Risk factors
The risks discussed below could have a material adverse effect separately, or in combination, on our earnings, cash flows and financial condition. Accordingly, investors should carefully consider these risks.
Further background on each risk is set out in the relevant sections of this Report, indicated by way of cross references under each risk factor.
The Board’s responsibility for identifying, evaluating and managing our significant and emerging risks is discussed in “Other regulatory and statutory information”.
We are exposed to macroeconomic risks including fluctuating prices of crude oil, natural gas, oil products and chemicals.
Further information: See “Market overview”
Risk description
The prices of crude oil, natural gas, oil products and chemicals can be volatile and 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. These include price caps on gas, the promotion of electric vehicle sales or the phasing-out of future sales of new diesel or gasoline vehicles (as announced in the UK and due to come into force in 2030). Oil and gas prices can also move independently of each other (as seen with European gas prices in 2022). Factors that influence supply and demand include operational issues, natural disasters, weather, pandemics such as COVID-19, political instability, conflicts, such as the 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 the past, a high oil and gas price environment has generally led to sharp increases in costs and this could continue. Under high oil and gas prices, our entitlement to proved reserves under some production-sharing contracts could also be reduced. Higher prices could also reduce demand for our products, which could result in lower profitability, particularly in our Chemicals and Products and Marketing businesses. Some of the reduction in demand could be permanent. Higher prices can also lead to more capacity being built, potentially resulting in an oversupplied market which would negatively affect our Upstream, Integrated Gas, Renewables and Energy Solutions, Chemicals and Products and Marketing 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”
Risk description
We use a range of commodity price and margin 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 and margins 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 “Our strategy“ and “Outlook”.
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 potential scenarios and business environments by identifying drivers, uncertainties, enablers and constraints to our competitiveness. These scenarios help us to find issues which affect our operating environment and have implications for our strategy.
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.
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 “Our journey to net zero”.
Risk description
Societal demand for urgent action on climate change has increased, especially since the Intergovernmental Panel on Climate Change (IPCC) Special Report of 2018 on 1.5°C effectively made the more ambitious 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 company 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 greenhouse gas (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, and protesting at some of our facilities and projects. We expect that these challenges and protests are likely to continue and could delay or prohibit operations in certain cases. Our journey to achieving our target of becoming net zero on all emissions from our operations has resulted in and could continue to require 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 pace and extent of the energy transition could pose a risk to Shell if we decarbonise our operations and the energy we sell 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.
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. 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, rounded. We expect to see additional regulatory requirements to provide disclosures related to climate risks.
In summary, rising climate change concerns, the pace at which we decarbonise our operations relative to society 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. Our climate change risk management approach 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.
We also actively monitor societal developments, such as regulation-driven carbon-pricing mechanisms and customer-driven preferences for products. We incorporate these into potential 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.
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.
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, regardless of whether we win or lose the appeal.
Investments in our low-carbon products and services may not achieve expected returns.
Further information: See “Marketing“ and “Renewables & Energy Solutions“.
Risk description
We are building our portfolio of low-carbon products and services such as electricity generated from solar and wind power, hydrogen and biofuels, and charging for electric vehicles through organic and inorganic growth.
In expanding our offerings of these low-carbon products and services, we expect to undertake acquisitions and form partnerships. The success of these transactions will depend on our ability to realise the synergies from combining our respective resources and capabilities, including the development of new processes, systems and distribution channels. For example, it may take time to develop these areas through retraining our workforce and recruitment for the necessary new skills. It may take longer to realise the expected returns from these transactions.
The operating margins for our low-carbon products and services may not be as high as the margins we have experienced historically in our oil and gas operations. Some of our acquired companies are not yet in full compliance with the Shell Control Framework.
Therefore, developing our low-carbon products and services is subject to challenges which could have a material adverse effect on our earnings, cash flows and financial condition.
How this risk is managed
We maintain an integrated business model, with trading and optimisation, to help us manage our value delivery. Our investments are subject to financial modelling and stress-testing, due diligence and risk assessments to ensure that our capital is allocated to the most attractive low carbon opportunities. We rigorously monitor and evaluate the performance of our acquisitions against our expectations. Following specific assessments of each new acquisition, dedicated projects are put in place to achieve compliance with the Shell Control Framework.
