Independent Auditor’s Report to the members of Shell plc

Identifying key audit matters (Section 6)

The key audit matters that we identified in the 2023 audit were:

• impact of climate change and the energy transition on the Consolidated Financial Statements;
• estimation of oil and gas reserves;
• impairment assessment of property plant and equipment (PP&E) and joint ventures and associates (JVAs); and
• accounting for complex transactions within Shell's trading and supply function and the valuation of financial derivatives.

Assessing materiality (Section 7)

We based materiality on three-year normalised Adjusted Earnings on a pre-tax basis. This approach removes both the effects of changes in oil price on inventory carrying amounts and non-recurring gains and charges disclosed as identified items, which can significantly distort Shell's results in any one particular year. By applying a normalised Adjusted Earnings approach, we concluded that it was appropriate to set planning materiality at $2.0 billion. We adopted the following materiality measures in our 2023 audit:

Assessing materiality

Our scope of the audit of Shell's Consolidated Financial Statements (Section 8)

Our scope was tailored to the circumstances of our audit of Shell and is influenced by our determination of materiality and our assessed risks of material misstatement. Similar to the prior year, during the course of the 2023 audit, we did not make any substantial changes to our assessment of the components where we performed full or specific scope audit procedures, nor the number of IT applications to test; however, what did change was the nature and emphasis of our testing in response to our significant audit risks and areas of audit focus. By following this approach, our audit effort focused on higher risk areas, such as management judgements.

The impact of climate change and the energy transition on the Consolidated Financial Statements

Description of the key audit matter

The financial statement and audit risks related to climate change and the energy transition remain an area of audit focus given the continuing uncertainty surrounding the impact of climate change and the pervasive impact it has on many areas of accounting judgement and estimation and, therefore, our audit.

The processes by which management is informed about climate-related issues is set out in Our journey to net zero, within the Strategic report, which forms part of the "other information", rather than the audited financial statements. Within Our journey to net zero, Shell have described climate-related risks and opportunities over the short, medium and long term. In this section, they also describe the impact of climate-related risks and opportunities on Shell's business, strategy and financial planning and Shell's process for identifying and assessing climate-related risks and the process for managing these risks.

In Note 4 to the Consolidated Financial Statements, Shell describe how they consider climate-related impacts in key areas of the Consolidated Financial Statements and how this translates into the valuation of assets and measurement of liabilities.

In carrying out our audit, we have focused on the alignment of assumptions adopted by Shell in the preparation of their financial statements with commentary on climate change within their Strategic Report. We also focused on how Shell had reflected material climate change risks in their financial statements, including the impact of the emissions reduction targets on accounting estimates and judgements.

In focusing on how Shell has reflected material climate change risks in Shell's Consolidated Financial Statements, we have considered:

1. how Shell's assumed future commodity price assumptions compare to energy transition scenarios and a range of third party forecasts;
2. the reasonableness of Shell's forecast future carbon costs;
3. the carbon intensity of Shell's Chemicals and Products, Upstream and Integrated Gas assets and associated products and related abatement projects;
4. the incorporation of Shell's stated emissions reduction targets (see Climate-related targets summary within Our journey to net zero in the Strategic Report) within Shell's operating plan;
5. the useful economic lives of assets (volumes expected to be produced beyond 2030 and 2050) and the risk of material stranded assets; and
6. how physical risk considerations have been incorporated into Shell's asset plans.

The critical accounting judgements and estimates that are impacted by climate change and the energy transition are disclosed within Note 4 to the Consolidated Financial Statements.

Our response to the risk

Overall response

To respond to the impact of climate change and the energy transition on our audit, we ensured that we had the appropriate skills and experience within the audit team. Our group engagement team included professionals with significant experience in climate change and energy transition. The audit procedures were performed by the group engagement team and component teams.

In our 2023 audit, as part of our risk assessment, we considered financial and non-financial data to assess six climate risks at a granular level. This covered Shell's higher risk assets, with a net book value of around $120 billion. We considered the carbon intensity of the assets and products sold and where there could be a higher degree of management judgement and bias. This included considering the execution risks of certain abatement projects.

For the assets that we assessed as most susceptible to climate change and energy transition risks, we performed sensitivity analysis and read management's climate scenario analysis to assess whether there were indicators of impairment.

Further procedures performed to address the climate risks included:

Alignment of statements made in Strategic Report with the financial statements

• in connection with our audit of the financial statements, we read the other information in the Annual Report and Accounts (as defined in section 9 below) and, in doing so, considered whether the other information, which includes Shell's climate targets, are materially consistent with the financial statements or our knowledge obtained in the audit;
• evaluated whether the effects of material climate risks, as disclosed within Our journey to net zero, within the Strategic report, had been appropriately reflected in asset values and associated financial statement disclosures, and the timing, nature and measurement of liabilities recognised are in accordance with IFRS, which is discussed further below;
• read and challenged the completeness of management's disclosures in Note 4. We audited the sensitivity disclosures in Note 4 of the carrying value of Shell's Upstream and Integrated Gas PP&E assets to a range of future oil and gas price assumptions, reflecting reduced demand scenarios due to climate change and the energy transition, including the IEA Net Zero Emissions (NZE) by 2050 scenario and Announced Pledges Scenarios (APS). This included considering whether the downside sensitivities could have reduced the level of Shell's distributable profits such that their 2023 shareholder distributions would not have been in compliance with the Companies Act 2006. For Upstream, Integrated Gas and Chemicals and Products assets, we also considered the carrying amounts and their sensitivity to IEA NZE 2050 carbon price scenario and the discount rate sensitivity considering Upstream, Integrated Gas, Chemicals and Products and Renewables and Energy Solutions carrying amounts; and
• assessed whether the climate change litigation described in Note 31 was complete and whether it represented obligations where the likelihood of a cash outflow was probable and therefore requiring provision. Also, we considered the appropriateness of the climate change litigation disclosures within Note 31, Legal proceedings and other contingencies, by comparing the disclosures to our understanding of the claims and allegations and to the most recent disclosures provided by other oil and gas companies.

