Strategic Report

06 STRATEGIC REPORT CHAIRMAN’S MESSAGE SHELL ANNUAL REPORT AND FORM 20-F 2014 STRATEGIC REPORT We are building a large floating LNG production facility, called CHAIRMAN’S MESSAGE Prelude, which will help access gas resources in remote waters. Prelude is one example of the technological advances we are making The energy landscape has fundamentally transformed in the nearly nine to help meet future demand. years that I have served as Chairman. Our deep-water technology is another. It enabled us to start production Technological advances have enabled a surge in gas and oil in 2014 at major projects in the Gulf of Mexico and off the coasts of production from deep beneath the ocean and unlocked important new Malaysia and Nigeria. shale resources over the last few years, for example. Through our joint venture Raízen in Brazil, we are also now one of the Shell plans to continue to invest in innovative technology, talented world’s largest producers of low-carbon biofuel. people and the development of new energy sources that will be vital to meet rising long-term demand, while limiting carbon emissions. CLIMATE CHANGE It is clear that new technologies will be needed to tackle climate But the short-term outlook for energy markets is uncertain. change effectively. For example, carbon capture and storage (CCS) technology to store carbon dioxide (CO2) safely underground could The International Monetary Fund (IMF) estimates that the world substantially reduce the amount of CO2 emitted in energy production at economy grew by 3.3% in 2014, unchanged from 2013. In January lower cost than many other technologies. 2015, the IMF revised its forecast for 2015 down from 3.8% to 3.5%, pointing to concerns over the Russian and eurozone economies, But widespread government and industry support is needed to ensure combined with slowing growth in China. that enough CCS plants are built around the world to make a substantial contribution to the wider drive to reduce CO2. Concerns over economic growth, coupled with buoyant global oil production, drove a decline in crude oil prices during the second half All sectors of society must work together to combat climate change of 2014, ending a three-year spell of relatively high prices. Although effectively. One vital and pressing step is to set up effective systems for the Brent crude oil price averaged $99 per barrel in 2014, down putting a price on carbon emissions. It is an efficient way to encourage from $109 in 2013, it ended the year at $55. companies to change their activities in ways that have a deep and lasting impact on emissions. Shell will continue to look carefully at how and where to allocate capital in an economic environment that remains fragile. I was encouraged to hear at the United Nations (UN) Climate Summit in New York in September 2014 that the need for effective carbon A sustained period of low oil prices could, of course, challenge the pricing systems had broad support. I hope that significant progress can economics of some of our planned projects and make them less be made on this at the crucial UN Climate Change Conference in attractive. But we must continue to take a long-term view in a world Paris in December 2015. where energy demand continues to rise. INNOVATION AND INNOVATORS ROBUST STRATEGY I have had the privilege of working with many talented, creative and In 2014, our steps to improve capital discipline helped deliver solid forward-thinking people at Shell. Their focus on developing innovative returns to shareholders. We delivered strong cash flow for the year ways to produce and refine new energy resources should benefit our and also completed our programme of divesting some parts of our shareholders and customers in the years ahead by keeping our portfolio ahead of schedule and before oil prices fell in the second half products competitive in any economic environment. of the year. Perhaps the best example is the Pearl gas-to-liquids (GTL) complex in Our strong balance sheet allows us to continue to invest, despite short- Qatar. The final decision to go ahead with the project was taken at term price volatility, while our emphasis on employing innovative the first Board meeting I chaired in 2006. Back then, there was some technologies will help make our new projects competitive sources of scepticism, outside Shell at least, about the project’s ambitious scope supply. and viability as a major investment. Many new energy resources will be needed in the longer term. Global We proved the sceptics wrong. Today we know that a GTL project on primary energy demand could grow by 37% from 2012 to 2040, this scale, it is the largest such plant in the world, does work. according to the International Energy Agency (IEA). Watching Pearl develop and seeing its products now benefiting customers around the world has been one of the most rewarding The IEA expects renewable energy to meet an increasing share of experiences during my time at Shell. global energy needs. But its central scenario, which takes into account existing government commitments and plans, points to a 14% rise in oil Pearl’s success underscores the importance of continuing our strategy consumption and a 55% rise in gas consumption by 2040. of making disciplined investments in key projects and new technologies. This is how we can compete more effectively on the Gas will be increasingly in demand partly because of the important global stage as we continue to create value for our customers, partners role it can play in reducing carbon emissions when replacing coal, and investors. particularly in power plants. JormaOllila Becoming the most competitive and innovative gas supplier has been a Chairman clear strategic goal for Shell throughout my time as Chairman, especially in liquefied natural gas (LNG), which is now central to the global trade in gas. Shell has evolved from being predominantly an oil producer to a company that produces more gas than oil. STRATEGIC REPORT 07 SHELL ANNUAL REPORT AND FORM 20-F 2014 CHIEF EXECUTIVE OFFICER’S REVIEW It was a good year for our exploration drive, with 10 notable CHIEF EXECUTIVE OFFICER’S discoveries. The resources we uncovered – including in the USA, REVIEW Gabon and Malaysia – could be important sources of gas and oil for decades to come. After my first year as Chief Executive Officer, I am pleased to see that We continued to streamline our Downstream operations, selling most we are delivering on our three key priorities of improved financial of our businesses in Australia and Italy, for example. While there is performance, enhanced capital efficiency and continued strong project some growth potential in businesses such as chemicals, lubricants and delivery. in China, we continue to look for opportunities to reduce our costs and optimise our Downstream portfolio. We have come a long way. Shell’s earnings on a current cost of supplies basis attributable to shareholders improved in 2014 PRUDENT PATH OF GROWTH compared with 2013, largely thanks to our prudent investment strategy The fall in oil prices in 2014 was part of the volatility our industry has and delivery of major new projects around the world. always faced. But it underlined the importance of being selective in our investments and keeping a tight grip on costs. We achieved these better results despite the fall in oil prices during the second half of 2014, a decline mainly caused by plentiful supply and Divestments, together with the initial public offering in Shell Midstream weak global demand. Partners, L.P., generated $15 billion in proceeds in 2014. They included shale oil and gas interests in North America and downstream Our improved operational performance, prudent spending and sales of businesses in several countries, meeting our target for 2014-15 well assets that are not central to our strategy helped us enter this period of ahead of schedule. We plan to continue to divest assets in 2015. low oil prices from a position of strength. To improve returns and control costs during this period of low prices, But there is still work to be done. I want to see more competitive we have also reduced our potential spending on organic growth by performance across Shell in 2015 and beyond. $15 billion for 2015-2017. For example, together with our partners Qatar Petroleum, we have decided not to proceed with the proposed We continued our focus on safety, but sadly five people working for Al Karaana petrochemicals project in Qatar because it is too costly in Shell in 2014 lost their lives. There was also an explosion at our the current environment. Moerdijk chemical plant in the Netherlands, but thankfully it caused no serious injuries. We expect organic capital investment to be lower in 2015 than 2014 levels of around $35 billion. But we want to preserve our growth to Tragically, we lost four colleagues and eight of their family members in ensure we continue to generate cash flow and dividends for our the Malaysia Airlines disaster over Ukraine in July. That was a deeply shareholders. That is why we are still planning to invest in saddening experience for all. economically-sound projects this year in key growth areas, such as deep water and LNG. 2014 MILESTONES For 2014, our earnings on a current cost of supplies basis attributable to Clearly, we do not want to miss future growth opportunities simply shareholders were $19 billion, which included impairments of $5 billion because they may seem unaffordable in the low oil price world we see and gains on divestments of $2 billion, compared with $17 billion in today. 2013, which included impairments of $4 billion.

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