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“.
Risk description
Developments in politics, laws and regulations can and do affect our operations. Potential impacts, which we have experienced in the past, 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. Many parts of the world are facing economic and fiscal challenges and growing pressure on cost-of-living standards. The situation is further exacerbated by Russia’s invasion of Ukraine, which is having an unprecedented impact on gas and power markets in terms of both supply and price. These issues impact our business as governments, in response to political and social pressures, pursue policies that could have a material adverse effect on our earnings, cash flows and financial condition.
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 seeking to ensure compliance with local laws and fiscal regulations. Our Corporate Relations department liaises with governments in countries where we operate to understand and engage on 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.
Russia’s invasion of Ukraine has affected the safety and security of our people and operations in these and neighbouring countries. The resulting 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”.
Risk description
Russia’s invasion of Ukraine continues to pose wide-ranging challenges to our operations and commercial decisions. The immediate impacts included those relating to 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 are having a material impact on a number of our activities, including supply, trading and treasury activities. More sanctions, export controls and taxes are expected.
Given the evolving situation, there may be 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. In addition, there is potential reputational risk associated with how Shell’s decisions in response to evolving challenges are perceived. 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 was set up to assess the situation, consider potential scenarios of how events may further develop and co-ordinate responses accordingly.
Care for our people remains 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 closely monitoring and responding to the sanctions that have been imposed and are following international guidelines where relevant to our business activities.
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)”.
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 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 “Powering Progress strategy”.
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.
|
|
|
Million boe [A] |
||
|---|---|---|---|---|---|
|
2022 |
2021 |
2020 |
||
Shell subsidiaries |
938 |
1,047 |
1,104 |
||
Shell share of joint ventures and associates |
108 |
134 |
135 |
||
Total |
1,046 |
1,181 |
1,239 |
||
|
|||||
|
|
|
Million boe [C] |
||||||
|---|---|---|---|---|---|---|---|---|---|
|
Dec 31, 2022 |
Dec 31, 2021 |
Dec 31, 2020 |
||||||
Shell subsidiaries |
8,317 |
8,456 |
8,222 |
||||||
Shell share of joint ventures and associates |
1,261 |
909 |
902 |
||||||
Total |
9,578 |
9,365 |
9,124 |
||||||
Attributable to non-controlling interest of Shell subsidiaries |
365 |
267 |
322 |
||||||
|
|||||||||
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.
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 “Respecting nature”, “Powering lives” and “Safety”.
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, which we have experienced in the past, 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. When planning new major projects, we conduct detailed environmental, social and health impact assessments. We routinely practise implementing our emergency response plans to significant risks (such as a spill, toxic substances, fire or explosion).
The Shell Internal Audit & Investigation team provides assurance on the HSSE & SP controls to the Safety, Environment and Sustainability Committee.
A further erosion of the business and operating environment in Nigeria could have a material adverse effect on us.
Further information: See “Upstream”.
Risk description
In our Nigerian operations, we face various risks and adverse conditions. These include: security incidents affecting the safety of our people, host communities and operations; sabotage and crude theft; ongoing litigation; limited infrastructure; challenges presented by delayed government and partner funding and budget delays; 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, with a potential 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, and governmental and non-governmental organisations to help promote peaceful and safe operations.
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“ and “Powering lives“.
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 companies 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”.
Risk description
Our continued focus on digitalising our business processes, and our increasing dependence on information technology (IT) systems for our core operations mean that we are heavily reliant on secure, affordable and resilient IT services.
Externally, we observe several dynamics impacting our IT and cyber risk profile: deterioration of the cyber security threat landscape represented by increasing volumes of attacks and sophisticated cyber actors, geopolitical conflicts and increases in regulations across the markets in which Shell operates. We have observed an increase in social engineering (manipulation of individuals) as a method of financially driven cybercrime. Threat actors are targeting bank account changes, invoice settlement and identity fraud to extract money from corporations. Ransomware attacks on corporations continue to be widespread. These contribute to potential breaches and disruptions of critical IT services, such as the security incident involving the transfer of files which Shell experienced in 2021. If the breaches are not detected early and responded to effectively, they could impact our operations and the safety of our staff and/or harm our reputation and/or result in material regulatory fines. This could have a material adverse effect on our earnings, cash flows and financial condition.