The reflection of material climate change risks and the impact of Shell's emissions reduction target in the material judgements and estimates

• tested management's internal controls over the identification and estimation of costs of the potential impacts associated with energy transition and climate change, and related financial statement disclosures in Note 4;
• held discussions with Group Planning, Group Reporting, Shell's Carbon Strategy group and, where necessary, individual asset managers to understand and challenge management on how the following five transition and one physical risks of climate change were being factored into Shell's financial statements:

1) The comparison of commodity price assumptions to energy transition scenarios and a range of third party forecasts

• engaged oil and gas valuation specialists to assess the reasonableness of Shell's short and long-term pricing assumptions. This included benchmarking Shell's assumptions against a range of third party forecasts (including other oil and gas companies, consultants, banks, brokers and other external outlooks such as International Energy Agency ('IEA'));
• considered specifically the extent to which management's forecast price assumptions incorporated the potential impact of climate change and the energy transition. This included consideration of assumed hydrocarbon and renewables demand and the impacts of such demand movements and supply constraints on future prices; and
• evaluated the reasonableness of Shell's refining and petrochemical margin assumptions, by comparing Shell's assumptions to external benchmarks. We also considered the expected impact on demand for oil products and chemicals in a transition to a net zero economy. Refining margin and petrochemical assumptions underpin the recoverable amount of refineries and petrochemical plants respectively.

2) The reasonableness of Shell's forecast future carbon costs

• we engaged our climate change specialists to assist in evaluating Shell's carbon price methodology, including how price and free allowance assumptions are applied in different jurisdictions. At a country level, we compared Shell's forecast carbon prices to those presented under the IEA NZE scenario. Our procedures were focused on assets with high scope 1 and 2 emissions and which are geographically located in high carbon price jurisdictions; and
• we independently calculated Shell's forecast carbon cost included in their operating plan, based on carbon price, free allowance and emission assumptions. We performed sensitivity analysis on the mid-point carbon price and free allowance assumptions in the operating plan to the independently determined outlooks identified by our climate change and energy transition specialists to determine whether deviations are material to Shell's operating plan and respective assets.

3) The carbon intensity of Shell's Chemicals and Products, Upstream and Integrated Gas assets and associated products and related abatement projects

• we considered the scope 1 and 2 and lifecycle emissions of the products sold by Shell's assets (net carbon intensity), to identify potential impairment triggers. For Shell's high carbon intensive assets, we considered the abatement plans included in their operating plan. We obtained an understanding of the planned strategies and the basis for associated costs with projects related to carbon capture and storage, energy efficiency and renewables growth. We challenged the associated opex and capex included in the operating plan. We also performed sensitivity analysis by removing all in-plan abatement projects at high carbon intensive assets to determine whether the incremental carbon cost that would need to be incurred on emissions would trigger an impairment.

4) The incorporation of emissions reductions into Shell's operating plan

• we confirmed that Shell's operating plan, included costs associated with Shell's plans to achieve Scope 1 and 2 emission reduction targets and their net carbon intensity ('NCI') targets. We challenged management's ability to accurately forecast their scope 1 and 2 emissions assumptions included in the operating plan to meet their 2030 absolute emissions targets through the performance of lookback analysis; and
• for abatement projects, we considered the degree to which Shell is relying on these projects to meet their reduction targets. We also considered additional abatement levers outside of the operating plan, which Shell has optionality to execute in order to meet their climate targets. We confirmed whether the carbon credits and associated costs were included in the operating plan to meet Shell's 2030 NCI targets.

5) The useful economic lives of assets (volumes expected to be produced beyond 2030 and 2050) and the risk of stranded assets

• considering Shell's long-term target to achieve net zero emissions by 2050, we have assessed Upstream and Integrated Gas assets which are expected to be producing beyond 2030 and 2050. We also verified that the oil, gas and carbon price sensitivity disclosures in Note 4 incorporated life of field assumptions.

6) Whether physical risk considerations have been incorporated into the asset plans

• evaluated management's disclosures around physical risk in the Our journey to net zero section of the Annual Report to ensure compliance with the Task Force on Climate-Related Financial Disclosures;
• using our data analytics and climate change specialists, we performed a physical risk assessment that considered Shell's asset-level mitigation and adaptation measures for the assets that we viewed as being exposed to the highest physical risks, such as hurricanes, flooding, rising temperatures, drought and water dredging. For assets assessed to be high risk, we evaluated the mitigation and adaption measures, and ensured that where relevant, the costs have been appropriately reflected in the operating plan; and
• assessed whether the risk exposure represents an impairment trigger for the associated asset through consideration of the severity of the physical risk, likely time horizon, historical ability to manage physical risk and headroom of the asset.

