Q3 2021 Royal Dutch Shell PLC Earnings Call (Q&A)
On LNG and the outlook on the contract pricing going forward.
This price environment is certainly supportive in terms of shifting up the.
The value we can achieve in our long term contracts and I would say that we've had some success and in that respect. These uncertain times. These high prices bring value to companies such as ourselves who can provide the stability and certainty in terms of supply and certainly our customers value more certainty on the pricing and are willing to.
Pay for that and pay for that risk management from a pricing perspective, and we're starting to see that so I am optimistic that this will have a positive effect on our contract renegotiations that will occur over over the coming years in terms of Martin, leaving I'm I'm I'm sad to see him leave shell and I wish him very well he's he's been a great partner on the Executive Committee, while is a fantastic leader.
He is very good at getting the most value out of the businesses He's run and we've seen that in the upstream I'm looking forward to his impact and integrated gas and he is known as being a pretty good negotiator himself.
Tracy next question please.
We will now take our next question from Michelle It's on Athena from Goldman Sachs. Please go ahead.
Thank you very much micaela.
Two questions.
First one probably for you Jessica.
It's very welcome to see a major recovery in the LNG volume from your guidance for Q4 I was wondering if we should expect these to allow the trading.
And volume maximization to come through in the LNG results in the fourth quarter after effectively Barry.
Lower results in Q2, and Q3 and then one question for who we burnt on refining we are seeing much higher margins, but we're also seeing higher costs for energy for carbon in Europe should we expect a material improvement in the profitability of the business as we go into Q4 into next year or do we run the <unk>.
That D. C is just a cost push higher and therefore margins do not substantially improve thank you.
Hello, Thank you for the questions I'll start with the first and hand over to hybrid.
In terms of the LNG business, both in Q3 and the outlook. Let me just spend a couple of minutes a couple of moments rather on Q3, and then shift to the to the outlook in the third quarter, our underlying assets have performed well from an LNG perspective, and those assets have seen upside associated with the current price environment.
For instance, prelude I has been ramping up those volumes are being sold into the current market pricing and that caused some 400 million dollar improvement from Q2 to Q3 in our in our LNG business.
However, in the third quarter from a trading and optimization perspective, there were supply disruption issues that Unfortunately continued into the third quarter from a third party gas issues flowing through into that in terms of the LNG supply chain for our trading business that had a negative effect for us in the quarter. So it's really the trading.
Peace and to supply from third party suppliers that does have a negative impact in the third quarter. So I'd like to make the distinction from our own operations and our own assets versus some of what's happening on the trading side. If you look forward. Unfortunately, some of those issues, we expect to continue through the fourth quarter and even into the first quarter.
I think we will have this behind us as we get into the second quarter. In 2022. However, this positive price environment will be reflected in the outperformance or the returns that we'll generate from our from our assets, but some of the issues that we see in the third quarter on supply from a trading perspective will persist a bit into the fourth quarter and into the first quarter.
<unk> and hopefully be behind us by the second quarter of next year.
Thanks, very much Jessica.
Thanks for the question.
Looking at the refinery margins, we indeed saw an average uptick in Q3.
Looking into Q4, we are within our own portfolio still have some items around to maintain turnaround start Scott Ford of the island and the effects of Hurricane Ida at our Norco refinery.
What I can tell you is that indeed, the cost structures of some of these refineries, particularly the feedstocks.
The associated items have gone up but.
When I was visiting our partner's refinery two weeks ago I can assure you that their daily and nightly calls between economics of scheduling and our trading team to constantly optimize and and determine how we further can kind of getting value out of that.
On the future outlooks of refinery margins that there's not too much.
I can say other than that I do believe the.
On a global scale, there's still quite some.
Overcapacity.
Great. Thanks, <unk> next question Tracy.
We will now take our next question from Lydia <unk> from Barclays. Please go ahead.
Thanks, and good afternoon, everyone two questions if I could the first one just on the emissions target.
Until I got 50% protection of escape one's got to I think that's already included within the Capex plan. So I'm just trying to look at what is different or what additional is where we were in February and then secondly, how the marketing is clearly going very well.
The split of the business into that with the partnerships that are outlined in the presentation.
Seeing a lot more demand so they called and management and the energy of the service.
But that's about to that is I think the shell what better as one integrated company involved in lots of different one.
Yeah.
Thank you Lydia I'll I'll start with the first question and then hand over to a hybrid for the second I. So yes. The emissions targets are we we announced today really really pleased to have those out out into the market.
This is the absolute emissions targets for our scope, one and scope two emissions under operational control, where we're looking to.
Reduced this by some 50% between 2016 and 2030.
And indeed in order to achieve that we have a we have already.
At hand, both the strategy as well as the capital allocation that's required to deliver on on that ambition.
What's different now is that we've added an absolute target I think that we've complemented our targets are.
But all of the levers that are necessary to achieve that by 2030 were contemplated when we introduced the strategy and in February So, yes from a capex perspective, and importantly from a returns perspective, we don't expect this additional target too.
To cause any change in that.
It's simply executing the strategy that we've laid out and of course, each week and each month, we learn new things certain things go better than expected certain things didn't go don't go quite as fast as we would hope so of course, we're learning every day, but essentially the main levers that we identified and strategy day 21 in terms of what is needed to achieve this reduction are already <unk>.