How this risk is managed
We operate globally integrated Information Risk Management (IRM) and cyber-defence teams that scan, assure and defend our global IT landscape. Our cyber-security capabilities are embedded into our IT systems, and our IT is protected by various detective and protective technologies. Identification and assessment capabilities are built into our support processes and align 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.
As a response to the growing set of threat actors and sophisticated forms of attacks resulting from the Russia/Ukraine war, we have prioritised accelerated closure of critical vulnerabilities identified by the Cybersecurity and Infrastructure Security Agency (CISA), performing rigorous rationalisation of high-risk entitlements, and supported our withdrawal/ divestment from Russian operations. We continue to track cyber-attacks, threat intelligence, and vulnerabilities in our estate.
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 “Respecting nature”, ”Powering lives” and ”Safety”.
Risk description
As seen in recent years, these risks can manifest themselves in the countries where we operate and elsewhere. These risks affect people, our operations and assets. Potential risks, which we have experienced in the past, include: acts of terrorism; acts of criminality including maritime piracy; cyber espionage or disruptive cyber attacks; conflicts including war - such as Russia's invasion of Ukraine; malicious acts carried out by individuals within Shell - such as increased data exfiltration during divestments; civil unrest which for example caused disruptions to our Trading & Supply distribution operations in South Africa, and environmental and climate activism (including disruptions by non-governmental and political organisations) especially in the USA and north-west Europe.
The above risks can threaten the safe operation of our assets 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 threat and risk assessments for all our assets and activities, and implement appropriate measures to deter, detect and respond to security risks. Further mitigations include strengthening the security of assets, reducing our exposure as appropriate and using journey management plans. We also invest in information risk management capabilities and 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.
Production from the Groningen field in the Netherlands causes earthquakes that affect local communities.
Further information: See “Upstream”.
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 Dutch government has announced it intends to accelerate the close-down, bringing the end of production forward from 2030 to possibly 2023 or 2024. The exact close-down date is still to be decided and depends on the Dutch government’s considerations of security of gas supply. 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 “Financial framework” and Note 25 to the “Consolidated Financial Statements”.
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 access to debt markets become more challenging, the impact on our liquidity could have a material adverse effect on our operations. Group 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 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. The Russian invasion of Ukraine has led to supply constraints and increased commodity price volatility in 2022, together with additional sanctions and export controls imposed by countries around the world, both of which have an impact on our trading activities. We use derivative instruments such as futures, options and contracts for difference to hedge market risks. Due to differences between derivative instruments available in the market to hedge market risks and the actual market risks we are exposed to, perfect hedging is not always achievable. Therefore, our hedging has from time to time not functioned as expected and may not function as expected in the future.
We are exposed to credit risk; our counterparties could fail or be unable to meet their payment and/or performance obligations under contractual arrangements.
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 effecting 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. We closely monitor developments in sanctions and export controls to ensure compliance with international guidelines. Senior Management regularly reviews mandated trading limits. We operated with enhanced risk management and increased governance to protect the business during the period following Russia’s invasion of Ukraine. 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.
Our future performance depends on the successful development and deployment of new technologies that provide new products and solutions.
Further information: See “Powering Progress strategy”.
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, products and solutions, 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, products and solutions, 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, products and solutions 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 using a robust technology maturation process, to systematically de-risk both technical and commercial risks, while ensuring 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 “Financial framework”.
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 and/or short- term liquidity requirements. 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. Pension fund liquidity is managed by holding liquid assets and maintaining credit facilities.
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”.
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 in the past 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“.
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.
We are exposed to regulatory and conduct risk in our trading operations.
Further information: See “Other regulatory and statutory information“ and Note 25 to the “Consolidated Financial Statements”.
Risk description
Commodity trading is an important component of our Upstream, Integrated Gas, Renewables and Energy Solutions, and Chemicals and Products 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. The rapidly changing regulatory environment creates a risk of insufficient, delayed or incorrect implementation of new or changes to existing regulatory requirements. Violations of such regulatory requirements could also expose us and/or our employees to regulatory fines and have an adverse effect on our licence to operate. These risks could have a material adverse effect on our earnings, cash flows, reputation 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 Shell Code of Conduct, 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.