Our procedures were led by the group engagement team, with input from our teams in Australia, Brazil, Canada, Philippines, Poland, Singapore, UK and the USA.

Key observations communicated to the Shell Audit and Risk Committee

We reported to the Audit and Risk Committee the key procedures that we had performed and the results of those procedures, which are set out below:

Alignment of statements made in Strategic Report with the financial statements

• we reported that we had not identified any material inconsistencies between Shell's disclosures in Note 4 to the Consolidated Financial Statements, which covers the material impacts of climate-related matters, and the disclosures included within the other information; and
• we reported that the various climate change litigations as detailed in Note 31 were consistent with the requirements of IAS 37. We also reported that based on our understanding of the claims and allegations, the disclosures within Note 31, are appropriate.

The reflection of material climate change risks and the impact of Shell's emissions reduction target in the critical accounting estimates and judgments

1) the comparison of Shell's assumed future commodity price assumptions to energy transition scenarios

• we reported that Shell's best estimate assumptions are within our range when compared against a range of third party forecasts and EY's independent consideration of an acceptable range. Overall, Shell's assumptions are reasonable, albeit for oil price assumptions towards the bottom end of these ranges. We are satisfied Shell's assumptions represent current best estimates, as required by IFRS;
• IEA's Announced Pledges Scenario (APS) price assumptions, which assumes that all climate commitments made by governments around the world to date, are aligned with Shell's oil price assumptions. Shell's Henry Hub gas price assumption are higher than the APS scenario; however, Henry Hub is not a significant input to the recoverable amount of the of the assets that are expected to be producing beyond 2030 and 2050;
• IEA's NZE price scenarios are lower than Shell's Brent and Henry Hub price assumptions and represent an aspirational target reflecting governmental, societal and regulatory responses to climate change risks that are still developing; however, as IFRS requires preparers to base the financial statements on current best estimates of future oil and gas prices, we are satisfied Shell's assumptions are within a range of benchmarks that reflect the current best estimates of future oil and gas prices; and
• we reported that Shell's refining and petrochemical margin assumptions are reasonable and materially aligned with external benchmarks that consider the impact on demand for oil products and chemicals in a transition to a net zero economy.

2) the reasonableness of Shell's forecast future carbon costs

• we concluded that Shell had adopted an appropriate methodology to forecast carbon prices and through our independent testing, we verified that Shell's forecast carbon price assumptions were within our independently determined ranges. Where assumed carbon prices were at the bottom end of our ranges, we were satisfied that applying our range did not represent an impairment trigger for the impacted assets. Also, we are satisfied that the changes to carbon costs in the operating plan versus the prior year plan are a result of changes to planned actions or to changes in allowances that could not have been previously forecast or that do not have a material impact. Our sensitivity analysis indicated that applying the IEA NZE50 carbon prices would have an additional operating cost of 2% of forecast operating expenses in the operating plan over a 10 year period, which does not represent a material increase in the overall forecast costs.

3) the carbon intensity of Shell's Chemicals and Products, Upstream and Integrated Gas assets and associated products and related abatement projects

• for the assets that we assessed as highly carbon intensive, we were satisfied that the planned abatement opex and capex costs related to carbon capture and storage, energy efficiency and renewables growth were included in the operating plan and that the headroom on the high carbon intensive assets is not sensitive to additional carbon costs that would be incurred should abatement activities not be successful;

4) the incorporation of Shell's stated climate targets within Shell's operating plan

• we reported that Shell's operating plan reflected the expected financial impact of management's current planned actions to address the identified climate change risks. Where impairment assessments were performed, we were satisfied that the climate change factors had been reflected in the assessments throughout the field life of the asset.

5) the useful economic lives of assets (volumes expected to be produced  beyond 2030 and 2050) and the risk of stranded assets 

• we reported that, of the SEC proved reserves currently recognised at the end of 2023, 54% are expected to be produced by 2030 and only an immaterial amount (3%) will be produced beyond 2050. Shell's Integrated Gas and Upstream assets and Canadian mines are mainly depreciated over SEC proved reserves. This means that the current carrying amount of these assets will be substantially depreciated by 2050, with around $0.7 billion remaining, which is not material;
• we concluded that there was a low risk of Shell's current refineries being stranded as the assets are expected to be fully depreciated in the next 11 years. We also concluded there was a low risk of Shell's Chemical assets being stranded as petrochemical demand is expected to be resilient to energy transition, as noted in the IEA Net Zero 2050 scenario on World Energy Consumption; and
• we were satisfied that the reserves recognised that are expected to be extracted post 2050 were consistent with Shell's NZE commitments and that the estimated carrying value of these assets in 2050 is not material.

6) whether physical risk considerations have been incorporated into the asset plans

• for the assets that we assessed as susceptible to higher physical risk, we were satisfied that assets included mitigation and adaptation plans and the associated costs in the operating plan. Where mitigation and adaptation plans were not included in the operating plan, we have identified other factors, such as annual risk assessments, preparation and insurance plans, that reduce the risk of impairment on these assets.