Place and therefore, the capital has already been considered in our returns are already considering these these changes.
Hybrid yes. Thanks.
<unk> just gone Lydia good to hear you.
A couple of things you're absolutely right that our marketing businesses are doing extremely well since 2013, we are in that earnings CAGR of more than 7% and as you could see in the presentation. Jessica gave that we continue to perform well.
A lot of that is due to many factors.
Around our focus on premium products like V power and the penetration that we can get her focus on loyalty customers are increasing convenience retailing, which we've now increased to 12000 sites actually is generating a gross margin of more than $1 billion. But you also have to realize a lot of that is integrated as well we operate in 80 countries.
And in retail and that's all integrated with our trading and supply businesses with our distribution businesses. So it's really an integrated value chain also if you look at the way we run our EV charging.
Our ambition is to be able to provide you as a customer the V facilities you need where you are when you are so that can be at home that can be on the streets that can be at destination. So at waitrose or it can be as you go to one of our retail sites and with that we will also then offer you the ability to recharge yourself with all those activities are coupled together and.
We need to make it very easy for you but.
But there are other important parts of our marketing businesses for instance, our lubricants business, where we're now 15 years in a row number one and we increased our market share that's fully integrated with the energy and chemical Sparks of the future as we need to provide high quality base oils group too goofy to be able to make these Greg lubricants are top tier lubricant actually we.
She can give you a few efficiency of four to five per cent for passenger car comes actually from a basal from Qatar GTO. So there you can really see the integrated nature and other examples determine where this fully integrated with our energy and chemical parks, where we make the quality vitamin based on customer demand. So customer demand is working from the customer back look.
At the integrated nature of the energy and chemicals parks, we have.
Great. Thanks hybrid next question Tracy.
We will now take our next question from Irene <unk> from Societe Generale. Please go ahead.
Thank you. Good afternoon, My first question back to the U S.
Our scope, one and two absolute emissions reduction target.
Is it possible to split it in two please so how much of that would be from disposals versus owned decarbonization and then what would be the contribution of the Permian disposal to that.
50% target and then my second question.
If we were done on marketing if you can please talk a little bit about what you're seeing in your key geographies in terms of retail.
Retail demand recovery and which areas.
It remains problematic for U S retail and thank you.
Thanks, Steve right now Ben.
Yes, Thanks Irina.
On the on the targets.
Maybe again recap a little bit so it's a 50% reduction target compared to 2016, when we had 83.
Tons of greenhouse gas emissions coming down to 41, if you would compare to 19, it's at 48% reduction. So that is therefore also better than what the court ruling at the Hague.
Required us to do so that's why we are saying, it's an important contribution to that ruling and this of course, just the emissions that are under our control that we can do something with it so emissions from our own facilities as well as the emissions associated with the energy that we buy power most of most of the time.
Now can we break that down yes, we can and we will give you progress updates by the time, we get to the.
The AGM for next year because this is part also of our plan to put forward the progress that we're making with the attainment of our targets and asked for an advisory vote from our shareholders to understand what I feel about the progress that we're making they actually made quite good progress we have already done out of the 50% 17.
<unk> by the end of this year. So you can see that we are making progress.
I'd add divestments in that yes, there are risks, but also closures and conversions and high grading all facilities et cetera, et cetera, but most of it is indeed just that it is a shut.
<unk> of our crude is stellar and pull of Bocom.
Conversion of our refinery into a terminal.
Is more efficient furnaces, it's also going to be Ccs and <unk>.
It's also going to be other components that contribute to it.
Now how much is the Permian negligible, because you have to bear in mind, our scope one emissions and even most of our scope two emissions are associated with our refineries chemical plants LNG plants and our GTR plans.
And if you look at the contribution on scope, one and scope two of our upstream. It is actually a very small amount. It's it is a few percent and I don't have the number off the top of my head, but I would be surprised if it was more than half of percentage points. If you look at the Permian.
I ran that we have a.
Also a video that we put together explaining again, how scope one two and three emissions work what we're doing about it what are the quantum's recycling them and I would recommend you take a view at it because it's probably one of the least well understood aspect of our strategy are all these scopes come together and what we are doing with it.
<unk>.
Irene and good to hear you so.
So if you look at the mobility volumes, we see actually an interesting trend if I look at Q3 compared to Q2 of this year, we're probably at 106% of our volume.
And actually it was our highest volume in the last seven quarters. So you might say when was it before that while we're not at the levels exactly on a volume basis on Q3 19, yet that's around 92% 90%.
Of course, a few this year, but I do see quite some regional differences, so you're asking me well, which region is behind them, which one is doing better I, particularly still see a bit of a softness in the east and that's obviously many countries together and there's a direct correlation with the still the impact of COVID-19, and the Lockdowns. If you look like a country.
Philippines, or we have more than 1 million customers.
There's been a basically a lockdown for around 18 months right now if you look at Malaysia, Theres still some severe lockdowns and other parts of the east as well so we see that through in our volume figures as well I think one of the things. We are demonstrating however is how resilient our mobility businesses that is not dependent purely on the volumes that we're able to make these very high end <unk>.
