and steps taken to manage those risks. Due to continued COVID-19 travel restrictions, the AC conducted virtual visits to Shell’s Energy Transition Campus in Amsterdam and Shell’s Houston offices. As part of its virtual visit to the US, the AC also toured virtually the Shell Geismar Chemicals facility in Baton Rouge, Louisiana. These site visits deepen the AC’s understanding of the risks and opportunities arising in key markets as well as of how the Company’s Powering Progress strategy is being implemented in those locations. The visits also provide the opportunity for the AC to engage with a diverse range of Shell staff in each location and to hear directly from them. On a final note, the AC acknowledges the financial reporting team’s substantial work during 2021. While continuing under a remote work environment, the team has demonstrated resilience and continued focus on enhancements in reporting while working to maintain a robust control environment. The AC conveys its gratitude and appreciation for their strong commitment and dedication. ANN GODBEHERE Chair of the Audit Committee March 9, 2022 Focus areas for 2021 ■ Non-financial reporting (including enhanced disclosures related to climate change) ■ Oil and gas pricing methodology (including carbon pricing and long-term demand for oil and gas) ■ New business models and ventures ■ Contracting and procurement ■ Trading and Supply ■ Pensions Priorities for 2022 ■ Non-operated ventures controls and governance ■ Update on regulatory developments (including in relation to climate change and energy transition) ■ Portfolio activities (refineries) and managing post-completion rights and obligations ■ Asset Management System ■ GHG reporting and assurance framework AUDIT COMMITTEE REPORT continued Governance
155Shell Annual Report and Accounts 2021 AC REMIT The roles and responsibilities of the AC, as set out in its Terms of Reference, are reviewed annually taking into account relevant regulatory changes and recommended best practice. The key responsibilities of the AC include, but are not limited to: Risk Management and Internal Control ■ evaluating the effectiveness of the system of risk management and internal control; Financial Reporting ■ reviewing the integrity of the financial statements, including annual reports, half-year reports, and quarterly financial statements; ■ reviewing the potential impact on the consolidated financial statements of the implementation of the Company’s strategy, climate change and the energy transition; ■ advising the Board whether, in the AC’s view, the Annual Report taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess Shell’s position and performance, business model and strategy; ■ reviewing and discussing with management the appropriateness of judgements involving the application of accounting principles and disclosure rules; Compliance and Governance ■ reviewing the functioning of the Shell Global Helpline and reports arising from its operation; ■ overseeing compliance with applicable legal and regulatory requirements, including monitoring ethics and compliance risks; Internal Audit ■ monitoring the qualifications, expertise, resources and independence of the internal audit function; ■ approving the internal audit function’s remit and the annual internal audit plan to ensure alignment with the key risks of the business; ■ reviewing the significant matters arising from internal audits with the Chief Internal Auditor and assessing management’s response to significant internal audit findings and notable control weaknesses. This includes discussing with management potential improvements and agreed actions; ■ assessing internal audit’s performance and effectiveness each year; and External Audit ■ reviewing and monitoring the qualifications, expertise, resources and independence and objectivity of the external auditor; ■ considering the annual external audit plan and approving related remuneration, including fees for audit and non-audit services; ■ assessing the performance and effectiveness of the external auditor and the audit process, including an assessment of the quality of the audit; and ■ recommending to the Board for it to put to the Company’s shareholders for approval at the Annual General Meeting (AGM) to appoint, reappoint, or remove the external auditor. All AC members are financially literate, independent Non-executive Directors. In respect of the year ended December 31, 2021, for the purposes of the UK Corporate Governance Code, Ann Godbehere and Martina Hund-Mejean both qualify as: a person with “recent and relevant financial experience” and competence in accounting, and, for the purposes of US securities laws, an “audit committee financial expert”. The experience of the AC members outlined on pages 121-128 demonstrates that the AC as a whole has competence relevant to the sector in which Shell operates, and the necessary commercial, regulatory, financial and audit expertise required to fulfil its responsibilities. The AC members have gained further knowledge and experience of the sector as a result of their Board membership and through various in-person and virtual site visits since their respective appointments. The AC invites the Chief Financial Officer, the Legal Director, the Chief Internal Auditor, the Executive Vice President (EVP) Taxation and Controller, the Vice President Group Reporting and the external auditor to attend each meeting. The Chief Executive Officer attends each meeting where the quarterly, half-year and year-end financial results are discussed. The Chair of the Board also regularly attends AC meetings. Other members of management attend when requested on specific topics or to provide input on more detailed technical matters that may arise. The AC regularly holds private sessions separately with the Chief Internal Auditor and the external auditor without members of management, except for the Legal Director, being present. Outside of the formal AC meetings the AC Chair meets regularly with each of the Chief Financial Officer, EVP Taxation and Controller, the Chief Internal Auditor, the external auditor, and the Chief Information Officer (CIO). G overnance
156 Shell Annual Report and Accounts 2021 These responsibilities form the basis of the AC’s annual work plan, which is adjusted throughout the year as necessary. In addition, the AC annually identifies certain business and function areas to focus on during that year. The focus areas generally encompass aspects of risk management and internal control, financial reporting and compliance. The AC is authorised to seek any information it requires from management and external parties and to investigate issues or concerns as it deems appropriate. The AC may also obtain independent professional advice at the Company’s expense. No such independent advice was requested in 2021. The AC keeps the Board informed of its activities and recommendations, and the Chair of the AC provides an update to the Board after every AC meeting. The AC discusses with the Board if it is not satisfied with or believes that action or improvement is required concerning any aspect of financial reporting, risk management and internal control, compliance or audit-related activities. A copy of the AC’s Terms of Reference, which was updated to reflect the amended New York Stock Exchange rule regarding the AC’s oversight for related party transactions and AC’s role regarding the impact of Shell’s strategy, climate change and energy transition on the financial statements of the Company and with respect to non-financial reporting relating to climate change and energy transition metrics, can be found at www.shell.com. AC TOPIC COVERAGE IN 2021 The pie chart below shows the percentage of time the AC spent on various activities during 2021. Senior leaders from various business and function areas briefed the AC on the adequacy, design and operational effectiveness of risk management and controls related to the critical activities carried out by their respective business or function. The discussions included information on any enhancements to strengthen controls and how areas identified for improvement had been addressed, monitoring activities around key risks, and steps being taken to identify new or emerging risk areas. In addition to the significant accounting and reporting considerations discussed on page 160, the business and function areas reviewed by the AC in 2021 included the following: ■ Non-Financial Reporting (NFR) – The AC was briefed on the increasing pace of change in external regulatory and voluntary frameworks in non-financial reporting, which includes ESG reporting. The AC and management discussed the key shifts in the external landscape and in particular requests for expanded disclosure regarding: (i) a company’s resilience to climate-related financial impacts, (ii) quantification of climate risks likelihood and impacts (including physical risks), (iii) explanations on emissions methodologies, (iv) further granularity on targets, and (v) details on low-carbon activities such as capital expenditure, revenues and research and development. The AC noted that Shell’s NFR and ESG disclosures are included in Shell publications such as the Annual Report, the Sustainability Report, the Shell Energy Transition Strategy and Shell’s website. The AC was informed of key regulatory and ESG frameworks and Shell advocacy activities in this area. The AC and management also discussed planned climate-related disclosure enhancements in Shell’s reporting in line with the framework of the Task Force on Climate-Related Financial Disclosures (TCFD) and guidance from regulators. The AC and management discussed the expanded disclosures around governance, strategy, risk management, and targets and metrics and how to describe these elements and demonstrate the interdependencies that exist in practice between them. Management and the AC discussed the scenarios included in the expanded disclosure to assist stakeholders to understand the robustness of Shell’s forward-looking strategy and plans across a range of possible future states. The AC and management also discussed a new note to the financial statements which summarises key areas where climate related risks are considered and the related impact on the financial statements. ■ Oil and gas pricing methodology – The AC reviewed the process, methodology and approach to price assumptions used in Shell for such purposes as business planning, accounting (for example, impairment and deferred tax assessments) and investment and divestment decisions. The AC considered the overall governance framework, how the key principles of independence, expertise, consistency and stability are applied and management’s oversight responsibilities. The AC also reviewed how factors such as supply and demand outlooks, the pace and extent of energy transition in different energy sources and markets, and macroeconomic conditions are considered when developing Shell’s short and long-term price assumptions. The AC also discussed with the external auditor its independent analysis of price assumptions and external benchmarks for price assumptions. AUDIT COMMITTEE REPORT continued FOCUS AREAS FOR 2021 23% of AC time and activities External Audit In te rn al A ud it G ov er na nc e Co m pl ia nc e an d Financial Reporting Risk Management a nd In te rn al C on tr ol s 2021 Focus Areas23% 9% 8% 24% 12% 24% Governance
157Shell Annual Report and Accounts 2021 FOCUS AREAS FOR 2021 continued ■ New business models and ventures – The AC received a briefing from management regarding the governance approach to new business models and ventures, including R&ES portfolio companies. The AC and management discussed the activities in 2021 to govern the implementation of the Shell Control Framework in the R&ES portfolio companies and the status of such activities. Management also provided the AC with an overview of recent internal audit results. The AC reviewed with management the challenges and risks related to the R&ES businesses and the learnings and planned governance improvements to support the R&ES ambitions. ■ Contracting and Procurement (C&P) – As part of a joint session with the Safety, Environment and Sustainability Committee (SESCo), the AC was briefed on Shell’s C&P programme. This included an overview of how (i) C&P and business lines work together to procure services and goods, (ii) C&P digital tools are designed to ensure that potential risks relating to procurement contracts, such as credit risks, regulatory requirements and ethics and compliance matters, are appropriately addressed at individual and Group level, and (iii) through its procurement activities, Shell manages stakeholders’ expectations that Shell will positively influence third parties in environmental and social issues; such as climate change, conserving natural resources and biodiversity, and promoting human rights, worker welfare, safety, and diversity. C&P leaders, the AC and SESCo discussed efforts to ensure continued competitive performance and resilience amid increasing volatility, rising inflation and supply chain disruption. In response to a request from the AC, the C&P leaders provided the supply chain risks matrix and how each risk is being managed. ■ Trading and Supply’s (T&S) control framework – Noting the continued regulatory demands in this area, the AC met with T&S leaders, including the Risk Officer, to gain a deeper understanding of the controls and processes enhancements undertaken in 2021. The AC was briefed on the Integrated Risk Management Framework being developed and the capabilities and systems improvements identified through the market risk road map. The AC and T&S leaders also discussed the progress on strengthening IT general controls, front and mid-office controls and compliance functions. T&S leaders briefed the AC on the structural organisational changes being made to enable effective implementation of systems and processes enhancement while managing the risks arising from a volatile commodity price environment and the impact of Reshape. ■ Pensions – Treasury leaders provided the AC with an overview of Shell’s pension plans which cover around 230,000 current and past employees in 46 countries. The AC reviewed the governance arrangements and operating model for Shell’s pension plans that result from their independent trust structures in different jurisdictions. The AC was briefed on pension risks and risk management governance, actuarial and investment management, operational oversight, and assurance activities undertaken by two centres of expertise which support Shell’s pension plans. The AC gained insights into the control framework, standards, modelling and guidelines that are designed to ensure appropriate measurement and reporting of pension liabilities, assets, and annual payments. In January 2022, the AC conducted a virtual visit to Shell’s Houston, Texas offices. As part of this visit, the AC received briefings on how the US businesses are implementing Shell’s Powering Progress strategy through an overview of various energy transition projects and initiatives. The AC also was informed of the initiatives under the Racial DEI Plan, which focuses on inclusion, representation and outreach, and planned activities focused on issues of race, ethnicity, which also include diversity, equity, and inclusion as it relates to gender, LGBT+, and people with disabilities. The AC also gained insight into the cyber-security defence and risk operations; the regional advancement of the energy transition in the USA; the integrated Power approach between Trading and Supply and R&ES businesses; and engaged with staff on how Shell is powering lives. The AC also conducted a virtual visit to Shell’s Geismar chemicals facility in Baton Rouge, Louisiana, which is the centre of a suite of potential projects that are focused on infrastructure and emissions mitigations to deliver low-carbon products to its customers. As part of this virtual facility visit, the AC reviewed risk management through the deep-water Gulf of Mexico lens of dealing with COVID-19, rapid and significant oil price declines and Hurricane Ida. In February 2022, the AC undertook a virtual visit to Shell’s Energy Transition Campus in Amsterdam. As part of this visit, the AC and Project and Technology (P&T) leaders discussed P&T’s business risk management and risk matrix. The AC was also provided with an overview of P&T’s portfolio, including those that support the energy transition and Shell’s net-zero emissions target, and was briefed on a current P&T project. As part of its review of new business models and ventures, the AC had intended to visit one of Shell’s new ventures in 2021. Due to COVID-19 travel restrictions, this visit has now been rescheduled to take place in 2022. Site visits are a welcome addition to the AC’s annual work plan, as they provide the opportunity for the AC to gain a deeper understanding of the various businesses and functions at each location, the local external environment within which those activities take place and how they contribute to Shell achieving its strategic ambitions. In addition to in-depth examinations of specific business areas, these visits enable the AC members to interact with a diverse group of staff and learn about their experiences, challenges they face and their opportunities for career development. The AC is also briefed on the impact of the energy transition at a local level, how risks associated with climate change are managed, and the results of the Shell People Survey. G overnance