Other observations

• with regards to the sensitivity analyses provided by Shell in Note 4 to the Consolidated Financial Statements, including commodity prices, carbon prices, refining and chemical margins and the discount rate, we were satisfied that the descriptions of the sensitivities reflected the sensitivities performed. Also, the prices and assumptions applied by Shell in their calculations were agreed to the scenarios as described. We reperformed the sensitivities and were satisfied that the ranges disclosed by Shell in Note 4 were materially correct, including the illustrative disclosures on the impact of commodity prices averaged from three 1.5-2 degrees Celsius external climate change scenarios and from the IEA NZE50 scenario; and
• we reported that we had considered Shell's dividend resilience statement in Note 4. Had Shell applied the IEA NZE50 scenario, and had this impairment of $25 billion directly reduced the carrying value of investments within the Parent Company, Shell plc, this would not have impacted the distributable reserves available to Shell from which to pay dividends and buyback shares in 2023. This is on the basis that Shell plc had a merger reserve of $234 billion and under Companies Act 2006, the adverse impact from an impairment would be on the merger reserve as opposed to distributable reserves.

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See the "Audit and Risk Committee Report" for details on how the Audit and Risk Committee reviewed climate change and energy transition. See "Powering Progress strategy" and "Energy transition strategy" for more details. Also, see Notes 2, 4, 11, 12, and 31 to the "Consolidated Financial Statements".

Estimation of oil and gas reserves

Description of the key audit matter

This is a forecast-based estimate. Oil and gas reserves estimates are used in the calculation of depreciation, depletion and amortisation (DD&A) and impairment testing. The risk is the inappropriate recognition of proved reserves that impacts these accounting estimates. Given the current environment, there may be a heightened risk of proved reserves with a high carbon intensity not ultimately being produced (also see climate change and energy transition key audit matter).

As described in Notes 11 and 13 to the Consolidated Financial Statements, at December 31, 2023, production assets amounted to $110.7 billion and had an associated DD&A charge of $18.2 billion. Joint ventures and associates (JVAs) amounted to $24.5 billion. As further described in Note 12, exploration and production impairment losses of $4.8 billion and exploration and production impairment reversals of $0.5 billion were recorded during the year.

If proved reserves are recognised that are not ultimately produced, DD&A will be understated, and the recoverable amount of assets may be overstated. In-year reserve movements are driven by revisions of previous estimates resulting from reclassifications, changes to recovery assumptions, extensions and discoveries and purchases and sales of reserves in place. Revisions generally arise from new information, for example additional drilling results, changes in production patterns and changes to development plans.

Auditing the estimation of oil and gas reserves is complex. There is significant estimation uncertainty in assessing the quantities of reserves and resources in place. The estimates are based on the Company's central group of experts' assessments of petroleum initially in place, production curves and certain other inputs, including prices, license expiration date, capex and opex. Estimation uncertainty is further elevated given the transition to a low-carbon economy, which increases the risk of underutilised or stranded oil and gas assets.

Our response to the risk

We obtained an understanding of the controls over Shell's oil and gas reserves estimation process. We then evaluated the design of these controls and tested their operating effectiveness. For example, we tested management's review controls over changes to year-on-year estimated oil and gas reserves volumes.

We involved professionals with oil and gas reserves audit experience in evaluating the key assumptions and methodologies applied by management.

Our procedures included, amongst others:

• evaluated the professional qualifications and objectivity of management's experts who performed the detailed preparation of the reserve estimates and those who are primarily responsible for providing independent review and challenge, and ultimately endorsement of, the reserve estimates. This covered around 24 individuals involved in the process;
• tested that significant additions or reductions in reserves had been made in the period in which the new information became available, by understanding the change in circumstance that drove the change. Our most experienced oil and gas team members, which included a reservoir engineer, reviewed the documentation and approvals of all changes greater than 50 mmboe (seven fields);
• verified that reserve movements were in compliance with Shell's reserves and resources guidance and SEC regulations;
• evaluated management's estimation of the point at which the operating cash flow from a project becomes negative (the economic limit), as this impacts DD&A and impairment. Where relevant, we assessed whether the economic limit test incorporated Shell's estimate of future carbon costs to reflect the potential impact of climate change and the energy transition;
• assessed the completeness and accuracy of the inputs used by management in estimating the oil and gas reserves by agreeing the inputs to source documentation. This included obtaining an understanding of the non-financial information used by the specialists when estimating the reserves. We also performed procedures around the completeness and accuracy of this information;
• performed back-testing of historical data to identify indications of optimism bias over time;
• performed sensitivity analysis on the impact of changes in oil and gas reserves;
• attended all of Shell's Upstream Reserves Committee meetings to observe the internal review and endorsement process. These meeting are part of Shell's proved reserves assurance process, which is described in Supplementary Information – Oil and gas section;
• we focused our audit procedures on those assets that are currently forecast to be producing beyond 2050 and the carbon intensity of the post 2050 production from those fields to identify assets that are carbon intensive, where there may be a higher risk of the reserves not ultimately being produced. The purpose of performing such analysis was to identify assets that were at higher risk of the current net book value being overstated; and
• we also included unpredictability in our testing by selecting a field that did not meet our selection criteria.