Record earnings I think this quarter is probably our second best ever for mobility, driven by different factors and I think Jessica presented today that we show that 40% to 50% of customers and many of our key markets don't come for fuel they actually come for convenience retailing. So you can see the differentiation and are coming through.
And in that part of the business.
Thanks Albert.
Tracy next question please.
We will now take our next question from Bofa Parka Toria from RBC. Please go ahead.
Hi, Thanks for taking my question I, just had a follow up on marketing given your slides today, where that business has been incredibly stable business and it actually Jenny.
Generated some of the highest returns in the portfolio.
And it looks like through the pandemic the metrics are only getting stronger and going the right direction, you could make a well I could make a reasonable argument that this business should be at a much higher multiple than the rest of the business, but obviously it gets hidden in the mix. So the question is if you were to look at a partial lifting of the float of the marketing business, but maintained the mcgee.
Alrighty stake what is the downside shell or what would you lose.
And then second question is just following up on Bens comments around one or two.
Growing your LNG business is a strategic priority for you.
Obviously from a scope one and two basis, there can be quite carbon intensive.
And obviously that you're adding large chunks to capacity as you get these things online. So how did you put the targets out today.
Does that have any implications for your ability to grow that business or does that imply a shift from equity volumes to be enough to take care of well.
The constraints around that thank you.
Thank you for honesty and.
Hi, Brett do you want to share your thoughts on integration value and versus kind of a standalone entity and then Ben.
Oh absolutely.
A couple of things I think on the question on say price earnings one of the things we realized that we need to should disclose much more about our marketing businesses and that's exactly what we're doing now and we will continue to do next year that you and others barrage.
Understand.
That business in much more detail and ask questions in much more detail around it and then hopefully you see that reflected back in the Investor base.
It's also very clear in my mind that a lot of the value is driven by the integration. We have I gave you. Some examples of our mobility business Theres No way, we can run that business without the close integration with trading supply distribution to get that physical flow of of molecules being able to source that better.
If you look at our lubricants business, it's not only actually integration with <unk>. It's also on the on the additive side, our bitumen business is totally integrated in itself as well. So there are many reasons why it is actually one value chain than if you go to the next step and you look at the value chain of the future are the ones that we're creating for instance, with sustainable aviation fuel.
It is really the game for me for instance of what we're trying to do it with partners Heifer, where we are building one of the largest biofuels plant in Europe is the optimization opportunity gives me. So let me explain to you because I have the customer base in aviation, but also in shipping.
And also in chemicals, I can determine by making those biofuels, how do I optimize that's always better I need to have a location, where I can make them, where I have the people, where I have the logistics and where I actually have the permits and then I can always optimize between shall I make more sustained waiver issue fuel shall I make.
Renewable diesel or shall I make more bio.
Bio NAFTA for a cleaner chemicals, but then you need to work from that customer back and for instance in the furnace example, if I want to make sustainable aviation fuel I actually have a pipeline from furnace to schiphol that I can go directly into the plane of KLM or any other customer in house with a blend of biofuels so that integral.
Asian value is real it's complex, but it's there's really a very high value for us in the marketing businesses.
Thanks Robert.
And just to add to that point very briefly and indeed, there were times that we had some of these value chains sort of cut up and distribute its a bit different ownership structures I actually first we spend a large part of my career and doing all of that because you actually do create tremendous barriers for Chinese walls.
Thank relationships and non competes and antitrust issues et cetera that actually eradicate the integrations all you debt.
<unk> sure well described but on your other point the LNG.
LNG plants, yes, indeed that do have a sort of quantum of emissions and of course the ones, we operate which are quite a few.
Come onto our count.
So we've been very clear for that if we wanted to build new LNG plants that better come with very competitive carbon footprints on the operational side and we have to find ways to offset this and offset with nature based solutions, but offset it with savings elsewhere. So I've been very clear with our.
Organization, if we are to do another LNG bumps say for instance in Canada, it needs to come either without emissions.
You need to find a way to reduce emissions elsewhere, because we are on a trajectory to bring down our emissions to net zero by 2050 and that means that every mission that you're at you're somehow if you take out elsewhere.
That I think is a real challenge.
But it's also the challenge that the World has and that's the challenge that we are rising too.
Great. Thanks, Dan.
Tracy next question please.
We will now take our next question from Roger read from Wells Fargo. Please go ahead.
Hey, good morning.
Yes afternoon, do you still still morning on our side of the pond.
I just would like to come back you were talking about a little with the last responses on the value of integration because I think it's a fair question with any company does it makes sense to have these many different business then you talked a little bit about it with with lubes in the downstream, but as we step back and look at the overall.
Operation probably a question for you Ben but like we're all should we think about the integration value how should we as analysts and investors think about shell as one company as opposed to some of the proposals that are out there.
And what is the the strong case for integration.
Yes, thanks, very much Roger I think of course integration is quite often an overused word and we have to work harder to make clear what we actually mean by it but there's two levels I would say we have to think about one of which is the fact that indeed, we use our assets.
And our supply change in our customer contracts and trading and supply business as one ecosystem within which we can optimize you heard some of the examples that that hybrid earlier mentioned, but actually we have that across our entire piece you will have seen that we also in the introductory video that Jessica did you talked about how we're going to use.