158 Shell Annual Report and Accounts 2021 The AC assists the Board in fulfilling its responsibilities in relation to risk management and internal control. In order to monitor the effectiveness of the procedures for internal control over financial reporting, compliance and operational matters, the AC reviews reports on risks, controls and assurance, including the annual assessment of the system of risk management and internal control. This annual assessment includes the AC’s review of outcomes from the Group Assurance Letter process. The Group Assurance Letter process involves each Executive Director conducting a structured internal assessment of compliance with legal and ethical requirements and the Shell Control Framework. The AC also reviews the Company’s evaluation of the internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act (SOX 404). The AC updated the Board on compliance with internal controls across the Shell Group and on any major matters for which action or improvement was recommended. Activities performed Frequency Risk Management and Internal Control Review the policies and practices and monitor the effectiveness relating to Shell’s risk management and internal control system. Receive briefings on regulatory developments. Review management’s SOX 404 assessment. Discuss significant matters arising from completed internal audits with the Chief Internal Auditor, management and the external auditors. Assess management’s responses to significant audit findings, recommendations and notable control weaknesses, including potential improvements and agreed actions. Review significant legal matters with Shell’s Legal Director. Review the oil and gas reserves control framework. Review Shell’s information risk management. Review Shell’s tax function, key tax risks and Shell’s approach to the evolving area of tax transparency. Committee Activity Key: Annually Quarterly Periodically Throughout the year, the AC and management discuss the Company’s overall approach to risk management and internal control, including compliance, tax, and information risk management matters and the adequacy of disclosure controls and procedures. The AC receives quarterly reports from the EVP Taxation and Controller on the status of actions to address control weaknesses identified via business control incidents and the trends in other measures used to monitor the robustness of the risk management framework and internal control systems. The AC is also briefed on litigation matters (see “Governance” on page 198 and Note 26 to the “Consolidated Financial Statements” on pages 278-279. The AC regularly reviews the status of management’s SOX 404 testing of controls and remediation actions to address any identified weaknesses. Similar to 2020, for 2021, these reviews included consideration of how the COVID-19 pandemic affected the controls and assurance landscape, including the financial reporting process. The AC and management discussed the steps taken to maintain an effective control environment, to demonstrate “management in control” during the pandemic and to address any new or emerging risks due to the working-from-home setting. The AC was also briefed on how management was monitoring and addressing any impacts on the control environment from the organisational restructuring from Reshape. It is important that the AC monitor and learn about evolving external developments in a timely fashion. Accordingly, the AC was informed of developments in the legal, regulatory and financial reporting landscape that could affect the Company. The AC’s briefings in this area were supplemented by the overview of the ESG reporting landscape provided as part of its non-financial reporting focus topic for 2021. In 2021, the AC dedicated time to the following topics: ■ Tax risks – In addition to the regular review of Shell’s tax provisions, the AC and management discussed the Tax function’s operational performance and key developments and challenges for a global company like Shell operating across many differing tax jurisdictions. The AC was briefed on the tax integrated assurance model which is designed to ensure compliance with applicable tax, disclosure and accounting requirements. Management outlined for the AC the potential implications of the current external tax environment and increasing demand for scrutiny and transparency. These included expected higher compliance burden, increased risk of double taxation, tax challenges arising from the digitalisation of the economy, and potential upward pressures on effective tax rates. ■ Information risk management – The CIO briefed the AC on the diverse risk landscape and the steps being taken to manage the increased external threats observed. The AC was informed of the investments made to build a robust cyber-security framework over the last decade with enhanced cyber-incident detection, response and recovery capabilities, and expanded monitoring and data protection. The AC and CIO also discussed the transformation occurring in Shell’s IT systems as part of the Powering Progress strategy, reflecting the evolving portfolio of businesses and the greater number of digital products for customers. ■ Oil and gas reserves control framework – The AC annually reviews the framework that supports Shell’s internal reporting and external disclosures of oil and gas reserves. The AC also reviews the processes and controls that prevent and/or mitigate the risks of non-compliance with regulatory reporting requirements. This annual review of Shell’s oil and gas reserves control framework supports the AC’s review of Shell’s reported proved oil and gas reserves discussed later in this report. In addition to the above, the AC also had quarterly discussions with the Chief Internal Auditor regarding the Company’s risk management and internal control system, significant matters arising from the internal audit assurance programme and management’s response to significant audit findings and notable control weaknesses, including planned improvements and agreed actions. The AC similarly holds discussions with EY on a quarterly basis regarding how risks to audit quality are addressed, key accounting and audit judgements, results from audit procedures and management’s response to any significant audit findings and any material communications between EY and management. RISK MANAGEMENT AND INTERNAL CONTROL AUDIT COMMITTEE REPORT continued 24% of AC time and activities Governance
159Shell Annual Report and Accounts 2021 The AC receives comprehensive reports from management and the external auditor on quarterly financial reporting, accounting policies and significant judgements and reporting matters. Activities performed Frequency Financial Reporting Review Shell’s accounting policies and practices, including compliance with accounting and reporting standards. Assess the appropriateness of key judgements and the interpretation and application of accounting principles. Review the potential impact on the consolidated financial statements of the implementation of the Company’s strategy, climate change and the energy transition Consider the integrity of the year-end financial statements and recommend to the Board whether the audited financial statements should be included in the Annual and statutory reports. Consider the integrity of the half-yearly report and quarterly financial statements. Review management’s assessment of going concern and longer-term viability. Review Shell’s policies with respect to earnings releases; financial and non-financial performance information and earnings guidance; and significant financial reporting matters. Review Shell’s policies with respect to oil and gas reserves accounting and reporting including the outcome of the oil and gas reserves booking/debooking process. Review the internal controls for financial reporting. Advise the Board of the AC’s view on whether, taken as a whole, the Annual Report is fair, balanced and understandable and provides the information necessary for shareholders to assess Shell’s position and performance, business model and strategy. Committee Activity Key: Annually Quarterly Periodically The AC reviewed the Company’s 2021 quarterly unaudited interim financial statements, half-yearly report and Annual Report with management and the external auditor. Shell uses alternative performance measures (APMs) to provide greater insights into its financial and operating results. The AC regularly considers the APMs used in Shell’s reporting, the reconciliations to IFRS financial statements and explanations for changes from the previous quarter. The AC reviews the overall presentation of APMs with management to ensure they are not given undue prominence. The AC discusses adjusting items with management including any changes to methodology. In 2021, the AC was briefed on a new APM: Adjusted EBITDA on a FIFO and CCS basis. The APMs disclosed by Shell are subject to the same internal controls process as for other financial reporting. Fair, balanced and understandable assessment The AC advised the Board that in its view the 2021 Annual Report including the financial statements for the year ended December 31, 2021, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess Shell’s position and performance, business model and strategy (see “Governance” on page 198). To arrive at this conclusion, the AC critically assessed drafts of the 2021 Annual Report including the financial statements and discussed with management the process undertaken to ensure that the relevant requirements were met. This process included: verifying that the contents of the 2021 Annual Report are consistent with the information shared with the Board during the year to support their assessment of Shell’s position and performance; ensuring that consistent materiality thresholds are applied for favourable and unfavourable items; considering observations from the external auditor; and receiving assurance from the Executive Committee (EC). Going concern and viability statement The AC reviewed and considered the Directors’ half-year and full-year statements with respect to the going concern basis of accounting. As noted in the viability statement, the Board also reviews the strategic plan which takes account of longer-term forecasts and a wide range of outlooks. Key assumptions included: the impact of commodity prices; exchange rates; future carbon costs; agreements like liquid natural gas contract renewals; production levels and product demand, schedules of growth programmes; the financial framework; Shell’s business portfolio developments including consideration of the impacts of various possible energy pathways and scenarios for changes in societal expectations in relation to climate change and Shell’s commitment to the Paris Agreement goals; the project funnel to support future growth; and using severe but possible scenarios to run models of the financial impact if certain of Shell’s principal risks materialised. The AC reviewed management’s determination that the associated material impacts from climate change and energy transition risk, including the recent Dutch court ruling, were appropriately considered in the context of the three-year viability statement period. The AC considered the mitigating measures and sensitivities that management had applied to the modelling of scenarios when evaluating the viability statement and noted that assumptions do go well beyond the three-year period and do take into account climate change and energy transition. The AC also considered the merits of extending the viability statement beyond a period of three years and concluded that the three-year period selected by the Board for the review of Shell’s prospects, in line with the operating plan, remained appropriate. The AC supported the going concern basis of accounting and the inclusion of Shell’s viability statement in “Governance” on page 199 and considered such statement to be in line with best practice guidance issued by the Financial Reporting Council (FRC). FINANCIAL REPORTING 24% of AC time and activities G overnance
160 Shell Annual Report and Accounts 2021 SIGNIFICANT ACCOUNTING AND REPORTING CONSIDERATIONS The AC assessed the following significant accounting and reporting areas, including those related to Shell’s 2021 Consolidated Financial Statements. The AC was satisfied with how each of the areas below was addressed. As part of this assessment, the AC received reports, requested and received clarifications from management, and sought assurance and received input from the internal and external auditors. Issue AC activity and outcome Climate change and energy transition Climate change and energy transition related risks are continually monitored to ensure impacts are reflected within Shell’s financial statements. After a claim by Milieudefensie (Friends of the Earth Netherlands), other NGOs and a group of private individuals, in May 2021 the District Court in The Hague ruled that Shell must reduce its global net carbon emissions by 45% by 2030 compared with 2019 levels. The external landscape related to non-financial disclosures continues to change at unprecedented speed. In the absence of one global standard for climate related reporting there are growing demands from various regulatory and voluntary bodies all with their own expectations for disclosures. The AC was briefed on key regulatory requirements including (but not limited to) the FRC, SEC and EU disclosure requirements and their implications for Shell’s external disclosures. The AC reviewed the new Note 4 of the financial statements summarising the key climate risks impacts on the Financial Statements as well as the new impairment sensitivity disclosures using price outlooks based on different climate change scenarios, including external scenarios. See Note 4 to the “Consolidated Financial Statements” on pages 242-245. The AC has considered the impact of the Dutch climate court case ruling on financial reporting. As at the second quarter of 2021 it agreed with management’s conclusion that the outcome of the case had no impact on the 2021 interim financial statements. In the third quarter 2021 Shell announced absolute GHG emissions reduction target of 50% on all Scope 1 and 2 emissions under Shell’s operational control by 2030, compared to 2016 levels on a net basis. This target has been reflected in the operating plan as reviewed by the Board. The AC sought assurance from management that assumptions used for the preparation of the consolidated financial statements are consistent with the operating plan. The AC was briefed on the non-financial reporting external landscape developments and regulatory requirements. In doing so, the AC considered the potential implications required for Shell’s external disclosures going forward (see Shell Powering Progress on pages 6-11). The AC reviewed the TCFD disclosure in the Energy Transition and Climate Change section and other non-financial disclosures as part of the Annual Report review and was briefed on the new EU taxonomy voluntary disclosures included as supplementary information to the Annual Report. Updates regarding climate change and energy transition have been included in the risk factors section on pages 75-98. Impairment and impairment reversals The carrying amount of an asset should be tested for impairment or impairment reversal whenever events or changes in circumstances indicate that the carrying amount for that asset may have changed, for example if there is a change in the outlook for commodity prices or refining margin assumptions, or revisions to future activity plans and developments. On classification as held for sale, the carrying amounts of property, plant and equipment (PP&E) and intangible assets must also be reviewed. The AC reviewed the impairment assessments that were performed each quarter, and the methodology applied in conducting impairment assessments. The AC reviewed the changed estimation technique to determine the value in use for impairment testing, including the change to a post-tax WACC based methodology and the appropriateness of the resulting new discount rate applied. The AC considered the updated oil and gas price and refining margin outlooks against market developments and benchmarks. The 2022 short term oil and gas price assumptions have been updated to reflect the current market environment. Notwithstanding the current buoyant oil and gas commodity markets, the long-term oil and gas price assumptions have not materially changed and therefore there have been no impairment or impairment reversal triggers. The AC also reviewed other impairment triggers, including for exploration and evaluation assets, held-for-sale classification for asset disposals (e.g. Puget Sound and Deer Park) and plans to convert refineries into energy and chemicals parks. The AC review of impairments covered a significant proportion of the balance sheet. See Notes 2, 8, 9 and 10 to the “Consolidated Financial Statements” on pages 233-241 and 249-254. Taxation The determination of tax assets and liabilities requires the application of judgement as to the ultimate outcome, which can change over time. In particular, tax exposures and the recognition of deferred tax assets require management to make assumptions regarding future profitability. As a result they are inherently uncertain. The AC considered the uncertain tax positions and discussed management’s assumptions of future taxable profits, including the impact of foregone future profits due to disposals. The AC also evaluated the appropriateness of the recognition of deferred tax assets and tax liabilities. The AC acknowledged that assumptions regarding future taxable profits are inherently uncertain because they involve assessing factors such as the pace of economic recovery in different countries and the potential impacts of climate change and energy transition. The AC deemed the assessments of uncertain tax exposures and the recognition of deferred tax assets and tax liabilities to be reasonable. The AC also assessed the accounting judgments made regarding the treatment of tax provision releases relating to Nigeria. The AC also reviewed the impact on tax balances and disclosures as a result of the simplification of Shell’s structure in 2021 and aligning Shell’s tax residence with its country of incorporation in the UK. See Notes 2 and 17 to the “Consolidated Financial Statements” on pages 233-241 and 259-261. AUDIT COMMITTEE REPORT continued FINANCIAL REPORTING continued Governance
161Shell Annual Report and Accounts 2021 Issue AC activity and outcome Portfolio activities In implementing the Powering Progress strategy, several portfolio developments occurred in 2021. In particular, there was rationalisation of the refinery portfolio, divestment of Upstream assets and investments in Renewables and Energy Solutions. The AC discussed the accounting implications of these decisions and the recognition of: (i) decommissioning and restoration provisions; (ii) deferred tax balances; (iii) impairment; and (iv) assets held for sale. The AC also considered the complex accounting treatments associated with some of the new business arrangements, such as the Amazon transaction and Hollandse Kust Noord CrossWind. The AC provided support for projects to develop detailed accounting guidance for these types of transaction. See Notes 2 and 19 to the “Consolidated Financial Statements” on pages 233-241 and 267. Reshape restructuring provisions A comprehensive portfolio and organisational review, Reshape, was implemented during 2021 with related redundancy provisions, pension curtailments and charges recognised in the 2021 Consolidated Financial Statements. During Q1 2021 the AC considered the accounting implications and whether the criteria to recognise a restructuring provision as per IAS 37.72 were fulfilled. The AC concurred with management that the criteria had been met by March 31, 2021 and that it was appropriate to recognise the restructuring provision. The AC also considered the effect of Reshape, received updates and reviewed associated accounting implications as Reshape activities progressed throughout the year. See Notes 2 and 19 to the “Consolidated Financial Statements” on pages 233-241 and 267. Decommissioning and restoration provisions Decommissioning and restoration provisions are one of the main components of balance sheet liabilities. The quantification of these provisions requires judgements on input parameters which include, but are not limited to, estimated future decommissioning and restoration costs and discount rates. Following the AC’s 2020 review of the decommissioning and restoration process, in 2021 the AC reviewed the input parameter assumptions and judgements used in arriving at the provisions. The AC reviewed the appropriateness of updates to the discount rate for provisions in Q4 2021 and shorter expected average duration of decommissioning and restoration outflows. See Note 19 to the “Consolidated Financial Statements” on page 267. Retirement benefit obligations Retirement benefits are an important component of both balance sheet assets and liabilities. The quantification of these assets and liabilities requires judgements on input parameters which include, but are not limited to, actuarial assumptions and discount rates. The AC was briefed on the management and risks in relation to retirement benefits in 2021, including financial, operational, and regulatory developments. The AC reviewed the key assumptions and sensitivities as part of the Annual Report review and the enhanced disclosures made in the 2021 Annual Report. See Note 18 to the “Consolidated Financial Statements” on pages 261-266. Trading and Supply, derivatives accounting and expected credit losses External events during the year such as the Texas winter storm and developments in gas and power markets in the second half of 2021 affected trading activities. The impacts on financial outcomes of Integrated Gas and Renewable and Energy Solutions included, for example, expected credit losses in the first quarter, and