Violations of antitrust and competition laws carry fines and expose us and/or our employees to criminal sanctions and civil suits.
Further information: See “Powering lives” and “Other regulatory and statutory information“.
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 fast-moving external antitrust developments/trends, internal, guidance is continually being monitored to ensure that it remains current (for example, recent guidance on collaboration in the energy transition and US enforcement action with regard to interlocking directors).
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 “Powering lives”, “Other regulatory and statutory information“ and Note 31 to the “Consolidated Financial Statements”.
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. On July 19, 2022, the Milan public prosecutor withdrew its appeal, meaning the criminal case is now closed and the acquittal of all defendants is final. On July 21, 2022, the Dutch Public Prosecutor’s office announced it had dismissed its investigation into bribery allegations related to OPL 245. On November 11, 2022, the Court of Appeal rejected the Federal Republic of Nigeria’s civil appeal of the March 17, 2021 decision.
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“.
Risk description
Data privacy and the management of personal data have become an issue of increasing importance and focus for companies and regulators in recent years. Following the implementation of the EU General Data Protection Regulation (GDPR) in May 2018, we have on a global basis seen updates to, or the introduction of, data privacy laws largely based on the GDPR. More than 100 countries globally now have data privacy laws. Shell companies are increasingly processing large volumes of personal data as we continue to acquire small companies with relatively large amounts of customer data. As we accelerate the delivery of our Powering Progress strategy, we expect to acquire an increasing number of companies. In doing so, we must consider how this is done responsibly, including managing cyber risks and managing personal data effectively. 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 often within short time frames (72 hours under the GDPR) 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 the 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 2022 of personal data breaches and have had fines issued against us. 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 could harm our reputation and have a material adverse effect on our earnings, cash flows and financial condition.
How this risk is managed
Over the last decade, the Shell Group has continued to invest in and develop a mature and robust privacy compliance programme based on our Binding Corporate Rules ("BCRs"). BCRs are a pragmatic way to enable large corporations to generate value from personal data by collecting them and sharing them between Group companies and are perceived as a positive mechanism by data privacy regulators for enabling lawful data sharing and demonstrating accountability within large corporate groups. BCRs allow intra-group transfers of personal data without needing to enter into additional complex intra-group agreements. The overall objective of the programme is to enable the Shell Group of companies to collect, handle and manage personal data in a professional, ethical, and lawful manner.
The Chief Privacy Officer also serves as the legally appointed "Data Protection Officer" (DPO) under the GDPR and other applicable data privacy laws, save where there is a requirement to have a locally based DPO, such as in China and the Phillippines.
Our 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.
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.
Newly acquired companies are expected 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.
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“.
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, financial flows and other dealings with certain parties, countries and territories. For example, the EU and the USA continue to impose comprehensive sanctions on countries and territories such as Syria, North Korea, and Crimea and other territories in Eastern Ukraine. The USA continues to have comprehensive sanctions against Iran and Cuba. The EU, UK and some other nations such as Canada and Australia 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 and gas industry.
In 2014, the EU and the USA imposed additional restrictions and controls directed at defined oil and gas activities in Russia, as well as restricting access to EU and USA financing sources for certain Russian state-owned entities and military and dual use controls. 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, and restrictions on access by Russia to financial systems. Export controls have also been introduced targeting Russian defence, aerospace, oil and gas related technology, IT and maritime sectors. The EU, USA and UK have also adopted a significant number of trade controls on oil, petroleum products and a wide range of products and technologies. These restrictions are subject to different wind-down periods and limited exceptions. Furthermore, it is likely that sanctions against Russia will continue to escalate. A number of countries have also implemented significant new sanctions against Belarus for its role in the Russian invasion. Russia has in turn adopted a significant number of countermeasures including making it an offence to take steps to comply with foreign sanctions.
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 the USA.
Abiding by all the laws and regulations on trade compliance and sanctions is often complex and challenging because of factors such as: the expansion of sanctions; the frequent addition of prohibited parties as well as other measures; 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.
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 it.
Investors should also consider the following, which could limit shareholder remedies.
The Company’s Articles of Association determine the jurisdiction for shareholder disputes. This could limit shareholder remedies.
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. At the 2023 AGM, shareholders will be asked to approve updated Articles of Association that change the place of any arbitration to London, the United Kingdom. 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.