Windpower on C to tune into hydrogen to turn into molecules and to turn into transportation fuels. All of these things are only possible because we have the opportunity to integrate and we have the opportunity to treat a business. There's a network a much in the same way of course, when you think about biofuels and alike. So into.
Aggression is partially the network effect. So it is an enabler for doing energy transition plays that are otherwise incredibly hard to piece together, if you have to do it with disparate businesses.
The second level of integration is financial integration. So many of these businesses that we are building for the future are going to be of course absorbing cash because we build them from very low to no materiality to something that is quite significant that has to be funded as well we've been very clear in our strategy that we see our upstream business not just.
Providing the energy that we need today in this world, but also the funding that we need to build the energy system of the future now we believe that we can do that quite efficiently and shell and that is what our strategy is all about if you again take that away you effectively take away our ability to invest in the future of energy.
That's two levels to think about it as much more of course that we could talk about but these are two very important considerations for the holistic and coherent strategy that we have.
Thanks Ben.
Tracy next question please.
We will now take our next question from Christian <unk> from J P. Morgan. Please go ahead.
Alright, Thank you Christian now like.
Firstly, I'd, just say congratulations to wild.
Given this new Jersey, calling because then you won't get to to drive the best deals.
One question for you and just to follow up on what you just mentioned on the previous answer if I may.
Let's talk about the market narrative around the sector.
If we just step away from ESG.
26, and what the sentiment is it just simply cyclical.
And that means that.
In the sense that.
You fast forward a year at commodity prices remained strong and shows generating significant cash flows.
It diminishes and favorable sort of a constructive dialogue around your business you could compromise that assuming that plays out.
Referring to shareholder activism, we're seeing why wouldn't you consider breaking up the business. If it generates shareholder value is at the same time, you can deliver on our commitments.
Climate change and I would say that assuming good investing getting more companies, there's no longer a toxic so to speak and then the bank.
The remain co and this hypothesis.
Offices retains its license to operate.
Thank you.
Yeah.
Yes.
Cynosure I hate order correctly Christian.
I'm sorry for that but.
But license to operate off the remain co depends of course, what what you would call the remain co but it.
But.
Maybe back up a bit and then perhaps also Jessica can comment on this.
It is indeed increasingly difficult to in the environment that we are experiencing.
It was also referred to Windows false first question.
But with significant hosted at the N demonization of our sector and I realize that finds its way also in the in the asset manager World and it finds its way in the asset owner World.
But let's also be very clear the world still needs oil and gas, it's using one I guess as a matter of fact, it's using more of it at this point in time than it used to before.
What has to be provided and.
And I think therefore, it is not only legal if there is legitimate unnecessary that's oil and gas products are being provided and I better be provided by companies that first of all know how to do it a very responsible attitude to doing so and indeed have a strategy to use some of that cash not just to fund shareholder.
<unk>, but also to transition the company to a to a better cleaner lower carbon slate.
And that means that we are a company in transition.
Some people don't like that they say well you know.
I don't want to be part of this transition I just want to only jumped to those companies that never had to do with transition or that have already transitioned to whatever else, but the reality of it is Chris John then that is actually going to impede the transition as well.
So in the end the energy transition that we are talking about.
I'm here talking about humanity and not just for the Investor Universe is going to be an energy transition that will only come about when companies with a scope scale and scale like us actually make it happen and actually work with our customers to say we can help you.
Use different types of energy products and if you had issues in terms of competitiveness, let's jointly work on the right policy framework that governments need to put in place to make all these things happen. So I do think there is a role for us in there now you might say well that sounds like you're on NGL or a government in the end you just have to deliver returns but.
And then at the same time I'm also absolutely convinced that we can deliver competitive returns in all of these aspects of the energy system of the future. So that's why we have the strategy as we have it I think it does hang together.
I do believe and each we are never done explaining that strategy and re emphasizing aspects of it but that is what we believe in and that's what we will be going forward.
Thanks Ben.
Vince covered it really well, but perhaps a couple of other points quickly.
In terms of value creation shareholder value, if we focus on the substance of our businesses. We have spent a lot of effort and energy over the last couple of years reshaping our upstream business in our upstream portfolio to have a high value business, that's very well run and very cash generative.
So in the third quarter, our upstream business generated some $5 $8 billion of cash flow from operations. That's the highest we've seen since 2018.
Lower production base and that's a great example of how we've reshaped that portfolio for value over over volume I think it's a great franchise generating a substantial amount of cash if you look at our EBITDA for the third quarter from $13 $5 billion half of that comes from our upstream business. So we've got a really great business highly cash generative.
High value business, that's part of who we are as a company. We've got I think unique skills and capabilities in that space to responsibly.
Responsibly provide oil and gas to the world and so from a substance perspective.
It's not obvious why you wouldn't want to have that in your portfolio in terms of who we are as a company and what we do well.
But also in terms of funding the energy transition to energy transition is going to need some anywhere from two to four trillion dollars a year, depending on who you ask over the next 30 years.
Our upstream business is a source of cash for us to then fund the <unk>.
Energy transition that that's so needed.
So from a substance perspective, the last thing I'll say is that the integration points that highlight raised if you look at the Pernis refinery our ability to bring hydrogen solutions to Pernis biofuels.
Biofuel solutions.
Pernis and Ccs solutions Pernis.
Hi.