mark-to-market fluctuations and derivative cash flows in the third and fourth quarters. The AC was briefed on Trading and Supply activities and developments. The AC reviewed the expected credit losses in Q1 relating to the Texas winter storm. In Q3 and Q4 the AC reviewed the impact of volatile gas and power markets including the impact on mark-to-market valuation of derivatives, IFRS and Adjusted Earnings, as well as the resulting cash flows movements. New reporting segments 2022 To align external disclosures with the Powering Progress strategy and the way Shell’s CEO reviews and assesses performance, management reassessed Shell’s segment reporting. Starting on January 1, 2022, Shell’s reportable segments will consist of Marketing, Renewables and Energy Solutions, Chemicals and Products, Integrated Gas, Upstream and Corporate. The AC assessed the appropriateness of the planned reportable segments for 2022 and received updates on implementation readiness to ensure the integrity of the reportable segments in Q1 2022. The AC also discussed with management implications for future impairment testing of the cash generating units including testing of goodwill relative to the new reportable segments. Alternative performance measures (APMs) and improved financial disclosures The use of APMs is reviewed throughout the year to consider attributes such as usefulness to stakeholders, how easy they are to understand and reconciliation transparency. To further improve the quality of insights provided by Shell’s financial disclosures, improvements were made during the year for example around enhanced data disclosures and the disclosure of assets held for sale on the balance sheet. The AC undertook its regular monitoring and assessment in the use of APMs, for example Adjusted Earnings (including identified items during the quarters and the identified items policy update in Q1 2021), CFFO excluding working capital, and Net Debt and Gearing. The AC reviewed the appropriateness of the financial disclosure improvements made during Q1 2021 including the changes to the MD&A in the Quarterly Results Announcement, the enhance disclosures in the Quarterly Date Book, and the introduction of adjusted EBITDA on a CCS and FIFO basis as APMs. As a result of the Permian sale announcement in Q3 2021, the AC reviewed the appropriateness of the Asset Held for Sale classification in the balance sheet. Other matters The AC reviewed: the year-end reported proved oil and gas reserves, including management judgements and adjustments made to reflect changes in geological, technical, contractual and economic information (including yearly average price assumptions) and the effectiveness of financial controls. On February 28, 2022, Shell announced its intention to exit its ventures in Russia with Gazprom and related entities. Subsequently, on March 8, 2022, Shell announced its intention to withdraw from its involvement in all Russian hydrocarbons in a phased manner, including shut its service stations, aviation fuels, and lubricant operations in Russia. These announcements have been included as non-adjusting post balance sheet events (PBSE) in the Consolidated Financial Statements and have been reviewed by the AC (see note 32 on page 283). FINANCIAL REPORTING continued G overnance
162 Shell Annual Report and Accounts 2021 Activities performed Frequency Compliance and Governance Monitor the receipt, retention, investigation and follow-up actions of complaints received, including those from the Shell Global Helpline. Review with the Chief Ethics and Compliance Officer the implementation and effectiveness of the ethics and compliance programme and function. Discuss compliance with applicable external legal and regulatory requirements. Perform an evaluation of the AC’s performance and effectiveness and report the results to the Board. Review and update the AC’s Terms of Reference. Review the Chief Financial Officer’s significant business and investment transactions for potential conflicts or related party transactions. Assess the Chief Financial Officer’s performance. Committee Activity Key: Annually Quarterly Periodically Ethics and compliance In 2021, the AC received an update from the Chief Ethics and Compliance Officer on how a range of macro factors and external trends and developments, the continued effect of COVID-19 and changes as a result of Reshape were affecting conduct risk at Shell. The Chief Ethics and Compliance Officer summarised the specific emerging conduct risks and management’s actions to manage and mitigate them. The Chief Ethics and Compliance Officer briefed the AC on communications to staff from both senior leaders and mid-level management reinforcing the importance of adherence to and affirming Shell’s commitment to the Ethics and Compliance framework and Code of Conduct throughout the pandemic. With staff returning to the workplace and the roll-out of the Future of Work initiative, the AC and the Chief Ethics and Compliance Officer discussed the potential challenges of hybrid work environments. These included the risk of employees feeling disadvantaged by working remotely and the possible loss of the informal learning and development that occurs when employees are together in the workplace. The Chief Ethics and Compliance Officer informed the AC of management’s considerations to address these challenges, which include using digital technology, novel approaches to training, and developing bite-sized and focused training to give staff targeted information. As part of the annual assessment of the system of risk management and internal control, the AC discussed with the Chief Ethics and Compliance Officer his annual report on compliance matters. The report included an overview of the effectiveness of the Shell ethics and compliance programme in managing ethics and compliance risk in Shell’s business activities, regulatory developments and compliance activities. The AC also discussed investigations of cases involving ethics and compliance concerns. The AC discussed management’s findings in such cases to satisfy itself that a rigorous process had been followed, and that appropriate disciplinary action had been taken where necessary and management had embedded learnings into Shell’s systems and controls. Whistleblowing investigations The AC is responsible for establishing and monitoring the implementation of procedures for the receipt, retention, investigation and follow-up actions COMPLIANCE AND GOVERNANCE AUDIT COMMITTEE REPORT continued of complaints received, including those from the Shell Global Helpline. The AC reviewed whistleblowing reports and internal audit reports and considered management’s responses to the findings in these reports. Regulatory developments The AC was briefed on regulatory developments in areas including sustainable finance (in particular management’s work on the EU Sustainable Finance Taxonomy); non-financial reporting (in particular management’s assessment of the EU Non-Financial Reporting Directive Revision); accounting and reporting; environmental liabilities and treasury activities. In March 2021, the UK Government’s Department for Business, Energy & Industrial Strategy (BEIS) launched a consultation paper entitle “Restoring trust in audit and corporate governance”. This paper contained wide ranging proposed reforms to strengthen the UK’s audit and corporate governance regime. The AC and management discussed the proposed reforms, including implications for the Company, the Board and the AC. The AC reviewed management’s proposed responses to certain topics in the consultation paper. The AC supports the Company’s response to BEIS. AC annual evaluation The AC undertakes an annual evaluation of its performance and effectiveness. Consistent with the Board’s annual performance evaluation for 2021, the AC’s performance evaluation was facilitated by Lintstock Limited, a London-based corporate advisory firm. Each AC member responded to a confidential questionnaire about the AC’s performance with questions on: the management of the AC in areas such as the annual cycle of work, agenda for meetings and time and input in meetings; the quality of the information provided to the AC; the value of the briefings provided to the AC on specific topics; the effectiveness of the AC’s oversight in areas such as financial reporting, risk management and internal control, compliance and governance and the work of internal and external audit; rating the AC’s performance in reviewing and assessing significant accounting and reporting judgements; and how to improve the AC’s performance. In assessing its progress against 2020 goals, the AC concluded it had achieved the 2021 priorities identified in the 2020 evaluation discussion (including the planned visits to Shell’s Houston offices and to Shell’s Energy Transition Campus in Amsterdam, reviews related to pensions, new business models and ventures, non-financial reporting, oil and gas pricing methodology, regulatory developments, C&P, and integrated risk management). The AC discussed the outcome of this review as part of its annual evaluation. The AC concluded that its performance in 2021 had been effective and that it had fulfilled its role in accordance with its Terms of Reference. In preparing its workplan for 2022, the AC has agreed to the following focus areas in addition to the standing items: joint venture and non- operated ventures controls and governance; update on regulatory developments (including in relation to climate change and energy transition); portfolio activities (refineries) and managing post-completion rights and obligations; the GHG reporting and assurance framework; and the Asset Management System. As noted earlier, the AC also plans to visit one of Shell’s new ventures in 2022 as a continuation of its focus on new business models and ventures in 2021. 8% of AC time and activities Governance
163Shell Annual Report and Accounts 2021 Activities performed Frequency Internal Audit Evaluate the quality, efficiency and effectiveness of the internal audit function including the competence, qualifications, expertise, compensation and budget. Review and approve the internal audit function’s remit, charter and audit plan. Assess the performance of the Chief Internal Auditor. Committee Activity Key: Annually Quarterly Periodically Quarterly, the AC discusses with the Chief Internal Auditor the Company’s risk management and internal control system, any significant matters arising from the internal audit assurance programme and management’s response to significant audit findings and notable control weaknesses including planned improvements and agreed actions. The AC also regularly holds private sessions separately with the Chief Internal Auditor without members of management, except for the Legal Director, being present. The AC’s time for these activities is included in Risk Management and Internal Control described earlier in this report. Outside of the formal AC meetings, the AC Chair meets regularly with the Chief Internal Auditor. Internal audit remit The internal audit function is an independent assurance function which supports Shell’s continuous efforts to improve its overall control framework. The internal audit function contributes to the maintenance of a systematic and disciplined approach to evaluate and improve the design and effectiveness of Shell’s risk management, control and governance processes. The primary role of the internal audit function’s assurance and investigation activities is to safeguard value by protecting Shell’s assets, reputation and sustainability in relation to the organisation’s defined goals and objectives. The AC defines the responsibility and scope of the internal audit function and approves its annual plan. The Chief Internal Auditor reports functionally to the Chair of the AC and administratively to the Chief Financial Officer. The Chair of the AC approves, in consultation with the Chief Financial Officer, all decisions regarding the performance evaluation, appointment or removal of the Chief Internal Auditor. Annual internal audit plan and assessment of internal audit’s effectiveness The AC considered and approved the internal audit function’s annual audit plan, including focus areas for 2021 consisting of: ■ talent and capability (professional audit development and technical capabilities); ■ quality (developing first-line staff competence and clarity on self- verification and supervisory controls); ■ alignment (improved integration of risk management and alignment of assurance processes across Shell); and ■ engagement (mainly in the area of keeping staff and Shell stakeholders engaged and informed on effective risk management and internal control). Beginning August 2021, audits of the Health, Safety, Security, Environment and Social Performance Control Framework were added to internal audit’s remit, creating a unified internal audit function. Recognising that 2021 was a transition year for internal audit due to Reshape, the Chief Internal Auditor updated the AC quarterly on the approved 2021 internal audit plan and discussed whether the plan remained fit for purpose in addressing the most critical areas of risk in a year of transition. The AC assessed the performance of the internal audit function as effective. The AC also assessed the performance of the Chief Internal Auditor as effective. The Chief Internal Auditor periodically assesses whether the purpose, authority and responsibilities of the internal audit function continue to enable it to accomplish its objectives. The results of this periodic assessment are communicated to the EC and AC. The Chief Internal Auditor maintains an internal quality assurance and improvement programme. This covers all aspects of internal audit’s activities and evaluates whether they conform with the standards of the Chartered Institute of Internal Auditors. The Chief Internal Auditor conducts an annual assessment of the efficiency and effectiveness of internal audit’s activities, identifying opportunities for improvement. The Chief Internal Auditor discusses the results of this annual assessment with the EC and AC. The Chief Internal Auditor also confirms to the AC of the continued validity of the charter of the internal audit function or puts forward proposals for updates to it. At least every five years, the effectiveness and quality of the internal audit function are independently assessed externally, and the Chief Internal Auditor reviews the report with the AC. An independent assessment of internal audit was conducted in 2018. The next such external assessment is planned to take place in 2022, one year ahead of the five-year review cycle. INTERNAL AUDIT 9% of AC time and activities G overnance
164 Shell Annual Report and Accounts 2021 EXTERNAL AUDITOR Activities performed Frequency External Audit Review and approve the engagement letter for EY’s annual audit of the Company’s consolidated and parent company financial statements. Approve the remuneration for audit and non-audit services, including pre-approval of permissible non-audit services. Consider the annual external audit plan and monitor the execution and results of the audit. Monitor the qualifications, expertise, resources and independence of EY. Review the Company’s representation letter prior to signing by management. Assess the performance, objectivity and effectiveness of EY, the audit process, the quality of the audit, EY’s handling of key judgements, and EY’s response to questions from the AC. Recommend to the Board that the reappointment of EY be put to the Company’s shareholders for approval at the AGM. Committee Activity Key: Annually Quarterly Periodically Annual external audit plan and assessment of external audit’s effectiveness EY reviewed with the AC its audit strategy, scope and plan for the 2021 audit, highlighting any areas which would receive special consideration. In particular, the AC and EY discussed how the audit would take into consideration risks associated with: ■ the uncertainties from climate change and energy transition; ■ the organisational restructuring aspects of Reshape; and ■ Shell’s Powering Progress strategy. The AC considered the annual audit plan, which included assessing whether the planned materiality levels and proposed resources to execute the audit plan were consistent with the scope of the audit. EY regularly updated the AC on the status of their procedures and preliminary findings, providing an opportunity for the AC to monitor the execution and results of the audit. The AC and EY discussed how risks to audit quality were addressed, key accounting and audit judgements, material communications between EY and management and any issues arising from them. Quarterly, the AC met privately with EY representatives without management being present in order to encourage open and transparent feedback from both parties. In addition, the AC Chair meets separately with the external auditor on a regular basis. As part of its oversight of the external auditor, the AC annually assesses the performance and effectiveness of the external auditor and the audit process. This includes assessing the quality of the audit, how the auditor handled key judgements, and the auditor’s response to the AC’s questions. The assessment also involves the AC evaluating the objectivity and independence of EY and the quality and effectiveness of the external audit process. The AC’s evaluation of the performance and effectiveness of the external auditor and the audit process includes the following key criteria: ■ professionalism in areas including competence, integrity and objectivity; ■ EY’s quality assurance procedures and internal quality control procedures; ■ audit quality priorities and actions taken as part of maintaining a sustainable audit quality programme; ■ constructive challenge of management and key judgements; ■ efficiency, covering aspects such as service level and innovation in the audit process, use of data analytical and digital audit tools, and opportunities for improvement; ■ the orderly transition of the recent partner rotation; ■ the most recent EY Transparency Report; ■ thought leadership and actions, especially in the areas of climate change, and value added; and ■ compliance with relevant legislative, regulatory and professional requirements. In addition to reflecting on its own experiences, including interactions with the external auditor throughout the year, the AC considered and discussed the results of management’s internal survey relating to EY’s performance over the financial year 2021, which reflected a broadly comparable performance to 2020 and the views and recommendations from management and the Chief Internal Auditor. Taking into account the above, the AC is satisfied that EY has continued to provide a high-quality and effective audit in its sixth year as auditor and has maintained its independence and objectivity. As required under UK and US auditing standards, the AC received a letter from EY confirming its independence. As required by applicable regulations, EY also informed the AC in writing and discussed with the AC any significant relationships and matters that may reasonably be thought to affect its objectivity and independence. In July 2021, the AC was informed by EY that non-audit services prohibited by the FRC’s Ethical Standard were provided to a Shell subsidiary in Denmark in May 2021. The services involved the provision of XBRL tagging services for local statutory 2020 accounts, and were performed by EY Denmark personnel that are not part of the audit engagement team and represented less than two hours of work. EY did not charge any fees to Shell for the performed services. The Shell subsidiary in Denmark was subsequently disposed of in July 2021. Based on the facts presented and discussion with EY, the AC noted that the provision of such services did not create a mutual or conflicting interest between EY and Shell; place EY in a position of auditing its own work; result in EY acting as management or an employee of Shell; or place EY in a position of being an advocate for Shell. Accordingly, the AC determined that EY continued to be able to exercise objective and impartial judgment on all issues encompassed within the audit engagement. This breach of the FRC’s Ethical Standard is reported by EY in its UK audit report issued pursuant to International Standards on Auditing (UK) and applicable law. AUDIT COMMITTEE REPORT continued 12% of AC time and activities Governance