Our procedures were led by the group engagement team, with input from our teams in Australia, Brazil, Canada, Malaysia, Nigeria, Poland, Qatar, UK and the USA.

Key observations communicated to the Shell Audit and Risk Committee

We reported to the Audit and Risk Committee in January 2024 that, in our view, Shell follows a robust process for recognising oil and gas reserves. There are no indications that the recognition of the reserve volumes beyond 2030 and 2050 results in any impairment triggers or that the carrying amounts of the related assets are overstated.

We reported to the Committee that the sensitivity analysis that we performed indicated that, at portfolio level with all other assumptions remaining unchanged, reserves would have to be overestimated by 18% for DD&A to be misstated by a material amount ($2 billion).

The inputs and assumptions used to estimate proved reserves and resources are appropriate such estimates. For the reserves and resources that were expected to be produced post 2050, we were satisfied that this was not inconsistent with Shell's NZE ambitions and that it remains appropriate to recognise these reserves on the basis that they are expected to be recovered.

Please see key audit matter on the impact of climate change and the energy transition on the financial statements for details of our considerations on the carbon intensity associated with reserves expected to be produced beyond 2030.

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See the "Audit and Risk Committee Report" for details on how the Audit and Risk Committee reviewed assurances for oil and gas reserves. Also, see Notes 2, 4 and 11 to the "Consolidated Financial Statements" and "Supplementary information – oil and gas (unaudited)".

Impairment of Property, plant and equipment (PP&E) and Joint ventures and associates (JVA)

Description of the key audit matter

This is a forecast-based estimate. The risk is that potential impairments are not identified on a timely basis, including whether the impacts of climate change and the energy transition have been considered in Shell's impairment trigger assessments (also see climate change and energy transition key audit matter).

As described in Notes 11, and 13 to the Consolidated Financial Statements, at December 31, 2023 Shell recognised $110.7 billion of production assets, $49.2 billion of manufacturing, supply and distribution assets (primarily refineries and petrochemical plants) and $24.5 billion of joint ventures and associates (JVAs). As disclosed in Note 12, in 2023, Shell recognised $8.2 billion impairment losses and $0.6 billion impairment loss reversals.

The recoverable amount of PP&E and JVAs can be sensitive to small changes in key assumptions, which increases the risk of indicators of impairment or impairment reversal not being identified. Our audit effort has focused on the completeness and timely identification of indicators of impairment charges or impairment reversals.

Assumptions underpinning the impairment assessments include:

• changes in future oil and gas prices, in particular over the mid-to-long term, which are more uncertain than short term forecasts;
• changes in refining margin assumptions;
• expected production volumes;
• the assumed weighted average cost of capital (WACC) and asset-specific risks; and
• individual asset impairment assessments.

As described in Note 2, the most complex of these judgements relate to management's view on the long-term oil and gas price outlook. Forecasting future prices is inherently difficult, as it requires forecasts that reflect developments in demand such as global economic growth, technology efficiency, policy measures and, on the supply side, consideration of investment and resource potential, cost of development of new supply and behaviour of major resource holders. These judgements are particularly difficult because of increased demand uncertainty and pace of decarbonisation due to climate change and the energy transition.

Our response to the risk

We obtained an understanding of the controls over Shell's asset impairment process. We then evaluated the design of these controls and tested their operating effectiveness. For example, we tested the controls over management's identification of indicators of impairment and reversals of impairment and the approval of oil and gas prices and petrochemical and refining margins.

Our procedures included, amongst others:

Oil and gas prices

• we have included observations on oil and gas prices in our key audit matter above on climate (The impact of climate change and the energy transition on the Consolidated Financial Statements).

Petrochemical and refining margins

• we involved our valuations specialists to assess the reasonableness of Shell's margin estimation methodologies and assumptions; and
• evaluated the reasonableness of Shell's refining margin assumptions by comparing these to independent market and consultant forecasts.

Oil and gas reserves

• we have included observations in our key audit matter above on oil and gas reserves.

WACC

• with the assistance of valuation specialists, we independently assessed a range of reasonable input assumptions for calculating Shell's WACC; and
• assessed whether Shell's risking in their impairment assessments, through both a discount rate and individual asset cash flows, adequately reflects the appropriate level of risking for the asset.

Individual asset assessments

• evaluated Shell's assessment of impairment losses and impairment reversal triggers, including changes in the forecast commodity price assumptions, movements in oil and gas reserves, changes in asset performance, changes in Shell's operating plan assumptions, including those relating to Shell's carbon emissions reductions targets, and whether these are indicators of impairment or impairment reversal. We also considered whether potential disposals meet the held for sale criteria;
• separately from management, for material assets, we also assessed independently whether or not indicators of impairment or reversal triggers exist and considered the existence of contradictory evidence such as external commentary on asset performance, which could indicate a significant increase or decrease in the recoverable amount of the assets;
• where triggers were identified, we assessed the inputs to the impairment assessment by comparing forecasts to the operating plan and life of field plans, historical actuals and other independent expectations. We also performed a consistency check on the assumptions to other assumptions applied by the group;
• tested the model integrity of material impairment assessments;
• evaluated the assumptions used in the preparation of the operating plan at a group, segment and asset level and compared the actual performance of assets to the forecasts made in the prior year; ;
• considered the existence of other contradictory evidence, such as the results of any comparable market transactions that could indicate a material increase or decrease in the recoverable amount of any of the assets, public comments or commitments made by Shell and whether these could impact the future potential value of any assets; and
• assessed potential operational changes that have or are expected to have a significant adverse effect on an asset, such unplanned shutdowns, and whether they should be considered as impairment triggers.