Bringing that altogether, and bringing bringing real solutions today in that space, we're able to do at pace, because we've got the skills and the capabilities and the assets within our portfolio and we can get all of those teams in the same room to work out all of the issues that need to be worked out to create these new business models of the future and I think that is our source of competitive differentiation.
And.
With respect to the energy transition, particularly for field.
Yeah.
Tracy next question please.
We will now take our next question from Jon Rigby from UBS. Please go ahead.
Hi, Hi, everybody thanks for taking.
My question.
I had two actually.
First is on on the integrated gas business. So.
I was looking back and it pays to mis and this could be to do with poor forecasting, but it pays to miss consensus earnings expectations six after the last seven quarters.
You might argue that.
Even the trading update at the end of September didn't quite capture.
All of what was going on.
And so.
With some of your peers actually making very good money in the LNG space I was just concerned maybe I'm looking for reassurance here.
That was a very strong highly profitable business was somewhat by virtue of the fact that you've dominated the space.
Actually now has become much more competitive and your sort of competitive positioning.
It's not as good and therefore, maybe we're a little too optimistic around its outlook on performance and maybe there are moving parts.
But perhaps even even shell doesn't quite.
I wasn't able to capture I remember a question, maybe a year ago. When I asked whether there was a structural issue and integrated gas you said there wasn't.
The second question is on buybacks.
I see you've done sort of the.
With that kind of $1 billion in the third quarter. Obviously, you only started in August and August is a fairly 10 months.
I imagined.
September was a decent month to do it.
And yet you've not opt into the fourth quarter.
And I'm sort of conscious of the amounts of CFO, you're generating in the sort of strike calculation of a buyback from that plus the commitments around the conoco Phillips.
So can you just explain to me with with the fact that you're already doing.
Sure and I think this is the second largest b share purchase in any one quarter, how youre going to get the share buyback program done. Thanks.
Great good.
Thank you John so in terms of the.
Integrated gas business, and I think probably more specifically Ellen LNG.
Pearl asset our detailed business is growing quite strong in some of the best operational performance, we've ever had and that business is also contributing to.
The results, but it's on the LNG side I think is where most of the questions are and I'd say. This you know this has not been our strongest year for for the business.
And remain very confident in the sector and very confident with our competitive positioning in the sector. I think there are distinct issues that have happened. This year that we have the ability to manage and to have a very different future in terms of what's happened this year not going into 2022.
And N P on.
What's happened I think are a couple of things in the past. If you look in 2018 in 2019, we had a couple of really outstanding quarters, and when we had this quarter as I.
I cautioned the market that these are really outstanding and this shouldn't be considered kind of.
The kind of the base expectation for for the business I think that that may have set expectations a bit a bit high.
But coming into 2021 in the last couple of quarters. The issue has really been around.
Supply issues in our trading and trading part of our business. So this is not this isn't an asset business as I tried to make the distinction before.
Our assets are performing well prelude ramping up it's enjoying this this.
In this current price environment, and so you see.
Some $500 million of.
Incremental earnings over Q2 associated with our assets and that's combination of performance and obviously the market, but on the trading side.
The real challenge has been on supply issues coming out of Peru, Trinidad, Nigeria, which I've mentioned before <unk> is up and running again, so hopefully that's that's behind us and as I said as we look into 2022, hopefully we can get the overall supply position, where we need it to be with some of these other assets are dressing addressing the issues are.
Most of those issues have are related to third party gas suppliers and arent really shell issues.
So I think structurally there is absolutely not an issue I think we have a very competitive business last year. The business did really well through a very difficult market and that was to a large extent because of the strength of our trading business supporting and a very difficult market and propping up if you will earnings and cash flow. This year, Unfortunately, not not getting the same bed.
From it but again this is really driven by supply issues and not kind of the fundamentals of the business and as barrage asked earlier some of the fundamentals I would say, we're feeling a bit more optimistic in terms of the price outlook as we look over the coming years are absolutely, but also in terms of how the contracts are being priced against against Brent. So I'd say, there's some.
Some optimism in terms of that business going forward as well in terms of the share of share buybacks you had a couple of questions there.
Why given the strength of the cash generation why didn't you do more buybacks I think it was the first question Hot Cup.
A couple of points to raise there and in the last 90 days, we've announced some.
$10 billion of incremental distributions to our shareholders. If you consider the dividend the share buybacks and then the proceeds that we're going to distribute out of Permian. So.
Feeling we're in a good place in terms of returning cash to our shareholders through various forms of distributions. That's the first piece. The second piece is in the second quarter, we talked about or I referenced that we would then look at the next tranche of share holder distribution increases and in Q4, and so we'll be doing that in the fourth.
Quarter.
Of course, we have our annual dividend increase but of course, we'll be looking at the 20% to 30% range, we'll do that looking back on the prior 12 months and of course the results of this quarter will feature and the decision making that we have in the fourth quarter in terms of increasing shareholder distributions.
In terms of the pace there is some constraints in terms of being able to execute that as efficiently as possible.
That's why we're buying the B shares currently are and in terms of trying to do that as fast as possible. There's various tactics that we're looking at and I will be more clear certainly once we get the proceeds and with Permian in terms of how we expect to execute that as quickly and as efficiently as possible.
Thank you.
Tracy next question please.