165Shell Annual Report and Accounts 2021 EXTERNAL AUDITOR continued During 2021, there was no review of EY’s audits of Shell’s Consolidated Financial Statements by the Audit Quality Review (AQR) team of the FRC. Reappointment The AC is responsible for considering whether there should be a rotation of the independent registered public accounting firm in order to ensure continuing auditor quality and/or independence, including consideration of the advisability and potential impact of conducting a tender process for the appointment of a different independent public accounting firm. The AC is also responsible for recommending to the Board whether it should ask the Company’s shareholders to appoint, reappoint or remove the external auditor at the AGM. At the AGM in May 2021, the shareholders approved a resolution to reappoint EY as external auditor until the conclusion of the next AGM. EY was first appointed at the AGM in May 2016 after a competitive tender process. This means that 2021 represents EY’s sixth year as the Company’s external auditor. Under UK legal requirements, the Company may retain EY as its external auditor for 20 years. For the 2021 financial year, the Company has complied with The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014. In its oversight of the external audit, the AC considered whether it would be appropriate to conduct an audit tender at this time. The AC took into account: ■ its continued satisfaction with the quality and independence of EY’s audit; ■ any new external auditor would need a transition period to develop sufficient understanding of the business given Shell’s size and complexity; ■ frequent changes of external auditor would be inefficient and could lead to increased risk and the loss of cumulative knowledge; ■ a change in auditor would be expected to have a significant impact on Shell, including on the Finance function; and ■ any change in auditor should be scheduled to limit operational disruption. The AC also considered the orderly rotation to Mr Gary Donald as the new audit partner for the 2021 audit and EY’s leadership and activities in the area of climate change. After due consideration the AC determined that it would not be appropriate to re-tender for the external audit at this time. The AC has recommended to the Board that at the 2022 AGM the Board should propose that EY be reappointed as the external auditor of the Company for the year ending December 31, 2022. The AC’s recommendation is free from third-party influence and there are no contractual obligations that restrict the AC’s ability to make such a recommendation. The AC acknowledges the UK legal requirements relating to mandatory audit rotation (maximum 20-year engagement) and audit tendering under which the Company will be required to tender for the audit no later than the financial year 2026. The AC regularly reviews auditor performance and may decide to conduct the tender earlier than the financial year 2026 if it considers this to be in the interests of the Company’s shareholders. NON-AUDIT SERVICES The AC maintains an auditor independence policy (AIP) in respect of the provision of services by the external auditor. The AC regularly reviews this policy for necessary changes in response to changes in related standards and regulatory requirements. This policy is designed to safeguard auditor objectivity and independence. It includes rules on the provision of audit services, audit-related services and other non-audit services and stipulates which services require specific prior approval by the AC. The policy also defines prohibited services that are not to be provided by the auditor because they represent a risk to the external auditor’s independence. Prohibited services are any that relate to management decision-taking or any other service that could compromise auditor independence or be perceived to compromise auditor independence. These prohibited services include all services listed as prohibited in the UK and US auditor independence rules. For certain services that are not prohibited, because of the knowledge and experience of the external auditor and/or for reasons of confidentiality, it can be more efficient or prudent to engage the external auditor rather than another party. This is particularly the case with audit-related assurance services that are closely connected to the audit function where the external auditor has the benefit of knowledge gained from work already performed as part of the audit. Under the AIP, the AC will only approve services to be carried out by the external auditor or its affiliates where such services do not present a conflict of interest risk in fact or in appearance. The AC reviews quarterly reports from management on the audit and non-audit services reported in accordance with the policy or for which specific prior approval from the AC is being sought. To the extent that the fee value of an additional audit service contract does not individually exceed $500,000, no prior approval of the AC is required. All non-audit services where the fee for an individual contract exceeds $100,000, including audit-related services, require individual prior approval by the AC. In each case where the audit or non-audit service contract does not exceed the relevant threshold, the matter is approved by management by delegated authority from the AC and is subsequently presented for approval by the AC at the next quarterly AC meeting. The AC is mindful of the overall proportion of fees for audit and non-audit services in determining whether to approve such services. The scope of the non-audit services contracted with the external auditor in 2021 consisted mainly of interim reviews and other audit-related assurance services. The associated compensation for these audit-related services and other non-audit services amounted to 5% and 5%, respectively, of the external auditor’s audit and audit-related remuneration. FEES After due consideration, the AC approved the auditor’s remuneration, satisfying itself that the level of fees payable in respect of the audit and non-audit services provided was appropriate and that an effective, high-quality audit could be conducted for such fees. Note 29 to the “Consolidated Financial Statements” on page 281 provides details of the auditor’s remuneration. G overnance
DIRECTORS’ REMUNERATION REPORT THIS REPORT This Directors’ Remuneration Report for 2021 has been prepared in accordance with relevant UK corporate governance and legal requirements, in particular Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended). The Board has approved this report. This report consists of two further sections: ■ the Annual Report on Remuneration (describing 2021 remuneration and the planned implementation of the Directors’ Remuneration Policy in 2022); and ■ the Directors’ Remuneration Policy, which was approved by shareholders at the 2020 AGM. “It has been a year of impressive financial performance and strong strategic progress.” NEIL CARSON Chair of the Remuneration Committee Pay outcomes for Executive Directors Annual bonus: €2,560,000 CEO and €1,600,000 CFO (129% of target). Long-term Incentive Plan (LTIP): below-target vesting of 49% based on three-year performance. Single-figure outcome: €7.4m (26% increase from 2020) for the CEO and €4.6m (24% increase from 2020) for the CFO. Dear Shareholders, It has been a year of impressive financial performance and strong strategic progress. Shell delivered a very strong set of financial results in 2021, generating more than $45 billion of cash flow from operations (CFFO) including working capital and $40 billion of free cash flow (FCF). This reflects the strength of Shell’s integrated business and the ongoing development of a strong and resilient portfolio. Together with robust operational performance in 2021, this enabled Shell to capitalise on dynamic energy markets and improved prices in the second half of the year. The strong financial performance in 2021 allowed Shell to reduce net debt, increase our quarterly dividend and start share buybacks again. The remaining $5.5 billion of proceeds from the divestment of our US Permian business that have been allocated for share buybacks will be distributed to shareholders in the first half of 2022. Over the year, Shell also delivered a number of key strategic milestones to accelerate the transition to being a net-zero emissions business, including: ■ launching of our updated strategy, Powering Progress in February 2021; ■ being the first energy company to ask shareholders to cast an advisory vote on its energy transition strategy, achieving support of 88.74% votes cast in May 2021; ■ implementing a simpler, more cost-effective organisation needed to support delivery of our strategic ambitions under Powering Progress, in August 2021; ■ setting a new target, in October 2021, for Shell to halve the absolute emissions from our operations and the energy it uses to run them by 2030, compared with 2016 levels on a net basis; ■ proposing to simplify the share structure and increase the speed and flexibility of capital and portfolio actions. In December 2021, 99.77% of shareholder votes cast were in support of amending the required Articles of Association of Shell plc (then named Royal Dutch Shell plc) to enable the changes. The alignment of Shell’s tax residence with its country of incorporation took place in December 2021, including relocating the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) to the UK. The corporate name change and implementation of a single line of shares, eliminating the complex A/B share structure, occurred in early 2022. Among this success, however, we were also deeply saddened by a number of tragic deaths that occurred as the result of three separate incidents during the year. Six contractor colleagues working under Shell operational control were deliberately killed in an attack by gunmen in Nigeria. In Pakistan, a lorry driver died during a refuelling accident, and in Indonesia, a contractor died following a construction accident. Later in this letter, I will share the REMCO’s assessment of these incidents and how we have reflected on them in determining the final pay outcomes. I also reflect on REMCO’s assessment of Shell’s wider performance and its progress in adapting to the energy transition, when considering the pay outcomes for 2021 and the year ahead. Governance 166
2021 PERFORMANCE AND REMUNERATION DECISIONS Annual bonus Summary of scorecard outcome: the overall mathematical outcome of the annual bonus scorecard was above target, at 1.32. But after reflecting on safety performance, in particular the number of fatalities, the REMCO used downwards discretion to determine the final outcome for Executive Directors to be 1.29. Taking into account the impact of the fatalities on the formulaic outcome and the discretionary adjustment, the total reduction in bonus outcome as a result of the fatalities was equal to 10% of base salary. This brings our 10-year average scorecard outcome to 1.03. The complete scorecard with all targets, ranges and weightings is set out on page 174. Financial delivery (35%): robust operational performance and a strong portfolio have led to very strong cash generation. CFFO (including working capital) of $45.1 billion exceeded our outstanding performance threshold of $34 billion, leading to a maximum outcome on this measure. It is worth repeating that the REMCO has long had a policy of not adjusting remuneration measures to take account of changes in energy prices and currency fluctuations. This means Senior Management also experience the ups and downs of the macroeconomic environment that affect our business and shareholders. In engagements with our largest shareholders, many have appreciated the transparency that this brings. Operational excellence (35%): Powering Progress emphasises operational excellence and the delivery of value over volume. In 2021, the REMCO updated the scorecard to reflect this by removing measures based on hydrocarbon production. The focus now is on ensuring Shell operates its assets efficiently and to plan, and that material projects are delivered on time and on budget. Performance was mixed across the segments. Downstream availability was better than target, as was delivery of projects against schedule. But Upstream and midstream availability was lower than plan, and aggregated project costs exceeded budget. Overall, the outcome was below target. Progress in the energy transition (15%): Powering Progress sets out a strategy to accelerate our transition to net-zero emissions. We linked this to the scorecard in 2021 by focusing on our operational emissions. The outcome was broadly on target. ■ On greenhouse gas (GHG) emissions intensity, performance has been mixed. Intensities from the Chemicals business were better than target, partly because of higher utilisation at Bukom and Deer Park. But shutdowns in the Gulf of Mexico from Hurricane Ida and operational difficulties in Nigeria led to a below-threshold result for the combined Upstream and Integrated Gas intensity measure. Refining intensities were also below target due to the impact of Hurricane Ida and the February freeze on our refineries in the USA. ■ GHG abatement tracks the implementation of identified projects that will reduce absolute GHG emissions. Shell made excellent progress in 2021, with a score that was close to outstanding, reflecting the cumulative effect of a wide range of actions taken across the portfolio to reduce absolute emissions, including abatement projects in QGC Australia and Pearl GTL in Qatar. Safety (15%): overall, the outcome on safety was slightly above target. ■ Process safety continues to be measured through the number of Tier 1 and 2 operational safety incidents and was above target for 2021, meaning a better than expected safety performance was achieved. ■ In 2021, Serious Injury and Fatality Frequency (SIF-F) was introduced as the measure of personal safety performance which focuses on the incidents with the most serious consequences. The outcome was consistent with our expectations based on the number of serious incidents experienced across our businesses in recent years, but not our aspirations. REMCO REFLECTIONS ON SAFETY Safety is Shell’s number one priority. The Powering Progress strategy is underpinned by our focus on safety, and it is critical that our day-to-day operations run safely, and the well-being of all our people is ensured. As a result, the REMCO and the Safety, Environment and Sustainability Committee (SESCo) have carefully considered the fatalities which occurred in the year, paying attention to both the nature of the incidents and Shell’s wider progress on safety. Nigeria is a high-risk country, in which we review our larger contractors’ safety plans, including those for moving personnel to sites in the Delta. These plans are then implemented by the contractors. At times, there have been up to around 4,500 escorted personnel movements per month for Shell companies in Nigeria. The number is significantly larger for our contractor movements. Existing safety protocols have been effective in supporting these movements. The 2021 incident in Nigeria was unprecedented. The attack on a routine personnel transport was perpetrated by a criminal group which operates for extortion. The criminal group’s leader has been arrested and has admitted responsibility. The extreme violence of the attack has been shocking to Shell and the local community. A review is ongoing, which given the deteriorating security situation in Nigeria, may lead to some changes. Sadly, two contractors also died following separate incidents at retail sites in Pakistan and in Indonesia. In Pakistan, a contractor colleague died after a fire at a dealer-operated retail site. Another contractor lost his life when a wall fell over during demolition work at a retail site in Indonesia. In addition to reflecting on these tragedies, the REMCO also considered safety performance as a whole over the year. The REMCO noted that, in an industry where road safety continues to present one of the single most material risk areas, we passed 1 billion kilometres of road journeys without a recordable fatality in our operated assets. The REMCO also noted that in 2021, the ongoing transition of the Safety refresh programme reached full implementation, creating the bedrock for the changes aimed at eradicating fatalities and life-changing incidents from Shell’s business. Our updated approach to safety is rooted in a consistent focus on human performance, and the way people, culture, equipment, work systems and processes all interact. People are key to completing complex tasks and to finding solutions to problems. To deliver the Safety refresh, Shell aims to apply a learner mindset, believing people can always improve, enhance their capabilities, learn from mistakes and successes, and speak up freely. The REMCO acknowledges the commitment and contributions of the Executive Directors in embracing a learner mindset and driving this cultural change across the organisation. The Safety refresh also included the introduction of the Serious Injury and Fatality Frequency (SIF-F) metric designed to ensure we focus on those incidents with the potential to cause most harm. This metric ensures a heavy weighting is given to fatalities in determining the scorecard outcome, in a manner that was not captured by Total Recordable Case Frequency (TRCF) metrics. The REMCO carefully considered the fatalities in the context of Shell’s overall safety performance in 2021. It took account of the impact the fatalities had on the formulaic outcome. Without the fatalities, the overall scorecard outcome would have been 1.37, not 1.32, reflecting the heavy emphasis that SIF-F rightly gives to serious incidents. The REMCO determined that the overall scorecard outcome should be further adjusted downwards to 1.29. The overall reduction in the bonus outcome for the CEO and CFO as a result of fatalities is equal to 10% of their base salary. G overnance 167Shell Annual Report and Accounts 2021