The audit procedures were performed primarily by our group engagement team as well as our local audit teams in Australia, Canada, Nigeria, Poland, UK and USA.

Key observations communicated to the Shell Audit and Risk Committee

In January 2024, we reported to the Audit and Risk Committee that:

Oil and gas prices

• see the key matter above on impact of climate change and the energy transition on the Consolidated Financial Statements.

Petrochemical and refining margins

• we reported to the Committee that Shell's refining and petrochemical margin assumptions are reasonable and sit comfortably within EY's ranges and relative to the external benchmarks. Also, Shell's petrochemical margin assumptions are within the benchmark ranges, other than for North America. Shell's assumptions for North America are conservative; however, this has not impacted any financial reporting judgements as no impairment assessments were performed in this region. The regions that we considered were Europe, North America and Asia.

Oil and gas reserves

• see key matter above on oil and gas reserves.

WACC

• Shell applied a post-tax WACC of 7.5% (2022: 6.5%) to all impairment assessments, other than for the Power business, where a post-tax WACC of 6% (2022: 5%) has been used. We reported to the Committee that Shell's methodology used in estimating the groupwide WACC was reasonable. Shell increased the rate during 2023 and reassessed the rate at the end of the year; and
• in addition to applying a discount rate to risk cash flows, Shell also applied asset-specific risks directly in their cash flows. We reported that our valuation specialists estimated an asset specific discount rate (the WACC and additional cash flow risking) for the most significant impairment assessments performed and that the implicit discount rates were within our ranges.

Individual asset assessments

• we reported that Shell's impairment assessment process is in line with IFRS. We reported to the Committee that we were satisfied with the outcomes of the individual impairment assessments, including the timing of the assessments. We provided the Committee with our observations on asset impairment trigger assessments where we spent the most audit effort, which included assessments where no charge was deemed necessary. Our observations included areas such as held for sale classification, cash flow phasing, cash flow risking and alignment with the operating plan;
• we reported that there was substantial headroom supporting the goodwill within Upstream, IG and Marketing and that there are no material goodwill impairment judgements relating to RE&S.

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See the Audit and Risk Committee Report for details on how the Audit and Risk Committee considered impairments. Also, see Notes 2, 4, 11, 12 and 13 to the Consolidated Financial Statements.

Accounting for complex transactions within Shell's Trading and Supply (T&S) function and the valuation of financial derivatives

Description of the key audit matter

The recognition of complex deals require accounting and valuation judgement. There is a risk of error in revenue due to the increased complexity of trades that are executed by Shell's T&S function.

Additionally, there is a higher inherent risk of unauthorised trading associated to Shell's wider portfolio of over-the-counter traded position.

As described in Note 25, Shell recognised derivative financial instrument assets of $15.9 billion and derivative financial instrument liabilities of $11.8 billion. As described in Note 7 of the Consolidated Financial Statements, at December 31, 2023 Shell recognised $317 billion of revenue. A subset of the consolidated revenue relates to T&S transactions, where there is a risk of unrealised revenues being inappropriately recorded. Shell has identified trading in the risk factors section of the Strategic Report, which form part of the other information, rather than the audited financial statements.

Shell's trading and supply function is integrated within the Integrated Gas, Upstream, Marketing, Chemicals and Products, and Renewables and Energy Solutions segments. The function executes and settles both standard and non-standard complex trades. The IT environment supporting the function is complex and involves a large number of systems, resulting in a high-level of manual intervention being required.

Auditing complex trades is challenging because of the significant judgement used in determining the appropriate accounting treatment, and the key assumptions used in valuing the trades. Also, trading is not always carried out in active markets where prices are readily available, increasing subjectivity used in determining the pricing curve and volatility assumptions, which are key inputs to valuing the trades and in determining unrealised gains and losses.

Unauthorised trading may occur on Shell’s portfolio of over-the-counter positions because of trader incentives and the high volume of transactions that Shell executes.

Our response to the risk

We obtained an understanding of the controls over Shell's process for the recognition of revenue relating to unrealised trading gains and losses, including controls over management's complex deal accounting and valuations. We then evaluated the design of these controls and tested their operating effectiveness.

We involved audit professionals with experience auditing large commodity trading organisations. Our audit procedures focus on the appropriateness of the accounting treatment and the valuation of complex contracts.