We will now take our next question from Matt <unk> from Morgan Stanley. Please go ahead.
Yeah, Hello, I've got two questions as well.
In the sort of any shorts that a prerecorded video that you put out this morning.
There was a comment about the reduction in the production of traditional fuels from 100 million tons, a year to 45 million tons, a year by 2030 and perhaps I.
Missed something but I was wondering if that is sort of a new indication of an existing one it wasn't sort of quite so clear to me.
And also I find it quite an intriguing number because it's sort of a 55% decrease between now and 2030. If you look at the IAA net zero scenario clearly the most stringent scenario.
Yes.
There is a sharp decline in oil demand, but it's only 30%. So it sort of sounds like you are sort of shrinking this business faster.
Very substantially faster than even the IEA net zero scenario sort of requires which which makes it quite interesting and so I was wondering if you could put these things in context and also.
How much of this decline is sort of disposals and will still be operated by other people versus actual closures, because frankly, if companies like shell or looking to shrink these businesses even faster.
Then a net zero scenario requires it does make you wonder.
Who at least on the timeframe between now and 2030.
It is going to produce these fields.
So that was one the other one is a much smaller question, but in the statements. There is a comment that there were comparatively lower earnings contributions from renewables and energy solutions.
North America.
I was wondering if you could say a few words sort of precisely what is in that business and what was driving that and also how material.
Lower earnings contribution is there.
Okay. Thank you my time I will quickly answer the final question, you had and then hand over to hybrid.
The.
Reduction in margins on our renewable energy solutions business in North America is really a delta versus the second quarter, where we had a bit of a makeup.
Posting if you will in our margin that came through and then we also had a.
An increase in.
Reserves related to our mark to market positions. So it's not a kind of fundamental issue with the business, it's really a delta versus the second quarter and not a signal in terms of the underlying performance of the business.
Hubbard.
Hi, Martin.
No the going from 100 million to $45 million fuels by 2030 is an existing target that we mentioned it in the as the <unk> and 'twenty, one and it's to certain extent, it's the transformation of our refinery to energy and chemical Sparks.
It includes the divestment of some of the refineries we've done over the last year and a half Martinez with Asia.
Working on Puget Mogul Deer Park in P. C K, but it also includes the conversion to a terminal so and what we're doing until Bongo and what we're thinking of a content refinery in the U S.
And book them, we actually took out accrued distillers are we fundamentally reduce quite significantly the fuels capacity, but importantly, it's not just taking out the fuel capacity is what do you actually do and in my view in a customer back world, we should make products and services based on the needs of customers, which are not only commodity driven but we are able to.
Price on what that product actually does so the technologies and the product. So what we will replace it with and the energy and chemical parks, which will you will remain will be more performance chemicals more basis for lubricants more bitumen, which will give you more ratable margin. So in the charts that you were able to see you see indeed the reduction in total fused.
Production, but you see quite an increase in margin. So this is actually a quite well business driven opportunity as I look at it working from the customer back and then determining per sector, what are exactly those needs and how do we make them more more ratable.
Great. Thank you and Montana I realize that the number on the reticence about $200 million for the quarter you'd asked that number right now.
So one thing sorry, I forgot I was just thinking one of the things. We also said in FY 'twenty, one as we're replacing actually parked that fuels with low carbon fuels. So we're going from 3% of our total transport fuels to 10% low carbon fuels by 2030. So that's an increase of eight eight times of the total production, which includes the 2 million tons of sustainable.
Aviation fuel, which we also mentioned so the blends will increase and therefore, the fuels actually consumption will decrease.
Great. Thank you.
Next question please.
We will now take our next question from Christopher Copeland from Bank of America. Please go ahead.
Thank you good afternoon, and thanks for taking my questions I've got two as well if I may.
First one a bit generic but considering that we are going into cop 26.
<unk> is still debating around its taxonomy.
Maybe I can ask a generic question. What do you think is a successful or unsuccessful cop 26, and does that matter at all whether it is a successful or not successful outcome as you define it for your energy transition strategy. So maybe I'm asking at the Devil's advocate.
Would you would you argue some of your commitments.
Actually exposed U if cop 26 failed to reach global consensus whatever that is.
And if I may just briefly a second question you mentioned the IPO right, then and Ben was that one of your earlier concerns around additional Chinese walls because isn't that.
Exactly.
Contradicting your points of view on integration and Biofuels marketing is this a very specific case, given you a local JV partner so.
Just wanted to hear a thumb a message on whether you're thinking about doing many more of these ips around the world or whether that actually.
Our specific exception to your point about vertical integration. Thank you.
Thanks, Chris.
Jessica looks at me so I'll answer the first one I think I was probably best placed to talk about the ryzen IPO I think on Cop 26 was of course, there's a lot of talk in the market what does it mean, what do we expect and what do we hope for.
I'm actually working on a linked in fees that I will hope to put out tomorrow. What are my hopes for cop 26. So by all means take a look at that as well.
But I would say that probably down to three things Chris. So first of all yes, we do need more ambition everybody talks about it of course, we need to do more because the current ambitions add up to something much more than two degrees C. You could argue that solve very bad but you could also argue that that's how it was supposed to work isn't it so if we.
Need to ratchet up ambitions through the point that we are on the right place and May be if you look before corp.