DIRECTORS’ REMUNERATION REPORT continued Vesting of the 2019 LTIP awards Overall LTIP vesting outcome: Overall, the mathematical outcome of the LTIP was 49%. For the avoidance of doubt, no LTIP targets were adjusted as a result of the COVID-19 pandemic or any other reason. CFFO (22.5%): In absolute terms, 2021 performance was very strong with CFFO at $45 billion, including working capital. The LTIP, though, does not consider the absolute value of CFFO. Instead, it looks at growth from a base year, in this case 2018, when Shell’s CFFO performance was also exceptional with more than $50 billion generated. The LTIP compares the growth of Shell’s CFFO with the increases in CFFO of the other energy majors (BP, Chevron, Exxon and TotalEnergies). On this basis, Shell ranked fifth, resulting in a nil vesting for this measure. Total shareholder return (TSR) (22.5%): Over the performance period, Shell returned more than $43 billion to shareholders in the form of dividends and share buybacks. However, similarly to CFFO, TSR is measured on a relative basis, compared with the other energy majors, Shell ranked fourth, resulting in a nil vesting for this measure. Return on average capital employed (ROACE) (22.5%): Shell’s absolute 2021 ROACE for LTIP purposes was 7.8% (note ROACE for the LTIP calculation is based on disclosed net income and is not adjusted for the after tax interest expense and therefore differs from disclosed ROACE). Again performance is measured on a relative basis against the 2018 base year when Shell had ROACE (for LTIP purposes) of 8.3% and on growth Shell ranked fifth, resulting in a nil vesting. FCF (22.5%): Performance is assessed on an absolute basis over the three-year performance period. Strong performance in 2021 has more than offset the impacts of the COVID-19 pandemic, with FCF of $87.5 billion generated over the three years, above the target of $82 billion. This resulted in a 137% vesting outcome on this measure. Energy transition (10%): The vesting of the 2019 LTIP also marks the first time that we have vested an element under the LTIP energy transition performance condition. Shell was the first major energy company, that we are aware of, to include such a comprehensive metric, which measures progress in transforming Shell’s businesses for a lower-carbon future, within long-term pay frameworks. This is a broad metric that assesses performance against a range of strategic business developments, as well as measuring our ultimate success in reducing the net carbon intensity of all energy products sold. The first set of metrics were focused on laying the foundations for Shell’s future growth, building the customer base and developing the organisational capability to deliver against the key strategic ways of decarbonising Shell’s business: growing a power business, developing lower-carbon energy products and developing emission sinks. The REMCO has been pleased with the tangible progress shown over the performance cycle, with management demonstrating that it can create a pipeline of new business opportunities and mature projects through to investment. This includes reaching new customers through our growing power business, with acquisitions like ERM in Australia, developing renewables projects such as CrossWind, and investment in ventures such as Enerkem Varennes, which will produce low-carbon fuels and renewable chemicals products from non-recyclable waste, and LanzaJet, which converts ethanol from waste materials into low-carbon jet fuel. While many of these projects are small in comparison to some of Shell’s existing businesses, they lay the foundations for future growth. The REMCO paid particular attention to the metric of net carbon intensity of all energy products sold. This provides a concrete marker of Shell’s success in decarbonising, with Shell the only major energy producer which has sought to connect executive pay with an intensity reduction target based on the full Scope 1, 2 and 3 emissions from all energy products sold. The REMCO noted that the target for this had also been met with a reduction of 2.5% against the target range of 2-3%. The REMCO is pleased to see this target met over the performance period. Taking everything into account, the REMCO determined that the final vesting outcome of the element of the 2019 LTIP weighted to the energy transition should vest at 180%. Based on the above outcomes, the overall LTIP vesting outcome was 49%. This brings the ten-year average vesting outcome to 97%. This is broadly aligned with our target grant, although there have been a number of high and low-vesting outcomes over the last 10 years. The REMCO believes this illustrates the fundamental effectiveness of the LTIP and the close alignment between pay and performance the structure has provided over time. Finalising the 2021 pay outcomes In finalising pay outcomes, the REMCO considered the wider performance of Shell during 2021 and the LTIP performance period. It paid particular attention to: ■ safety performance, in particular the eight fatalities within Shell’s operational control which occurred in three incidents and the downward adjustment to the annual bonus scorecard resulting in an overall bonus reduction equivalent to 10% of base salary of the Executive Directors; ■ the strong financial and operational performance in 2021, with more than $45 billion of CFFO, including working capital, and $40 billion of FCF generated in the year; ■ the work to accelerate Shell’s progress in the energy transition, including setting out our Powering Progress strategy, reshaping the organisation, simplifying the share structure, aligning Shell’s tax residence with its country of incorporation and setting targets for reducing absolute emissions; ■ the shareholder experience, including the decline and extent of recovery in the share price over the LTIP performance period, as well as shareholder feedback provided during my engagements with major shareholders during March and April 2021; ■ the reduction in net debt, which has supported the restart of share buybacks in 2021, and the progressive dividend policy; ■ the employee experience, where the REMCO noted that the Group scorecard for all employees was set at 1.50 following an upwards management adjustment in recognition and appreciation of the extraordinary contributions made by our employees over a challenging period, and the Performance Share Plan, used to make discretionary share awards below senior executive level, which vested at 67%; ■ the year-on-year comparison between single figure outcomes in 2020 and 2021, noting that the REMCO had decided there would be no 2020 annual bonuses for Executive Directors and Senior Management and year-on-year increases are primarily as a result of a 2021 bonus being awarded; and ■ the ten-year average outcomes of the annual bonus scorecard (1.0) and LTIP (97%), which demonstrate the effectiveness of the current reward structures in aligning pay outcomes with targets over the longer term. This resulted in a single-figure outcome of €7.4m for the CEO, an increase of 26% from 2020. The CFO’s single-figure outcome was €4.6m, a 24% increase from 2020. The REMCO was satisfied that the remuneration policies had operated as intended, and these outcomes were appropriate in the context of Company performance and the target pay opportunity under the shareholder-approved Remuneration Policy. Governance 168 Shell Annual Report and Accounts 2021
UPDATING REMUNERATION IN LINE WITH OUR DEVELOPING STRATEGY Relocation of the CEO and CFO to London The CEO and CFO relocated to the UK, effective from December 31, 2021. Their transition to the UK is being supported in line with our existing shareholder-approved Directors’ Remuneration Policy, including the Group’s international mobility policies: ■ There is no change to the target pay opportunity as a percentage of base salary. Base salaries have been converted from euros to pounds sterling using a 12-month average exchange rate. ■ Target annual bonus and long-term incentive awards are unchanged. ■ The CEO has moved from his Dutch pension plan to the standard UK Shell pension. This provides a contribution level of up to 20% of base salary, which is the same as that available to the general Shell employee population in the UK. This is less than the benefits provided under the CEO’s Dutch arrangements. ■ The CFO will remain within her existing US pension arrangements. The REMCO manages this membership prudently as the annual bonus continues to be not pensionable for the CFO while it is for other US employees. ■ The CEO and CFO will be responsible for their own taxes in the UK, except for some limited benefits such as relocation. ■ In line with our Group-wide International Mobility policies, the CEO and CFO will receive support with temporary commuting costs such as travel and accommodation for the first six months, while their families remain in the Netherlands as their children complete their respective school years. The CEO will receive relocation benefits for his family’s move to the UK in due course. ■ The CEO will receive a gross housing allowance for a time-limited period of 24 months from when his family relocates. This is a reduced benefit from Shell’s usual arrangements as Shell’s International Mobility policy would normally provide for housing throughout the overseas position where the employee is asked to move at the Company’s request. ■ The approach the REMCO has taken is within the confines and provisions of the existing approved remuneration policy and the REMCO has taken a prudent approach in applying elements of Shell’s International Mobility policies. 2021 pay outcomes summary Fixed pay Bonus LTIP CEO (€m) 2021 realised pay 2021 realised pay 2020 policy target 2020 policy maximum 0 4 12 168 CFO (€m) 2020 policy target 2020 policy maximum 0 4 6 10 12 142 8 2021 pay compared with policy [A] ten-year LTIP vesting 0 200 150 100 50 a b c d e ten-year CEO single figure outcomes 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 30,000 25,000 20,000 15,000 10,000 5,000 Base salary and benefits Bonus LTI Pension and tax equalisation a b c d CEO target pay [A] TSR EPS/FCF CFFO Production/ROACE a b c d Energy transitione (€ th ou sa nd ) Target 10 year average: 97% of target a b c a b c '19-'21'18-'20'17-'19'16-'18'15-'17'14-'16'13-'15'12-'14'11-'13'10-'12 a b c d [A] Policy target and maximum based on the scenarios as published on page 194. G overnance 169Shell Annual Report and Accounts 2021
DIRECTORS’ REMUNERATION REPORT continued Appointment of new CFO On March 1, 2022 Shell announced that Sinead Gorman will replace Jessica Uhl as CFO with effect from April 1, 2022. Mrs Gorman will be based in London and will receive an annual base salary of £900,000 from appointment as CFO. There will be no change to the current target bonus and LTIP awards for the CFO of 120% (annual bonus) and 270% (LTIP). Mrs Gorman’s pension provision is aligned with the standard UK pension arrangement for new employees in the UK, with an employer contribution of 20% which she has elected to receive as a cash allowance. A further announcement regarding the terms of Mrs Uhl’s departure will be made in due course. Other changes to 2022 remuneration To ensure that Shell’s remuneration structures continue to be closely aligned with strategy, we will make the following changes to the 2022 annual bonus scorecard: ■ The progress in the energy transition measure has to date focused on managing and reducing our operational emissions. However, succeeding in the energy transition requires us to change what we sell. To date, this has been reflected in pay through the LTIP’s energy transition performance condition. Starting in 2022, we will widen the scope of the progress in the energy transition measure on the annual bonus scorecard, to be based on three key themes: – Selling lower-carbon products – as an energy supplier, we help customers to reduce their emissions by supplying lower-carbon products. We will measure our success at this according to the earnings share of our Marketing business from low- and no-carbon products. – Reducing our emissions - as an energy user, our target is to achieve a 50% reduction by 2030; and this measure will be based on reducing our Scope 1 and 2 operational emissions. – Partnering to decarbonise - as a partner, we work with our customers to help them reduce their emissions. In 2022, we will measure success in this area in terms of our progress in rolling out our electric vehicle charging network. ■ Powering Progress emphasises the importance of building on our strong customer relationships to help transform Shell in the energy transition. To emphasise the importance of becoming increasingly customer-led, we will introduce a new customer excellence measure for 2022 under operational excellence. This will be based on our customer satisfaction scores, and the extent to which people prefer Shell over competitor brands, measured via brand preference scores. The customer excellence measure will combine elements of business-to-business and business-to-customer performance. LOOKING AHEAD The year ahead promises to be another busy one, as the REMCO continues to make changes that will help Shell succeed in the energy transition and finalises proposals for the 2023 Directors’ Remuneration Policy, ahead of a vote at the 2023 AGM. I look forward to ongoing dialogue with our shareholders in the coming months. NEIL CARSON Chair of the Remuneration Committee March 9, 2022 Governance 170 Shell Annual Report and Accounts 2021
ANNUAL REPORT ON REMUNERATION The Annual Report on Remuneration sets out: the REMCO’s responsibilities and activities, page 171; ■ remuneration at a glance, page 172; ■ Directors’ remuneration for 2021, page 173; and ■ the statement of the planned implementation of policy in 2022, page 186. The base currency in this Annual Report on Remuneration is the euro, as this is the currency of the base salary of the Executive Directors to December 30, 2021. From December 31, 2021, base salaries and Non-executive Director fees are given in British pound sterling (GBP). Where amounts are shown in other currencies, an average exchange rate for the relevant year is used, unless a specific date is stated, in which case the average exchange rate for the specific date is used. The REMCO operates within its Terms of Reference, which are reviewed annually. They were last updated on December 7, 2021, and are available on www.shell.com. Advice from within Shell was provided by: ■ Ben van Beurden, Chief Executive Officer (CEO); ■ Ronan Cassidy, Chief Human Resources and Corporate Officer and Secretary to the REMCO; and ■ Stephanie Boyde, Executive Vice President Performance and Reward. The Chair of the Board was consulted on remuneration proposals affecting the CEO. The CEO was consulted on proposals relating to the Chief Financial Officer (CFO) and Senior Management. The REMCO met eight times in 2021 and its activities included: ■ determining vesting of the 2018 Long-term Incentive Plan (LTIP) award for Senior Management; ■ determining 2021 target bonuses and 2021 LTIP awards for Senior Management; ■ approving the 2020 Directors’ Remuneration Report; ■ setting 2021 annual bonus and LTIP performance measures and targets; ■ considering matters relating to the updated strategy and the transition of our business to net-zero emissions, and the potential implications for the 2022 annual bonus and LTIP performance measures and targets; ■ setting exit and appointment remuneration for changes in the Executive Committee; ■ setting terms for the relocation, and pay arrangements of the Executive Directors from the Hague to London; and ■ monitoring external developments and assessing their impact on the Directors’ Remuneration Policy. After a competitive tender process, in 2021 Deloitte was chosen to provide external advice on Shell’s remuneration structures and developments in market practice around remuneration. The choice was based on ability to assess the risk profile of policies, knowledge of investors’ expectations and familiarity with international market practices. Deloitte is a member of the Remuneration Consultants Group and operates according to the group’s code of conduct when advising clients. REMCO is satisfied that the advice provided was objective and independent. The total fees in relation to the advice were £55,000 (excluding value-added tax). Deloitte provided other consultancy and accountancy services to Shell during the year, but the REMCO is satisfied that this did not compromise the independence of the advice on executive remuneration. The REMCO also reviewed benchmarking data and analysis prepared by Shell’s internal HR function on market developments in executive pay. PRINCIPLES The principles that underpin the REMCO’s approach to executive remuneration are set out on page 189. The REMCO considered the provisions of the UK Corporate Governance Code when deciding 2021 pay outcomes. It also sought to reflect the principles of clarity, simplicity, risk management, predictability, proportionality and alignment with culture. Shell has a consistent global reward and performance philosophy that sets clear expectations of employees. The annual bonus scorecard and LTIP are designed to ensure that remuneration is clearly aligned with Shell’s operating plan and strategic ambitions. The same measures apply to Executive Directors and Senior Management and to a significantly broader employee base. This provides alignment throughout the organisation with Shell’s culture and strategy. The annual operating plan translates into targets on the annual bonus scorecard, and a quarterly update on performance against scorecard targets is provided to employees. The LTIP is largely based on outperforming the competition. Employees receive regular updates on Shell’s performance against competitors. To assist in the mitigation of reputational risk and to ensure proportionality, the REMCO will use discretion to ensure the highest pay outcomes are delivered only for outstanding performance. REMUNERATION COMMITTEE Neil Carson Euleen Goh Catherine Hughes Gerrit Zalm Biographies are given on pages 121-127; and the REMCO meeting attendance is set out below: Committee Member Member since Maximum possible meetings Number of meetings attended % of meetings attended Neil Carson (Chair) June 1, 2019 8 8 100% Euleen Goh May 20, 2020 8 8 100% Catherine Hughes July 26, 2017 8 8 100% Gerrit Zalm [A] May 21, 2014 8 7 88% [A] Mr Zalm was unable to attend one meeting due to the short notice with which it had been scheduled. The REMCO’s key responsibilities include determining: Senior Management Executive Directors Executive Committee Company Secretary and EVP Taxation and Controller Performance framework Remuneration policy Actual remuneration and benefits Annual bonus and long-term incentive measures and targets The REMCO is also responsible for determining the Chair of the Board’s remuneration. The REMCO monitors the level and structure of remuneration for senior executives below Senior Management and makes recommendations if appropriate to ensure consistency and alignment with Shell’s remuneration objectives. When setting the policy for Executive Director remuneration, the REMCO reviews and considers workforce remuneration and related policies, and how pay and benefits align with culture. In exercising its responsibilities, the REMCO takes into account a variety of stakeholder considerations. G overnance 171Shell Annual Report and Accounts 2021