To respond to the risk of inappropriate accounting for complex deals we:

• assessed the completeness of the list of complex deals by performing an independent search considering non-standard contractual terms, multiple commodity-based transactions, long-term contracts, unobservable inputs and complex valuation models;
• directly confirmed with the counterparty a sample of new or amended complex deals;
• obtained an understanding of the commercial rationale of complex deals by analysing the executed agreements and through discussions with management. Also, we performed an independent assessment of the accounting treatment of a sample of the complex deals, challenging management on contract terms and previous accounting judgement;
• assessed the reasonableness of Shell's derivative valuation methodology by comparing it to market practice, analysing whether a consistent framework was applied and checked the consistency of inputs used in deal valuations and other assumptions;
• involved valuation specialists to assist us in performing independent testing of complex deals, checking that the appropriate valuation model, accounting method, and liquidity window has been applied. Our valuations were established using independent externally sourced inputs, where available;
• tested the forward pricing curve and volatility assumptions in management's valuation models, including comparing to external broker quotes, market consensus providers, and our independent assessments and further reviewed valuation reserve adjustments for a sample of material complex contracts;
• we specifically challenged management’s accounting consideration of whether forward physical contracts to buy and sell LNG are in the scope of IFRS 9 and should be fair valued.

To respond to the risk of unauthorised trading, we:

• performed external confirmation procedures for the existence and completeness of recorded forward positions. Our tests included, amongst other procedures, requesting Shell's counterparties to confirm their entire position with Shell and asking counterparties to provide details of individual trades;
• performed additional procedures over the post year-end tradebook to identify material additions, deletions or amendments from the balance sheet date procedures over late deal entries post year-end, corroborating the reasons for the late entry, and validating the impact on the balance sheet date;
• analysed material post-balance sheet date cash receipts/disbursements and assessed the completeness of the associated derivative recorded as of the balance sheet date;
• performed testing of deals that were unconfirmed or excluded from the management’s confirmation process at the balance sheet date. We obtained evidence of the trade’s existence at the year-end and validating their exclusion respectively, for a sample of deals; and
• performed procedures to assess the appropriateness of Shell's forward price estimates.

The audit procedures were performed principally by the group engagement team and the UK and US component teams.

Key observations communicated to the Shell Audit and Risk Committee

In January 2024, we reported to the Audit and Risk Committee that:

• the valuation of complex derivative contracts were materially correct and the related unrealised gains and losses have been recorded appropriately in the financial statements;
• we were satisfied with Shell's key accounting judgments and the application of their accounting policies, including the accounting treatment of non-standard contractual terms, were appropriate;
• we highlighted that the accounting judgement around LNG liquidity was a significant judgement. We stated that it was appropriate that Shell do not account for their LNG contracts as derivatives and therefore do not reflect these at fair value. This was based on Shell's net settlement history (there is no significant past practice of net settlement within Shell's LNG portfolio) and market liquidity (indicators do not demonstrate any increase in liquidity in 2023 mid/long term contracts continue to dominate the market); and
• we did not identify instances of unauthorised trading as of the balance sheet date.

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See the "Audit and Risk Committee Report" for details on how the Audit and Risk Committee reviewed the Trading and Supply's control framework. Also see Note 25 to the "Consolidated Financial Statements".

Overall materiality

What we mean

We define materiality as the magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our procedures.

Level set

Group materiality

We set our preliminary overall materiality for Shell's Consolidated Financial Statements at $2.0 billion (2022: $1.2 billion). We kept this under review throughout the year and reassessed the appropriateness of our original assessment in the light of Shell's results and external market conditions. We did not find it necessary to revise our level of overall materiality.

Parent Company materiality

We determined materiality for the Parent Company to be $2.0 billion (2022: $1.2 billion), which is 0.7% of equity (2022: 1.0%). We concluded that equity remains an appropriate basis to determine materiality for an investment holding company. The range we normally apply when determining materiality on an equity measurement basis is 1-2%. We applied a lower percentage to align the materiality of the Parent Company with that of the Group.

Our basis of determining materiality

Our assessment of overall materiality that we applied throughout the year was $2.0 billion, which represented 4.7% of the three-year normalised Adjusted Earnings pre-tax (see table below). Our approach is the same as that applied in 2022 other than the period over which we normalise. In 2022, we changed our approach and normalised over a two-year period (rather than a three-year period) to reflect structural changes to Shell following significant disposals. Applying a shorter period in 2022 did not increase the materiality that we applied in 2022. In 2023, we reverted to a three-year period as Shell's underlying business in 2021, 2022 and 2023 are structurally more comparable.

Where we measure materiality on a pre-tax earnings basis, we normally apply 5% of the measure. Applying this to the three-year normalised Adjusted pre-tax earnings would indicate materiality of $2.1 billion. In deciding on an appropriate planning materiality to apply in the Shell audit, we judgementally selected $2.0 billion. In 2022, we applied a lower planning materiality ($1.2 billion); however, we could have applied a level similar to that in 2023. We selected a lower level in 2022 on the basis that there was more uncertainty over long term prices.

Our materiality was derived from an average of Shell's earnings for 2021-2023, including an initial estimate of the 2023 result, on an Adjusted Earnings basis, which we then adjusted for an average effective tax rate. At the end of the year, we reassessed materiality based on the actual results for 2023. As disclosed within Non-GAAP measures reconciliations within Additional Information, the "Adjusted Earnings" measure aims to facilitate a comparative understanding of Shell’s financial performance from period to period by removing the effects of oil price changes on inventory carrying amounts and removing the effects of identified items. Shell's identified items are disclosed within Additional Information, Non-GAAP measures reconciliations, in the section Identified items.