And Paris.
Cop 21, we were looking for its five degrees. So it so in that sense, we have made progress, but we need more progress we need more ambition in that perspective, that's point number one point number two we need more reelection.
Because it's not just good enough to have more targets and ambitions out that needs to be re election on the ground and in my mind quite a large part of that election increasingly needs to focus on the hard to abate sectors. So these are things that are somewhat outside the necessarily determined contributions as well take aviation no. One single country has gone.
To take care of aviation unless we collectively put mandates in place. The same is true for shipping. The same is true for steel cement heavy duty industry, even heavy duty road transport probing needs to have a.
Sort of.
Super National approach and that's what we mean by a sectorial approach that we are strongly advocating for.
And therefore, my second point is more action along the lines of individuals' sectors, and we are putting out today a set of policy recommendations that we believe governments need to embrace in order to drive all of these different sectors forward with our own decarbonization roadmap. The third one I would say is.
Finally, operationalize article six of the Paris agreement, we are not going to get anywhere close to two or one five degrees. If he cannot do it with the help of the market, meaning to say that we need to be able to exchange emissions to trade emissions you cannot have a situation where people and say.
Kind of as I say, we don't like to export LNG to China to shutdown that call bonds because it gives emissions here, we need to be able to take a global view on how we manage emissions and that effectively means that we have to have an operational article six that has been in I think four five years, if it doesn't happen.
I would be very disappointed. So these are my three points Chris.
Thank you Ben next question. Please Tracey do you want me.
Thank you.
Yeah just.
On the horizon that even first of all is it is clearly already a joint venture 50, 50 between us and <unk> and goes on.
We put 8% indeed IPO it was a very specific case, because we needed to have the funds.
Particularly also from the Covid on site to be able to fund our growth. So we were able to raise $1 $3 billion in the market. What did we do with that while we actually acquired a bio <unk>, which was the number two.
Player domestic player in which increased our total capacity from the agriculture side with our with 50%. So from that perspective. It was specific what is very important however that what we place where nonvoting shares. So we remain fully in control of the of the joint venture we have.
Thank you Hi, Bert.
Now next question please Tracy.
We will now take our next question from Alastair Syme from Citi. Please go ahead.
Hi, everyone. Just one question just come back to the LNG trading.
Just to clarify so you're saying because of supply issues.
You have them to buy cargos in the market to fulfill contracts or were you able to declare force majeure.
I guess, if you were having to buy cargos does that mean in fourth quarter given the it looks like spot prices got on average EBITDA in third quarter.
Although that's even going to be more of a headwind. Thank you.
Thank you Alastair indeed, Unfortunately, we did have to buy cargos in the market and so.
That is the negative impact that Youre seeing is is the incremental cost associated with those cargos that will continue into the fourth quarter as well. However, there is the upside as well on the price that's still coming through on the cargoes that we are receiving both from a trading side and from a from an asset side as well. So it we will get some of the upside, but we will have some <unk>.
Incremental cost, we expect because of supply issues in the fourth quarter as well.
Turning to the next question please.
Stephen I'll take our next question from Lucas Herrmann from Exane BNP Paribas. Please go ahead.
Thanks, very much and thanks for the opportunity and.
Just.
As a comment.
Pretty good opportunity for the narrative to change around this right now at least given where energy prices, what's happening in terms of energy prices and to some extent was a consequence of them.
Third point position.
But maybe my sentiments aside Jessica I wanted to ask you about derivatives and the impact of derivatives and how we should think about that potential reversal.
And indeed, you know how.
Perhaps we should think about them in the context of CFO and your calculations on returns.
And the second question I'm, sorry, I'm trying to go back to LNG and <unk>.
It's really about what when I look at the asset base.
A number of the fields of Oleds.
Declining I'm wondering the extent to which.
To what extent.
The issues that youre, having with supply all very simply also around issues that providing the plant whether its trinidad whether it's nigeria, whether its northwest shelf. So when the cycle all of which you are replacing credit we're going to place increasing.
Pressure on.
On the business going forwards.
Given the maturity of much of the asset base.
Thank you.
Good.
Thank you so in terms of derivatives.
A couple of important or big movers, there and.
And just a little bit of context, there are derivatives in relation to our LNG business and their derivatives in relation to our gas supply business.
For the third quarter, what you see happening from a mark to market perspective, and from a variation margin perspective, it's a mix of those things unbalanced the variation margin for the quarter for the group was a positive help a $4 billion.
All things being equal in terms of the foreign curves that determined that variation margin amount, we would expect that to unwind over over the next coming quarters yeah.
But that's if everything.
It is on.
If everything moves in tandem and of course these things don't always move in tandem, but I think it's a reasonable expectation that that $4 billion.
If if things generally stay as they are today, we would expect that to roll off if you will.
In the next couple of quarters, even if that's the case I would I would just highlight that that's $4 billion, we would still townhouse over $13 billion of cash in the quarter. So I think very strong cash generation that.
That you would see and of course, depending on what's happening with prices. You can also have a positive effect from a working capital perspective. So.
There's a lot of different moving parts in the cash flow. So I would look at the fundamentals the underlying cash flow. If you will of $13 $5 billion in terms of the substance of the business, which is very strong and that will certainly flow through regardless of what happens on the variation margin.