ANNUAL REPORT ON REMUNERATION continued REMUNERATION AT A GLANCE FIXED PAY AND SHAREHOLDING Base salary €1,588,000 Ben van Beurden (CEO) €1,035,000 Jessica Uhl (CFO) Pension Executive Directors participate in the same home-country pension arrangements as other employees Benefits Typically include car allowance, transport between home and office, and medical insurance Shareholding Target levels, % of base salary at December 31, 2021 700% CEO 500% CFO Actual levels, % of base salary at December 31, 2021 972% CEO 555% CFO FIXED PAY AND SHAREHOLDING Base salary £1,420,000 Ben van Beurden 3.5% £921,000 Jessica Uhl 3% £900,000 Sinead Gorman Pension Following his relocation to the UK, the CEO’s pension was aligned to the standard UK pension offered to all new employees with an employer contribution of 20%. Sinead Gorman was offered participation in the same arrangement. Both have elected to receive this as a cash allowance. There was no change to Jessica Uhl’s pension provision from 2021. Benefits Following relocation to the UK, the CEO and CFO will receive support with temporary commuting costs such as travel and accommodation for the first six months while their families complete the school year. The CEO will also receive relocation support for his family’s move to the UK in due course, and a housing allowance for a time-limited period of 24 months. Shareholding Target levels, % of base salary 2021 700% CEO 500% CFO Actual levels, % of base salary March 4, 2022 904% CEO 693% CFO ANNUAL BONUS Target % of base salary Target 125% CEO 120% CFO Maximum 250% CEO 240% CFO Scorecard architecture 35% 35% 15% 15% a b c d a Cash flow from operations (weighted 35%) b Operational excellence (Asset management excellence 15%, project delivery excellence 10%, customer excellence 10%) c Progress in the energy transition (Selling no/low-carbon products 5%, operational emissions reduction 5%, partnering to decarbonise 5%) d Safety (SIF-F 7.5%, Tier 1 and 2 process safety 7.5%) LONG-TERM INCENTIVE PLAN Target awards % of base salary Target – policy 300% CEO 270% CFO Maximum 600% CEO 540% CFO Performance conditions 20% 20% 20% 20% 20% a b c d e a TSR b ROACE c CFFO d FCF e Energy transition LONG-TERM INCENTIVE PLAN 2019 – 2021 LTIP vesting outcome €2,812,302 CEO $1,539,732 CFO Vesting outcome Measures Outcome Vesting TSR 1 2 3 4 5 0% CFFO 1 2 3 4 5 0% ROACE 1 2 3 4 5 0% FCF 31% Energy transition 18% 49% (out of a 200% maximum) Shares are subject to a three-year holding period which extends beyond an Executive Director’s tenure 2021 2022 ANNUAL BONUS 2021 annual bonus €2,560,000 CEO €1,600,000 CFO 2021 bonus scorecard outcome Mathematical outcome 1.32 Given the eight fatalities in 2021, this was reduced to: 1.29 No individual performance factor used in bonus calculation Bonus Delivery 50% delivered in cash 50% delivered in shares Shares are subject to a three-year holding period which extends beyond an Executive Director’s tenure Governance 172 Shell Annual Report and Accounts 2021
DIRECTORS’ REMUNERATION FOR 2021 Single total figure of remuneration for Non-executive Directors (audited) € thousand Fees Taxable benefits [A] Total 2021 2020 2021 2020 2021 2020 Dick Boer [B] 167 98 – – 167 98 Neil Carson 192 184 – – 192 184 Ann Godbehere 212 206 1 – 213 206 Euleen Goh 224 201 1 – 225 201 Charles O. Holliday [C] 324 850 61 69 385 919 Catherine J. Hughes 185 180 1 – 186 180 Martina Hund-Mejean [D] 165 98 1 – 166 98 Jane Holl Lute [E] 99 – 1 – 100 – Sir Andrew Mackenzie [F] 582 37 17 – 599 37 Abraham Schot [G] 152 38 – – 152 38 Sir Nigel Sheinwald [H] 69 184 – – 69 184 Gerrit Zalm 177 177 – – 177 177 [A] UK regulations require the inclusion of benefits where these would be taxable in the UK, on the assumption that Directors are tax residents in the UK. On this premise, the taxable benefits include the cost of a Non-executive Director’s occasional business-required partner travel. Shell also pays for travel between home and the head office, where Board and committee meetings are typically held, and related hotel and subsistence costs. For consistency, business expenses for travel between home and the head office are not reported as taxable benefits because for most Non-executive Directors this is international travel and hence would not be taxable in the UK. [B] Appointed as a Director with effect from May 20, 2020. [C] Stepped down as a Director with effect from May 18, 2021. Benefits include the use of a Shell-provided apartment while in The Hague (2021: €27,848, 2020: €68,942). [D] Appointed as a Director with effect from May 20, 2020. [E] Appointed as a Director with effect from May 19, 2021. [F] Appointed as a Director with effect from October 1, 2020, and as Chair with effect from May 18, 2021. [G] Appointed as a Director with effect from October 1, 2020. [H] Stepped down as a Director with effect from May 18, 2021. Single total figure of remuneration for Executive Directors (audited) € thousand Ben van Beurden Jessica Uhl 2021 2020 2021 2020 Salaries [A] 1,588 1,588 1,035 1,035 Taxable benefits [B] 17 16 323 418 Pension [C] 402 540 281 288 Total fixed remuneration 2,007 2,144 1,639 1,741 Annual bonus [D] 2,560 — 1,600 — LTIP [E] 2,812 3,698 1,388 1,993 Total variable remuneration 5,372 3,698 2,988 1,993 Total remuneration 7,380 5,841 4,627 3,734 in dollars 8,728 6,671 5,473 4,264 in sterling 6,344 5,197 3,978 3,322 [A] As disclosed in the 2020 Directors’ Remuneration Report, the REMCO maintained Ben van Beurden’s base salary for 2021 at €1,588,000 (+0.0% compared with 2020), and Jessica Uhl’s base salary at €1,035,000 (+0.0% compared with 2020). [B] For Ben van Beurden these include motoring allowance (€14,400) and transport between home and the office (€2,494). Jessica Uhl’s benefits include tax equalisation (€292,334), medical insurance and risk benefits (€17,047), transport between home and the office (€10,051) and international mobility benefits (€3,391). Jessica Uhl’s benefits include tax equalisation of pension contributions to foreign pension plan(s), when they are taxable above a certain pensionable salary threshold or once a double tax treaty exemption ceases, under Dutch law. Tax equalisation is applied for the loss of pension relief for members of a foreign pension plan(s) in their host country. Jessica Uhl’s benefits also include tax equalisation of employer contributions to benefits and certain US social taxes that are taxable in the Netherlands. [C] For Ben van Beurden, the amount reported for pension consists of a net pay-defined contribution amount of €402,311. The amount to be reported for his defined benefit pension accrual is 0 calculated in accordance with UK reporting requirements. For Jessica Uhl, the amount reported for pension consists of a defined contribution amount of €99,816 and a defined benefit pension accrual €181,363. [D] The full value of the bonus, comprising both the 50% delivered in cash and 50% bonus delivered in shares. For 2021, the market price of shares on February 21, 2022 for Amsterdam listed shares (€23.34) and on February 24, 2022 for London listed shares (£19.528), was used to determine the number of shares delivered, resulting in 29,677 ordinary shares for Ben van Beurden and 18,551 ordinary shares for Jessica Uhl, net of tax. This was split between the Netherlands and UK due to the relocation of the Directors on December 31, 2021. [E] Remuneration for performance periods of more than one year, comprising the value of released LTIP awards. The amounts reported for 2021 relate to the 2019 LTIP award, which vested on March 3, 2022, at the market price of €24.79 and $52.85 for ordinary shares and ADSs respectively. The value in respect of the LTIP is calculated as the product of: the number of shares of the original award multiplied by the vesting percentage; plus accrued dividend shares; and the market price of ordinary shares or ADSs at the vesting date. The market price of ADSs is converted into euros using the exchange rate on the respective date. Share price depreciation accounted for -€229,832 for Ben van Beurden and -$244,395 for Jessica Uhl. G overnance 173Shell Annual Report and Accounts 2021
Notes to the table: Single total figure of remuneration for Executive Directors (audited) Annual bonus As disclosed on pages 190-191, the annual bonus is intended to reward delivery of short-term operational targets. All targets are derived from Shell’s annual operating plan. ANNUAL REPORT ON REMUNERATION continued Determination of the 2021 annual bonus The table below summarises the 2021 annual bonus scorecard measures including their weightings, targets and outcomes. The mathematical scorecard outcome for 2021 was 1.32. This was adjusted downwards by the REMCO to reflect the number of fatalities in the year to 1.29. Please refer to pages 166-167 for a commentary on the scorecard outcome. 2021 annual bonus scorecard measures and weightings Performance Measures Weighting Unit Threshold Target Outstanding Outcome Score Financial delivery 35% Cash flow from operations [A] 35% $ – bn 22 28 34 45 2.00 Operational excellence 35% Asset management excellence [B] 25% Availability – % See note B 0.77 Project delivery excellence [C] 10% Projects delivered on schedule and budget – % 30/110 65/103 100/96 87/104 1.24 Progress in the energy transition 15% Greenhouse gas emissions intensity [D] 10% Tonne CO2e intensity See note D 0.48 Greenhouse gas abatement 5% Thousand Tonne CO2e 168 224 280 279 1.98 Safety 15% Personal safety 7.5% Serious Injury & Fatality Frequency (SIF-F) cases per 100 million working hours 9.7 6.9 4.1 6.9 1.00 Process safety 7.5% Number of events 130 105 80 102 1.12 Mathematical performance outcome 1.32 Adjusted outcome 1.29 [A] Including working capital adjustments. [B] Upstream controllable availability: Target: 88.1% (Threshold 86.1%, Outstanding 90.1%), midstream availability: 89.2% (87.2%/91.2%), Downstream (Refining and Chemicals) availability: 95.2% (94.2%/96.2%). Full-year outcomes were 87.8%, 87.3% and 95.6% respectively. Performance assessment is equally weighted between Upstream, midstream and Downstream availability. [C] Performance assessment is equally weighted between project schedule and budget. [D] Upstream/midstream (Tonne CO2 equivalent per Tonne of hydrocarbon production available for sale): Target 0.152 (0.160/0.144); Refining GHG (Tonne CO2 equivalent per Solomon’s Utilised Equivalent Distillation Capacity): Target 1.03 (1.08/0.98); Chemicals (tonne CO2 equivalent per tonne of steam cracker high-value chemicals production): Target 0.97 (1.07/0.87). Full-year outcomes were: 0.172, 1.05 and 0.95 respectively. Performance assessment is split 4% Upstream/midstream, 4% Refining and 2% Chemicals. 2021 bonus outcome calculation Ben van Beurden Jessica Uhl Target bonus: €1,588,000 (base salary) x 125% = €1,985,000 2021 scorecard result 1.29 Target bonus: €1,035,000 (base salary) x 120% = €1,242,000 2021 scorecard result 1.29 [A] Rounded down to the nearest €5,000. Half was delivered in shares subject to a three-year holding period which extends beyond the Executive Director's tenure. €2,560,000 [A] €1,600,000 [A] Accordingly, the REMCO decided the final bonus outcome for the CEO should be €2,560,000, which is 129% of target and 64% of maximum. The REMCO decided the final bonus outcome for the CFO should be €1,600,000, which is 129% of target and 64% of maximum. Governance 174 Shell Annual Report and Accounts 2021
LTIP Vesting In 2019, Ben van Beurden was granted a conditional LTIP award of 340% (maximum 680%) of base salary and Jessica Uhl an award of 270% (maximum 540%), excluding share price movement and dividends. In making the vesting decision, the REMCO considered Shell’s performance over the three-year vesting period. On the relative measures, Shell ranked fourth on total shareholder return (TSR), and fifth on cash flow from operations (CFFO) and return on average capital employed (ROACE), leading to a nil vesting outcome on each of the relative measures. On the absolute measures, Shell exceeded the free cash flow (FCF) target of $82 billion, generating $87.5 billion over the performance period, and substantively met all of the four energy transition performance targets. (See below for more details.) The REMCO also noted the impact of the decline in share price between award and vesting on the overall outcome. The REMCO further reflected on the overall single outcome for the CEO. The REMCO decided that the outcome was consistent with the target opportunity and intended operation of the plan under the remuneration policy and no adjustment to the vesting outcomes was required. Accordingly, the REMCO decided that the LTIP should vest at 49% without the use of discretion. This is illustrated below. See page 168 for more detail. 2019 LTIP vesting outcomes – performance measures + + + + +CFFO 0% Formulaic vesting outcome 49% Final vesting outcome 49% The REMCO reviewed Shell’s performance over the vesting period, considering financial and safety performance, whether there had been any breaches of ethics and compliance standards or other events that might damage Shell’s reputation, and individual performance. The REMCO decided that the LTIP outcome was a fair reflection of performance and should vest without discretionary adjustment. TSR 0% ROACE 0% FCF 31% Energy transition 18% Total formulaic vesting outcome 49% Performance Measures Weighting Threshold performance Maximum performance Outcome (out of the maximum 200%) Relative Performance ranked against the other energy majors: BP, Chevron, ExxonMobil and TotalEnergies CFFO 22.5% Third First Fifth 0% TSR 22.5% Third First Fourth 0% ROACE 22.5% Third First Fifth 0% Absolute Performance assessed against internal financial and strategic targets FCF 22.5% $73bn $97bn $87.5bn 137% Energy transition 10% 1/4 target areas 4/4 target areas 180% Vesting of the energy transition performance condition The energy transition condition supports delivery of Shell’s net carbon intensity (NCI) target (measured by Shell’s Net Carbon Footprint (NCF) methodology). This is a broad metric which consists of a mix of strategic measures that set the foundations for Shell achieving our longer-term ambitions in the energy transition, as well as Shell’s success in reducing the NCI of all energy products sold. The outcome was intended to be determined holistically by the REMCO, after taking advice from the Safety, Environment and Sustainability Committee (SESCo), taking account of performance against quantifiable targets but also with regard to Shell’s wider progress in the energy transition beyond the defined measures. The metrics for the first LTIP cycle (2019-2021) were focused on laying the foundations for Shell’s future growth, building the customer base and developing the organisational capability to deliver against the key strategic ways of decarbonising Shell’s business: growing a power business, developing lower-carbon energy products and developing emission sinks. G overnance 175Shell Annual Report and Accounts 2021
The overall vesting outcome, including an illustration of the impact of share price movement and accrued dividends, is set out below. The CEO and CFO’s vested awards are subject to a further three-year holding period which extends beyond their tenure as Executive Director. 2019 LTIP vesting outcome CEO CFO 194,625 x 49% = 95,366 Ordinary shares €2,593,955 Vesting outcome: [A] 18,079 Ordinary shares €448,178 Accrued dividends: [C] 95,366 x -€2.41 -€229,832 Change in share price: [B] Total LTIP Vesting: [C][D] 113,445 Ordinary shares €2,812,302 49,927 x 49% = 24,464 ADS $1,537,318 Vesting outcome: [A] 4,670 ADS $246,810 Accrued dividends: [C] 24,464 x -$9.99 -$244,395 Change in share price: [B] Total LTIP Vesting: [C][D] 29,134 ADS $1,539,732 [A] Based on the share price at award of €27.20 for CEO and $62.84 for CFO. [B] Calculated based on the opening share price March 3, 2022 minus the share price at the date of award for CEO €24.79 - €27.20 = -€2.41 and for CFO: $52.85 – $62.84 = -$9.99. [C] Based on the opening share price on March 3, 2022 of €24.79 for CEO and $52.85 for CFO. [D] Vested shares are subject to a three-year holding period, which extends beyond tenure as an Executive Director. Build a material Power business: The first cycle of the LTIP was orientated toward creating the foundations on which a material power business can be built: entering new markets to access customers, and developing new commercial pathways by creating a funnel of renewable power capacity options and then converting those options to realised investments. The REMCO considered that this target had substantively being met. Noting the movement into new markets for direct power sales to end customers through acquisitions such as ERM in Australia (now trading as Shell Energy), and the expansion of the North American renewables power business with the acquisition of Inspire. Strong progress has also been made on renewables, with a funnel of installed renewable capacity and pipeline of options well ahead of what was expected in 2019 following the acquisition of solar and energy storage developer, Savion. Demonstrable progress was made on converting those options into the renewable energy projects that a lower-carbon energy future will require, for example with the CrossWinds joint venture in the Netherlands. Advanced biofuels technology: Biofuels are expected to play an important role in energy transition, providing a key decarbonisation lever for sectors that will continue to need to use liquid fuels. This element of the LTIP measure reflects our strategy, which is to prove multiple technology platforms that can be subsequently replicated at pace, with performance assessed based on Shell developing or taking an equity position in commercial scale biofuels projects. The initial target was focussed on taking the first steps to implement this strategy, and the REMCO considered this had been met in full through Enerkem Varennes, a biofuels plant in Québec, Canada, that will produce low-carbon fuel and chemicals from non-recyclable waste, and LanzaJet, which will produce jet fuel from ethanol from a plant in Georgia in the US. Developing emissions sinks: The development of systems that capture and absorb carbon are required as part of the global response to climate change. The target for the first LTIP cycle was based on setting the foundations to develop future commercial value chains and REMCO considered this element of the LTIP measure had been met in full. This was through the Northern Lights project in Norway, with the REMCO noting that this project provided the opportunity to build the commercial knowledge and organisational capacity for future carbon capture projects. The REMCO also took account of the significant progress made on investment in the nature based solutions (NBS), which will make a big contribution to Shell reaching net-zero emissions, with nine investments in NBS projects that are verified by recognised carbon credit standards over the performance period. Net carbon intensity: Finally, the REMCO paid particular attention to the outcome on the metric based on the NCI reduction. This a comprehensive metric covering the Scope 1, 2 and 3 emissions from all energy products sold by Shell and provides a concrete marker of Shell’s success in decarbonising. The REMCO believes that Shell remains the only major energy company to tie executive pay to a target for reducing the Scope 1, 2 and 3 emissions intensity from the sale of all energy products. The outcome of this metric is a reduction of 2.5% against a target range of 2-3%. This target has evolved over time to reflect the decarbonisation actions necessary to meet our longer-term NCI targets (NCI reduction targets for later LTIP cycles are 2020-2022: 3-4%, 2021-2023: 6-8%, 2022-2024 9-12%, compared to the 2016 base year). Further detail is available on page 94. The REMCO considered the alignment to the financial statements and the enhancement of the quality of our emissions data when making their decision. After taking advice from the SESCo REMCO decided the energy transition performance condition should vest at 180%. ANNUAL REPORT ON REMUNERATION continued Governance 176 Shell Annual Report and Accounts 2021
In determining the final pay outcomes, the REMCO also considered the personal performance of the Executive Directors. Personal performance 2019 – 2021 It has been a challenging period for business as the world has grappled with the challenges of the COVID-19 pandemic and, for the energy sector in particular, as society accelerates towards a future of cleaner energy. Responding to these challenges has demanded strong leadership which both the CEO and CFO have provided. The REMCO acknowledges the exceptional personal contributions made by both the CEO and CFO in delivering a very strong set of financial results, coupled with a number of key strategic and organisational developments in 2021. This includes an updated strategy, Powering Progress, the first shareholder advisory vote on Shell’s Energy Transition Report and the implementation of a new organisational structure (Project Reshape). This culminated with the simplification, an important step, which the Board believes will strengthen Shell’s competitiveness and accelerate both shareholder distributions and delivery of its strategy to become a net-zero emissions energy business. Ben van Beurden Jessica Uhl Against a backdrop of transformational strategic and organisational change, the strength of Shell integrated business, quality of portfolio and operational delivery allowed Shell to capitalise on improved prices to deliver adjusted earnings of $19.3bn and generated an outstanding $45.1bn of CFFO (including working capital). The work has also continued to reshape Shell’s portfolio with the delivery of divestment proceeds of $15.1bn in 2021, far beyond target. These operating cash flows and divestment proceeds significantly contributed to reducing net debt to $52.6 billion at the end 2021, down from $75.4 billion at the end of 2020. This strong financial performance has enabled Shell to deliver on our commitment to increase shareholder distributions in keeping with our successful net debt reduction. Starting from Q2 2021, we rebased our quarterly dividend to 24 US cents per share and started share buybacks. The REMCO acknowledges the fundamental role the CEO’s strategic and operational leadership has played in enabling these financial outcomes and delivery of shareholder returns. Tackling climate change is an urgent challenge. This is why Shell has set a target to become a net-zero emissions energy business by 2050, in step with society and our customers. The CEO has led the development of Shell’s updated strategy, Powering Progress, which sets out a comprehensive strategy on how Shell intends to decarbonise energy customers while running legacy businesses for value rather than volume, integrating business and investment decisions with Shell’s longer-term ambitions. This was supported by the implementation of the new organisation (Project Reshape) necessary to support this updated strategy, which was completed in August 2021 without operational disruption. Externally, the CEO has played a leading role in the energy transition debate through such initiatives as the first joint statement with institutional shareholders, encouraging other companies to adopt the net carbon intensity methodology. He has been instrumental in galvanising coalitions to start action on sectoral decarbonisation. His personal role, for example in the Aviation Clean Skies Initiative, is recognised by both customers and external stakeholders. His interventions have helped in shifting the climate agenda towards the practical measures that will be needed for creating sustained demand for lower-carbon products. The refreshed safety programme was rolled out and a new personal safety measure designed to focus attention on the most serious incidents was introduced. To deliver the safety refresh Shell aims to apply a learner mindset, believing people can always improve, enhance their capabilities, learn from mistakes and successes, and speak up freely. The REMCO recognise the work across the leadership team at Shell, from the CEO down, in embracing a learner mindset and driving this across the organisation. The REMCO recognises the leadership of the CFO in delivering a number of key enterprise initiatives over the course of 2021. Notably this included the successful delivery of the simplification of Shell plc. This was a complex and challenging undertaking that involved the establishment of a single line of shares to eliminate the complexity of Shell’s A/B share structure and aligning Shell’s tax residence with its country of incorporation in the UK. Shell’s strong financial results were underpinned by discipline on capital, operating and lease expenditure and by the delivery of a divestment programme in excess of $15 billion. This enabled a reduction in net debt by $23 billion over the course of 2021. Dividends were increased twice in the year and share buybacks commenced, accelerating the pace of shareholder distributions. The CFO played a critical role in guiding the company through the implementation of an updated capital allocation framework to balance growth and shareholder distributions. To support ongoing transparency for shareholders, the CFO led the introduction of significantly improved external financial and operational quarterly disclosures in 2021 with positive feedback from the market. Over the performance period, the CFO has made significant progress maturing the internal management systems relating to carbon dioxide (CO₂) and ensuring these are reflected in decisions about portfolio, planning and resource allocation. In 2021, this included the delivery of carbon budgets within the annual business planning cycle for the first time. From the 2021 Annual Report, improved disclosure in the Annual Report. The CFO led the delivery of the Shell Energy Transition Strategy publication, which is part of our continuing work to implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The report sets out how Shell plans to be resilient to expected changes in the energy system and how its strategy helps it to thrive as the world transitions to lower-carbon energy culminating in the first shareholder advisory vote at the 2021 AGM in May (88.74% of votes cast were in favour). The REMCO considered the single-figure outcomes for the CEO and CFO. It noted that the overall remuneration outcomes were higher than in 2020, by 26% for the CEO and 24% for the CFO. The REMCO was satisfied that these single-figure outcomes represented a fair level of remuneration. In finalising its remuneration decisions for 2021, the REMCO considered a range of factors, including: ■ Shell’s performance in 2021 and over the LTIP performance period 2019-2021; ■ The impact of the fatalities on the formulaic scorecard outcome, and further downwards adjustment applied by the REMCO on the bonus scorecard; ■ the ongoing leadership shown by the CEO and CFO in continuing to set out a clear strategic direction for Shell in the energy transition and delivering the organisational redesign necessary to deliver on those strategic promises; ■ a range of other factors taking account of Shell’s performance beyond the formulaic outcomes of defined pay architecture, including safety, ethics and compliance, and feedback from the Audit Committee and the Safety, Environment and Sustainability Committee (SESCo); ■ the final LTIP vesting outcome; ■ the CEO’s and CFO’s remuneration compared with the variable pay outcomes for the general workforce; ■ the alignment of the CEO and CFO with the shareholder experience through their high shareholding requirements; and ■ the personal performance of the Executive Directors. After reflecting on the above factors, the REMCO was satisfied that the remuneration policies had operated as intended. G overnance 177Shell Annual Report and Accounts 2021
Pension In 2021, Ben van Beurden’s pension arrangements comprised a defined benefit plan with a maximum pensionable salary of €100,861; and a net pay defined contribution pension plan with a 2021 employer contribution of 27% of salary in excess of €100,861. He has the option of taking cash as an alternative to pension contributions (in either case subject to income tax). He elected to take his benefit in the form of contributions up to and including November 2021. The employer contribution levels were in line with those applicable to other Netherlands-based employees. Under the Dutch pension regulations applicable to the pension arrangement in which the CEO participates, the contribution rate increases with age and is shown below. At December 31, 2021, the average employer contribution rate for Netherlands employees who participate in the net pay defined contribution pension arrangement on the same terms as Ben van Beurden was 22%. After relocating to the UK, from December 31, 2021, the CEO is eligible to participate in the UK Shell Pension Plan, with a contribution rate of 20%, or to take this as a pension cash alternative. The UK Shell Pension Plan and associated pension cash alternative are available to new employees in the UK at the same contribution levels and currently around half of the UK employees participate in these arrangements. The majority of the remainder participate in a legacy defined benefit plan which closed to new members from March 2013. Jessica Uhl is a member of the Shell US retirement benefit arrangements, which include the Shell Pension Plan (a defined benefit plan), and a defined contribution plan where she receives an employer contribution of 10% of salary. This is the same as the average employer contribution rate for US employees, which was 10%. As for all other pre-2013 members of the Shell Pension Plan, she has an annual choice of two accrual formulas with different forms of benefits, one in the form of a lifetime annuity and the other allowing for a lump-sum payment. She elected to accrue benefits for 2021 under the former. Around 9,000 out of 15,000 Shell US Scheme interests awarded in 2021 Scheme interests awarded to Executive Directors in 2021 (audited) Scheme interest type Type of interest awarded End of performance period Target award [A] Potential amount vesting Minimum performance (% of shares awarded) [B] Maximum performance (% of shares of the target award) [A] LTIP Performance shares December 31, 2023 Ben van Beurden: 231,679 A shares, equivalent to 2.645 x base salary or €4,200,344. Jessica Uhl: 69,972 A ADS shares, equivalent to 2.485 x base salary or €2,572,119 0% Maximum number of shares vesting is 200% of the shares awarded, before dividends. [A] The award for Ben van Beurden was based on the closing market price on the date of grant, March 5, 2021, for A shares of €18.13. The award for Jessica Uhl was based on the closing market price on the date of grant, March 5, 2021, for A ADSs of $43.85. [B] Minimum performance relates to the lowest level of achievement, for which no reward is given. employees have the option of choosing between the two formulas. These arrangements are the same for all employees who joined Shell US at the same time as Jessica Uhl. The difference in Jessica Uhl’s pension provision, compared with other employees who joined before 2013, is that because she is an Executive Director her bonus is not pensionable. For other relevant US employees the bonus is pensionable. She also has a deferred Dutch defined benefit pension plan, as a result of a previous Shell assignment on local Dutch terms and conditions. The REMCO believes these arrangements are aligned with corporate governance developments in the UK which emphasise the desirability of Executive Directors’ pension arrangements being the same as those for the general employee population. Shell Netherlands Pension Stichting net pay defined contribution ladder Age Employer contribution 15 – 19 65 – 67 60 – 64 55 – 59 50 – 54 45 – 49 40 – 44 35 – 39 30 – 34 25 – 29 20 – 24 6.30% 7.54% 8.99% 10.44% 12.31% 14.38% 17.07% 19.77% 23.29% 27.02%(2021 rate for Ben van Beurden) 30.13% ANNUAL REPORT ON REMUNERATION continued Governance 178 Shell Annual Report and Accounts 2021
The measures and weightings applying to LTIP awards made in 2021 were: energy transition (20%), FCF (20%), TSR (20%), ROACE growth (20%) and growth in cash flow from operating activities (20%). Absolute measures Energy transition The energy transition condition supports the delivery of Shell’s net carbon intensity (NCI) target (calculated using Shell’s Net Carbon Footprint (NCF) methodology). The condition consists of a mix of leading and lagging measures that help establish the basis for achieving Shell’s longer-term strategic ambitions. They are as follows: Lagging measure – a measure of our progress in meeting our ambition: ■ Reducing the carbon intensity of all energy products sold: a target for reducing the NCI of the energy products Shell sells (a carbon intensity measure that takes into account the full life-cycle emissions of products, including customers’ emissions associated with using them). Leading measures – Shell will use these to reduce our NCI in the future: ■ The growth of our Power business: all scenarios recognise that one of the main ways to cut greenhouse gas emissions is to use more electricity, produced via lower-carbon means such as renewables and gas-fired power generation. Our ambition is to expand our Power business through selective investments in generation and by reselling power generated by others. ■ Offer more lower-carbon energy products: biofuels are expected to play a valuable role in the changing energy mix. They are likely to be one of the main ways to reduce carbon emissions in sectors that need to keep using liquid fuels for a significant number of years, such as some segments of transport and industry. ■ The development of systems to capture and absorb carbon: carbon capture usage and storage (CCUS) and carbon sinks, such as nature-based solutions, need to be part of the global response to climate change. Shell has set targets for each element. Progress in the energy transition is not expected to be linear because it will reflect the pace of change of society as a whole and the speed at which Shell makes progress with its strategic business objectives. As a result, targets have been set as ranges. These targets are commercially sensitive, so they will not be disclosed until the end of the performance period (or until they are no longer considered commercially sensitive). An update on our performance in relation to the measures set for the 2019 LTIP is provided on page 180. The vesting outcome for the part of the LTIP weighted to the energy transition condition ranges from 0% to 200% of award. The REMCO, at its sole discretion, will determine vesting outcomes after considering achievement against the target ranges and feedback from the SESCo. The REMCO will consider, in relation to each element, progress over the performance period relative to short-term aims that encourage progress towards Shell’s long-term NCI ambition. The starting point for determining the vesting outcome will be how many of the targets have been met for each of the four areas. One out of four will equal 40%, two will equal 100%, three will equal 150%, and 200% will be awarded for scoring four out of four. It is important to note that performance against these elements will serve simply as a starting point for the REMCO, which will also take into account any other considerations it deems appropriate, including (without limitation) the relative importance of these elements in meeting the long-term ambition announced by Shell. For example, the REMCO may decide to allocate a greater importance to overall performance in relation to the NCI than the other three elements. The REMCO believes this approach is appropriate, given the uncertainties around the speed and direction of progress in the energy transition. The REMCO will fully disclose and explain the application of any discretion. 2021 energy transition performance condition – measures Performance is assessed based on our reduction in the carbon intensity of all energy products sold and progress on the key strategic means of achieving decarbonisation: Reducing the carbon intensity of all energy products sold Total power sales Reduce the carbon intensity of the Power portfolio Renewable power generation capacity Electric vehicle charging network Advanced biofuels Deployment of low-carbon fuels Hydrogen business development Nature-based solutions Carbon capture, utilisation and storage Build a material Power business Grow new lower-carbon energy product offerings Develop emission sinks Reduction in net carbon intensity vs. base year measured by Net Carbon Footprint • • • • • • • • • • Quantitative targets are set for each metric. Vesting will be based on how many of the four targets are met. 1/4 equals 40%, 2/4 equals 100%, 3/4 equals 150% and 4/4 equals 200%. The REMCO will apply judgement in determining the final outcome after taking advice from the SESCo. G overnance 179Shell Annual Report and Accounts 2021
FCF The FCF performance condition supports the delivery of our cash flow priorities, which are to service and reduce debt, pay dividends, buy back shares and make future capital investments. The target for FCF, along with the ranges for threshold and outstanding performance, will be set by reference to Shell’s annual operating plans, being the aggregate of our plan FCF targets over the three-year performance period. Given that FCF is heavily influenced by the volatility of oil and gas prices, the annual operating plans are updated each year to set an annual target to reflect a changing oil price premise. As a result, FCF targets are set annually for each annual operating plan and will only be disclosed in aggregate retrospectively after the three-year period. The REMCO has considered setting a three-year target at the outset, but it believes such an approach would require adjustments for the oil and gas price premise and other matters at the end of the period, given the unpredictability and volatility in oil and gas prices. The REMCO has a long-standing no-adjustments policy which leads it to believe that a more appropriate approach is to set the target based on the aggregation of the annual operating plans. The amounts payable under this measure will range from 20% of the available maximum, for threshold performance, to full vesting for outstanding performance. A straight-line vesting schedule will apply for performance between threshold and outstanding. Relative measures The relative measures are based on our performance on a number of key financial measures against the our closest comparators. For relative measures, we rank growth based on the data points at the end of the performance period compared with those at the beginning of the period, using publicly reported data. ■ TSR, calculated in US dollars using a 90-day averaging period, 45 days either side of the start and end of the performance period; ■ ROACE growth. For this purpose, to facilitate the comparison, the calculation of ROACE differs from that described in “Performance indicators” on page 36 because there is no adjustment for after-tax interest expense; and ■ growth in cash flow from operating activities. Each relative measure affects vesting independently, with the amounts payable ranging from 0% to 200%, in accordance with the following vesting schedule: ■ ranking first equals 200% vesting for the LTIP element weighted to that measure; ■ ranking second equals 150% vesting for the LTIP element weighted to that measure; ■ ranking third equals 80% vesting for the LTIP element weighted to that measure; and ■ ranking fourth or fifth equals 0% vesting for the LTIP element weighted to that measure. TSR Underpin If the TSR ranking is fourth or fifth, the level of the award that can vest on the basis of the other measures will be capped at 50% of the maximum. Performance update on FCF 2020 LTIP award At December 31, 2021, FCF performance is above target, with a below-threshold outcome for 2020 of $20.8 billion (target $38 billion) balanced by a strong performance in 2021 of $40.3 billion (target $9 billion). As one year of FCF performance remains, and 77.5% of the award is subject to relative and energy transition performance conditions, this does not reflect the potential vesting of the award. 2021 LTIP award At December 31, 2021, FCF performance, $40.3 billion for 2021, is above target ($9 billion). As two years of FCF performance remain, and 80% of the award is subject to relative and energy transition performance conditions, this does not reflect the potential vesting of the award. Statement of Directors’ shareholding and share interests (audited) Shareholding guidelines The REMCO believes that Executive Directors should align their interests with those of shareholders by holding shares in Shell plc (the Company). The CEO is expected to build a shareholding with a value of 700% of base salary, and the CFO 500%. The shareholding requirement extends post employment, such that Executive Directors will be required to maintain their shareholding requirement, or the number of shares actually held if this is less than the shareholding requirement, for a period of two years post employment. There is a Company-sponsored nominee account which allows for restrictions to be applied on the sale or transfer of shares that are subject to holding periods and individual shareholding requirements. The restrictions remain in force beyond the Executive Director’s employment. Only unfettered shares count. Shares delivered that are subject to holding requirements also count towards the guidelines. The values of shares counting towards the shareholding guideline (as a percentage of base salary) were 904% for the CEO and 693% for the CFO at March 4, 2022. Executive Directors’ shareholding (audited) Shareholding guideline (% of base salary) Value of shares counting towards guideline (% of base salary at December 31, 2021) [A] Ben van Beurden 700% 972% Jessica Uhl 500% 555% [A] Following the sale of 190,000 ordinary shares by Ben van Beurden on February 7, 2022, the delivery of half the 2021 annual bonus in shares and the vesting of the 2019 LTIP on March 4, 2022, their respective holdings are Ben van Beurden 904% and Jessica Uhl 693%. Non-executive Directors are encouraged to hold shares with a value equivalent to 100% of their fixed annual fee and to maintain that holding during their tenure. ANNUAL REPORT ON REMUNERATION continued Governance 180 Shell Annual Report and Accounts 2021