In terms of the LNG.
Business a bit more on term and what might be driving some of the.
The supply issues as I said before it is it's not about the performance of our of our own asset portfolio, If you will and odd and.
And it is about a couple of our sources of supply that I've I've referenced in prior quarters Trinidad Nigeria.
Those gas supply issues, which is third party supply issues are playing playing into that we're working solutions.
And continue to do so but of course, we also have other sources of supply we contract supply we are having some more supply coming into the portfolio next year from a contractual perspective. So there's other levers in terms of getting access to supply from contracts. While we continue to work solving the gas issues and the reliability issues that we've seen and some of the supply contracts for the.
Trading business.
Hope that helps.
Tracy next question please.
We will now take our next question from Jason <unk> from Cowen. Please go ahead.
Hey, Thanks for taking my question I'm, Unfortunately going to ask another one about LNG so apologies.
But I'm trying to understand how the supply impacts flow through to the volumes, because you're essentially saying you're back filling your <unk>.
Trading volumes so as there are.
Are we going to see an indication in the volume number when I'm kind.
Kind of things not normalized for you in the business or is it just that sales number stays flat, but the.
The margin moves higher and then connected to that is it possible to provide.
A figure for the lost profit opportunity in the LNG business during the third Q as a result of these disruptions.
Good.
Hi.
Indeed, it so I'm trying to.
Simple way of answering the first question. So on the LNG side, we will see more volumes coming through in the fourth quarter, but we're also seeing.
Some of our.
Mark to market positions will also be coming through and we're still expecting some supply disruption so while we'll be having.
Increased sales.
Opening and higher prices positively affecting the assets in our business, we will still have supply issues that will negatively affect us and.
In the fourth quarter and in the fourth first quarter, assuming the pricing moves as they currently are.
Today.
The.
The second question in terms of.
I'm sorry, the second question on Europe.
Opportunity loss monitor without any loss, yes, indeed, so for the third quarter.
Impact was around $300 million for the quarter in terms of the supply impact because that's obviously a material.
Hit four for the quarter and again.
As we worked through that that should be sorted hopefully by first second quarter of next year and that will.
Hopefully come back to our bottom line once we get those issues resolved.
Yeah.
Next question please.
We will now take our last question from Paul Cheng from Scotiabank. Please go ahead.
Hey, good luck.
Thank you.
Two questions Peter first I think it's Oh Huber.
Do you have a sensitivity that you can help us in the epic all up here Mcf change in natural gas prices, how that impact on your refining margin capture on a per barrel basis.
As far as debt refunding opex on a per barrel basis.
That's the first question.
Second question.
I think Jessica we have heard some women talking about LNG, Canada may.
You may have seen some causal for one that's a dispute between the consortium in the U P C.
Can you confirm whether that is the case and that way we are in terms of the coals.
I can sneak in a final one on the 7 billion of the additional cash return from the Permian sale.
At that time, and I think that when that that would be executed.
Or 12 months after that they will compete or that don't have a timeline. Thank you.
Good.
How about do you want to start with the first question yes.
Understood that correctly.
Sensitivity and change of the gas prices the impact on the refinery margin.
What I mentioned earlier is that we constantly are optimizing the impact of gas prices and then determining what slates, we can make and we do that.
The different inputs, we havent feedstocks between our economics and scheduling teams in all our refineries together with the various trading teams and that happens on a daily basis, but obviously the exact impact is that will that will depend very much on the locality of the slate and the different feedstocks that we have so I don't have an exact number.
For that now the only thing I can assure you is that obviously, we're optimizing that and believe I firmly believe that within the industry, our cooperation and integration between our energy and chemicals parks on a refinery is top notch and our trading and supply businesses. So top notch that we do that.
Very effectively.
Hybrid.
Paul I believe the question was about the LNG.
Plant being constructed in Canada, if I understood you correctly.
Pardon the pipeline, it's a pipeline.
So there are discussions on the on the pipeline ongoing we've had some challenges on the pipeline. There is no nothing to announce at this moment in time.
Working with our contractor. So you can also direct inquiries to trans Canada, as well who is constructing the pipeline.
And there's no updates at this moment in time in terms of where that stands what I would say is that the project itself is going very well I think we've reached 50% of completion.
We are pleased with the performance outside of Canada in terms of the supply chain and within Canada, particularly during the during the pandemic. So really really pleased with the overall.
Progress at the project has has made today.
To date.
In terms of the $7 billion cash return, we're looking to do that of course, we need to get the proceeds that the deal needs to close we're hoping it closes in the fourth quarter. Once it closes and we received the proceeds we're looking to distribute that to our shareholders.
As quickly as possible, but also as efficiently which means at the at the best price on in terms of.
And the best method in terms of getting that back to our shareholders as I said as quickly and as efficiently as possible. We're looking at different ways of doing that but hoping to complete.
On that very quickly as we go into 2022.
With that I believe that was the last question. So I'm going to now I'll say, thank you to all of you for joining us today and for your questions.
I hope this is giving you insights into our strategy and delivery.
Absolute emissions reduction targets and our performance in the third quarter of 2021.
Wish you a pleasant end of the week and I Hope you and your families stay safe and well.
Thank you.
And this concludes the session. Thank you for your participation you may now leave the call.
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