Directors’ share interests The interests, in shares of the Company or calculated equivalents, of the Directors in office during 2021, including any interests of their connected persons, are set out in the table below. Directors’ share interests (audited) January 1, 2021 December 31, 2021 A shares B shares A shares B shares Executive Directors [A] Ben van Beurden 866,433 [B] – 973,533 Jessica Uhl 240,557 [C] – 299,283 [D] Non-executive Directors Dick Boer 10,000 – 10,000 – Neil Carson 16,000 – 16,000 – Ann Godbehere – 10,000 [E] – 10,000 [E] Euleen Goh – 12,895 – 12,895 Charles O. Holliday – 50,000 [F] – 50,000 [G] Catherine J. Hughes 4,080 51,904 [H] 4,080 51,904 [H] Martina Hund-Mejean 20,000 [I] – 20,000 [I] Jane Holl Lute – [J] – 5,002 [K] Sir Andrew Mackenzie – 20,732 – 27,623 Abraham Schot [L] – – – – Sir Nigel Sheinwald – 1,124 – 1,124 [M] Gerrit Zalm 2,026 – 2,026 – [A] Includes vested LTIP awards subject to holding conditions. Excludes unvested interests in shares awarded under the LTIP. [B] Includes 174,000 RDS A shares pledged with Van Lanschot N.V. [C] Held as 26,590 RDS A shares and 44,789 ADS (RDS.A ADS). Each RDS.A represents two A shares. [D] Held as 35,201 RDS A shares and 132,041 ADS (RDS.A ADS). Each RDS.A represents two A shares [E] Held as 5,000 ADSs (RDS.B ADS). Each RDS.B represents two B shares. [F] Held as 25,000 ADS (RDS.B. ADS). Each RDS.B represents two B shares [G] Interests at May 18, 2021, when he stood down as a Director. Held as 25,000 ADS (RDS.B. ADS). Each RDS.B represents two B shares [H] Held as 46,904 RDS B shares and 2,500 ADS (RDS.B. ADS). Each RDS.B represents two B shares [I] Held as 10,000 ADSs (RDS.B ADS). Each RDS.B represents two B shares. [J] Interests at May 19, 2021, when she was appointed as a Director. [K] Held as 2,501 ADSs (RDS.B ADS). Each RDS.B represents two B shares [L] On August 17, 2020, Bram Schot purchased 5,500 certificates Shell Turbo Long 7,5 BNP Paribas Markets (previously called: Royal Dutch Shell A Turbo Long 8,2 BNP Paribas Markets) (ISIN: NL0009558519) at a price of €5.37 per certificate. These certificates are cash settlement instruments the value of which is linked to the share price of Shell Shares (until January 29, 2022, RDS A Shares). In this case, the ratio of the turbo is 1:1 and accordingly 5,500 certificates represent 5,500 Shell shares. As at February 23, 2022, the leverage is 1.42 but fluctuates depending on the share price. If the share price increases, the leverage will decrease. The finance level is 6.91 and the stop-loss level is 7.5. The finance level is adjusted on the 15th of every month. Finance costs are 2.45% on an annual basis. With a turbo long, there is a finance level and a stop-loss level. If the underlying share price drops below the stop-loss level, the turbo long is terminated. The investor then receives the value of the difference between the finance level and the level on which the counterparty, in this case BNP Paribas, can close the turbo. Take for example a turbo with a stop-loss level of 10 and a finance level of 8. When the underlying share price drops below 10, which is the stop-loss level, the buyer will still receive the amount 10-8=2. But if the share price would suddenly drop to 8 or below, the buyer will receive nothing and the total investment is lost. In most cases, the turbo would be terminated at the stop-loss level, and the buyer receives the amount of the difference between the finance level and the stop-loss level. The actual amount will be determined by BNP. In addition, on August 27, 2020, Bram Schot purchased 100 Leonteq Express Euro Denominated Certificates on ING, Shell, Unilever (previously called: Leonteq Express Euro Denominated Certificates on ING, Royal Dutch Shell, Unilever) (ISIN: CH0470808913), with a nominal value of €1,000 each at a price of €515 per certificate. These certificates are cash settlement instruments of which payment of a conditional coupon depends for 1/3 on the development of the price of the Shell Shares on Euronext Amsterdam and, as such, is a financial instrument linked to the Shell Shares. Both transactions took place before Bram Schot became a Director of the Company. On February 12, 2021, Bram Shot purchased (i) an additional 2,500 certificates Shell Turbo Long 7,5 BNP Paribas Markets (ISIN: NL0009558519) at a price of €7.69 per certificate; and (ii) an additional 50 Leonteq Express Euro Denominated Certificates on ING, Shell, Unilever (ISIN: CH0470808913), with a nominal value of €1,000 each at price of €715 per certificate. [M] Interests at May 19, 2020, when he stood down as a Director. The Directors share interests converted into ordinary shares or ADS, as appropriate, following the assimilation of Shell’s A and B shares into a single class of share on January 29, 2022. The changes to Directors’ shareholdings as at March 4, 2022 are that Ben van Beurden sold 190,000 ordinary shares on February 7, 2022, and after the delivery of half the 2021 annual bonus in shares and the vesting of the 2019 LTIP award, Ben van Beurden’s share interests increased by 90,998 ordinary shares, and Jessica Uhl’s by 15,096 ADS and 18,551 ordinary shares. Jane Lute purchased 903 ADS on February 11, 2022. At March 4, 2022, the Directors and Senior Management (pages 121-130) of the Company beneficially owned, individually and in aggregate (including shares under option), less than 1% of Company shares. These shareholdings are not considered sufficient to affect the independence of the Directors. Directors’ scheme interests The table below shows the aggregate position for Directors’ interests under share schemes at December 31, 2021. These are RDS A shares for Ben van Beurden and RDS.A ADS for Jessica Uhl. During the period from December 31, 2021, to March 4, 2022, scheme interests have changed as a result of the vesting of the 2019 LTIP on March 3, 2022, and because of the 2022 LTIP awards made on February 4, 2022, as described on pages 176 and 178 respectively. Directors’ scheme interests (audited) Share plan interests [A] LTIP subject to performance conditions [B] 2021 2020 Ben van Beurden [C] 691,227 662,751 Jessica Uhl [D] 196,751 179,565 [A] Includes unvested long-term incentive awards and notional dividend shares accrued at December 31. Interests are shown on the basis of the original awards. The shares subject to performance conditions can vest at between 0% and 200%. Dividend shares accumulate each year on an assumed notional LTIP award. Such dividend shares are disclosed and recorded on the basis of the number of shares conditionally awarded but, when an award vests, dividend shares will be awarded only in relation to vested shares as if the vested shares were held from the award date. Shares released during the year are included in the “Directors’ share interests” table. [B] Total number of unvested LTIP shares at December 31, 2021, including dividend shares accrued on the original LTIP award. [C] Ordinary shares. [D] ADS. Dilution In any 10-year period, no more than 5% of the issued ordinary share capital of the Company may be issued or issuable under executive (discretionary) share plans adopted by the Company, or 10% when aggregated with awards under any other employee share plan operated by the Company. To date, no shareholder dilution has resulted from these plans, although it is permitted under the rules of the plans, subject to these limits. Payments to past Directors (audited) No payments to past Directors were made in 2021. Payments below €5,000 are not reported as they are considered de minimis. G overnance 181Shell Annual Report and Accounts 2021
TSR performance and CEO pay Performance graphs The graphs compare the TSR performance of Shell plc over the past 10 financial years with that of the companies comprising the Euronext 100 and the FTSE 100 share indices. The Board regards these indices as appropriate broad market equity indices for comparison, because they are the leading market indices in Shell plc’s home markets. Data shown is for the performance of RDS A and RDS B shares prior to the assimilation of Shell’s shares to a single line of ordinary shares on January 29, 2022. Historical TSR performance (RDSA) Value of hypothetical €100 holding Historical TSR performance (RDSB) Value of hypothetical £100 holding €50 €0 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 €100 €150 €200 €250 €300 €350 RDSA b a Euronext 100a b RDSB b a FTSE 100a b £50 £0 £100 £150 £200 £250 £300 £350 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 CEO pay outcomes The following table sets out the single total figure of remuneration, the annual bonus payment and long-term incentive (LTI) vesting rates compared with the respective maximum opportunity, for the CEO for the past 10 years. CEO pay outcomes Year CEO Single total figure of remuneration (€000) Annual bonus award against maximum opportunity LTI vesting against maximum opportunity 2021 Ben van Beurden 7,380 64% 25% 2020 Ben van Beurden 5,841 0% 45% 2019 Ben van Beurden 9,963 21% 74% 2018 Ben van Beurden 20,138 79% 95% 2017 Ben van Beurden 8,909 81% 35% 2016 Ben van Beurden 8,593 66% 42% 2015 Ben van Beurden 5,576 98% 8% 2014 Ben van Beurden [A] 24,198 94% 49% 2013 Peter Voser 8,456 44% 30% 2012 Peter Voser 18,246 83% 88% [A] Ben van Beurden’s single total figure for 2014 was impacted by the increase in pension accrual (€10.695 million) calculated under the UK reporting regulations and tax equalisation (€7.905 million) as a result of his promotion and prior assignment to the UK. ANNUAL REPORT ON REMUNERATION continued Governance 182 Shell Annual Report and Accounts 2021
Percentage change in remuneration of Directors and employees As Shell plc does not have any direct employees, the table below compares the remuneration of the Directors of Shell plc with an employee comparator group consisting of local employees in the Netherlands, the UK and the USA. The local employee population of these countries is considered to be a suitable employee comparator group because: these are countries with a significant Shell employee base; a large proportion of senior managers come from these countries; and the REMCO considers remuneration levels in these countries when setting base salaries for Executive Directors. For the purposes of comparison, the change in employee remuneration is calculated by reference to the change in salary scale, benefits and annual bonus for a notional employee in each of the base countries, not by reference to the actual change in pay for a group of employees. Taxable benefits are those that align with the definition of taxable benefits applying in the respective country. In line with the “Single total figure of remuneration for Executive Directors” table, the annual bonus is included in the year in which it was earned. Percentage change in remuneration of Directors and employees [A] 2020-2021 2019-2020 Employees [B] UK, USA and the Netherlands Salaries/fees 0.6% 3.0% Benefits –% –% Bonus N/A (100.0)% Executive Directors CEO Salaries/fees –% 2.0% Benefits 8.6% (23.7)% Bonus N/A (100.0)% CFO Salaries/fees –% 2.0% Benefits (22.8)% 28.1% Bonus N/A (100.0)% Non-executive Directors [C] Dick Boer Salaries/fees 70.4% N/A Benefits –% N/A Neil Carson Salaries/fees 4.3% 85.6% Benefits –% –% Ann Godbehere Salaries/fees 2.9% 15.8% Benefits N/A –% Euleen Goh Salaries/fees 11.4% 0.2% Benefits N/A –% Jane Holl Lute Salaries/fees N/A N/A Benefits N/A N/A Charles O. Holliday Salaries/fees (61.9)% –% Benefits (11.6)% (2.4)% Catherine J. Hughes Salaries/fees 2.8% (10.0)% Benefits N/A –% Martina Hund Mejean Salaries/fees 68.4% N/A Benefits N/A N/A Sir Andrew Mackenzie Salaries/fees 1,473.0% N/A Benefits N/A N/A Abraham Schot Salaries/fees 300% N/A Benefits N/A N/A Sir Nigel Sheinwald Salaries/fees (62.5)% (1.7)% Benefits N/A (100.0)% Gerrit Zalm Salaries/fees –% –% Benefits N/A –% [A] In a number of instances the value for the preceding year was zero. In these cases, N/A is recorded. [B] As Shell plc does not have any employees, the change in pay for an employee comparator group from the UK, USA and the Netherlands is shown. [C] Non-executive directors do not receive any short-term incentives. G overnance 183Shell Annual Report and Accounts 2021
Relative importance of spend on pay The table below sets out distributions to shareholders by way of dividends and share buybacks, and remuneration paid to or receivable by employees for the last five years, together with annual percentage changes. Relative importance of spend on pay Year Dividends and share buybacks [A] Spend on pay (all employees) [B] $ billion Annual change $ billion Annual change 2021 9.1 –% 12.1 –% 2020 9.1 -64% 12.1 -8% 2019 25.4 26% 13.2 -1% 2018 20.2 29% 13.4 -6% 2017 15.6 4% 14.3 -9% [A] Dividends paid, which includes the dividends settled in shares via our Scrip Dividend Programme and repurchases of shares as reported in the “Consolidated Statement of Changes in Equity”. [B] Employee costs, excluding redundancy costs, as reported in Note 26 to the “Consolidated Financial Statements”. Spend on pay can be compared with the major costs associated with generating income by referring to the “Consolidated Statement of Income”. Over the last five years, the average spend on pay was 5% of the major costs of generating income. These costs are considered to be the sum of: purchases; production and manufacturing expenses; selling, distribution and administrative expenses; research and development; exploration; and depreciation, depletion and amortisation. Total pension entitlements (audited) During 2021, Ben van Beurden and Jessica Uhl accrued retirement benefits under defined benefit plans. The pensions accrued under these plans at December 31, 2021, are set out below. The exchange rates used for conversion into euros and dollars are at December 31, 2021. Accrued pension (audited) Thousand Local € $ Ben van Beurden [A] 1,189 1,189 1,345 Jessica Uhl [B] 1,247 1,102 1,247 [A] The accrued benefits are disclosed on a per annum basis. Note that in 2021, Ben van Beurden entered into a pension sharing agreement with his former spouse, the amount disclosed reflects Mr van Beurden’s entitlements after that agreement. [B] Jessica Uhl has an annual choice between two accrual formulas with different forms of benefits. One is in the form of a lifetime annuity and the other allows for a lump-sum payment. She elected to accrue benefits up to 2018 under the arrangement for a lump-sum payment, and the eventual lump-sum benefit is shown. From 2019, she elected to accrue benefits as a lifetime annuity. The value of this accrued benefit at December 31, 2021, was $12,430 per annum plus a lump sum of $361,413. She also has a deferred Dutch defined benefit pension plan, as a result of a prior Shell assignment on local Dutch terms and conditions. The age at which Jessica Uhl can receive any pension benefit without an actuarial reduction under this Dutch plan is 60. The value of the deferred pension benefit is €3,427 per annum. The age at which Ben van Beurden can receive any pension benefit without an actuarial reduction is 68. It is 65 for Jessica Uhl under her US pension plan. Any pension benefits on early retirement are reduced using actuarial factors to reflect early payment. No payments were made in 2021 regarding early retirement or in lieu of retirement benefits. Please refer to page 178 for further details (Pension). External appointments Ben van Beurden joined the Supervisory Board of Daimler AG as a Non-executive Director in April 2021. Jessica Uhl joined the Board of Goldman Sachs Group as Non-executive Director in July 2021. Statement of voting at 2021 AGM Shell’s 2021 AGM was held on May 18, 2021, in the Netherlands. The result of the poll in respect of Directors’ remuneration was as follows: Approval of Directors’ Remuneration Report Votes Number Percentage For 3,567,342,830.00 95.86% Against 153,872,670.00 4.14% Total cast 3,721,215,500 [A] 100.00% Withheld [B] 54,753,918 [A] Representing 47.66% of issued share capital. [B] A vote withheld is not a vote under English law and is not counted in the calculation of the proportion of the votes for and against a resolution. The result of the poll in respect of the Directors’ Remuneration Policy last approved at the 2020 AGM was as follows: Approval of Directors’ Remuneration Policy Votes Number Percentage For 3,567,342,830 92.91% Against 153,872,670 7.09% Total cast 3,988,673,865 [A] 100.00% Withheld [B] 24,979,832 [A] Representing 51.09% of issued share capital. [B] A vote withheld is not a vote under English law and is not counted in the calculation of the proportion of the votes for and against a resolution. Directors’ employment arrangements and letters of appointment Executive Directors are employed for an indefinite period. Non-executive Directors, including the Chair, have letters of appointment. Details of Executive Directors’ employment arrangements can be found in the Directors’ Remuneration Policy on page 195. Further details of Non-executive Directors’ terms of appointment can be found in the “Other Regulatory and Statutory Information” on page 205 and the “Governance framework” report on page 136. Compensation of Directors and Senior Management During the year ended December 31, 2021, Shell paid and/or accrued compensation totalling $48 million (2020: $36 million) to Directors and Senior Management for services in all capacities while serving as a Director or member of Senior Management, including $3 million (2020: $3 million) accrued to provide pension, retirement and similar benefits. The amounts stated are those recognised in Shell’s income on an IFRS basis. See Note 28 to the “Consolidated Financial Statements”. Personal loans or guarantees were not provided to Directors or Senior Management. ANNUAL REPORT ON REMUNERATION continued Governance 184 Shell Annual Report and Accounts 2021
CEO pay ratio Option 25th percentile pay ratio Median pay ratio 75th percentile pay ratio 2021 A 97:1 57:1 37:1 Total pay and benefits: Salary: £65,123 £43,550 £111,912 £68,238 £170,289 £101,000 2020 A 93:1 57:1 38:1 Total pay and benefits: Salary: £55,584 £49,117 &pou