Our key criterion in determining materiality remains our perception of the needs of Shell's stakeholders. We consider which earnings, activity or capital-based measure aligns best with their expectations. In so doing, we apply a 'reasonable investor perspective', which reflects our understanding of the common financial information needs of the members of Shell as a group.

In our view these needs are best met by basing materiality on normalised Adjusted Earnings on a pre-tax basis. Through applying a normalised earnings approach, large year-on-year swings in materiality are minimised. These swings would be driven primarily by price fluctuations rather than specific structural changes to Shell's business. In addition, an Adjusted Earnings approach is consistent with the presentation of Shell's segment earnings, which is the earnings measure used by the CEO for the purposes of making decisions about allocating resources and assessing performance.

We have considered alternative benchmarks to Adjusted Earnings, including profit before taxation and EBITDA. These indicate a range of $1.4 billion to $2.1 billion.

By applying a normalised Adjusted Earnings approach, we have concluded that it is appropriate to apply a materiality of $2.0 billion (2022: $1.2 billion).

The Adjusted Earnings were as follows:

Performance materiality

What we mean

Having established overall materiality, we determined 'performance materiality', which represents our tolerance for misstatement in an individual account. It is calculated as a percentage of overall materiality in order to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality of $2.0 billion for Shell's financial statements as a whole. We assigned performance materiality to our various in-scope operating units. The performance materiality allocation is dependent on the size of the operating unit, measured by its contribution of earnings to Shell, or other appropriate metric, and the risk associated with the operating unit.

Level set

In our assessment for 2023, we considered the nature, number and impact of the audit differences identified in 2022. We also noted the way in which management navigated the financial statement close throughout 2022, and the fact that we did not experience any notable increase in control deficiencies in the prior year audit. Based on our assessment of these factors, our judgement was that performance materiality for the 2023 audit should be 75% (2022: 75%) of our overall materiality or $1.5 billion (2022: $0.9 billion).

The level of materiality that we applied in undertaking our audit work at the operating unit level, for the purpose of obtaining coverage over significant financial statements accounts, was determined by applying a percentage of our total performance materiality. This percentage is based on the significance of the operating unit relative to Shell as a whole and our assessment of the risk of material misstatement at that operating unit. In 2023 the range of materiality applied at the operating unit level was $225 million to $975 million (2022: $135 million to $585 million).

The performance materiality was kept under ongoing review, but the conclusion remained unchanged at our year-end re-assessment of materiality.

Audit difference reporting threshold

What we mean

This is the amount below which identified misstatements are clearly trivial. The threshold is the level above which we collate and report audit differences to the Audit and Risk Committee. We also report differences below that threshold that, in our view, warrant reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in the light of other relevant qualitative considerations in forming our opinion.

Level set

We agreed with the Audit and Risk Committee that we would report to the Committee all audit differences more than $100 million (2022: $60 million), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. This represents 5% of our planning materiality (2022: 5%).

What we mean

We are required to establish an overall audit strategy that sets the scope, timing, and direction of our audit. Audit scope comprises the physical locations, operating units, activities, and processes to be audited that, in aggregate, are expected to provide sufficient coverage of the financial statements for us to express an audit opinion.

Criteria for determining our audit scope and selection of in-scope operating units

Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determined our audit scope for each operating unit within Shell which, when taken together, enabled us to form an opinion on the consolidated financial statements. Our audit effort was focused towards higher risk areas, such as management judgements and on operating units that we considered significant based upon size, complexity or risk.

We assessed our 2023 audit scope following the completion of our 2022 audit. We identified those Areas of Operation (AoOs or operating units) that were significant by virtue of their contribution to Shell's results or significant by virtue of their associated risk or complexity. In doing this we considered the history or expectation of unusual or complex transactions, potential for or history of material misstatements, the previous effectiveness of controls, our forensic assessment in relation to fraud, bribery or corruption, and internal audit findings. We then considered the adequacy of account coverage and remaining audit risk of AoOs not directly covered by audit procedures. Finally, we sense checked our scope to the prior year; ensured that there was appropriate unpredictability in our scope and made the necessary changes where appropriate. We applied our Risk Scan analytics techniques, which consolidate internal and external data to inform us on higher risk components to be included in scope. This allowed us to risk rate the group's operating units. We identified 94 operating units where we believed that it was appropriate to carry out targeted testing.

By following this approach, our audit effort focused on higher risk areas, such as management judgements. Our group wide procedures enabled us to obtain audit evidence over the AoOs that were not full, specific or specified procedure scope.

We did not make substantial changes to our 2022 assessment of the components where we performed full or specific scope audit procedures. Also, there were no significant changes to the number of IT applications we tested.

We kept our audit scope under review throughout the year to reflect changes in Shell's underlying business and risks; however, no significant changes were required.

The table below illustrates the scope of work performed by our audit teams:

Coverage

Our coverage by full, specific, specified and group procedures is illustrated below. The summary is by Total Assets, Adjusted Earnings and Revenue. Overall, our full, specific and specified procedures accounted for 65% of Shell's absolute Adjusted Earnings reported by Shell in its quarterly results announcements and adjusted for an effective tax rate. The remaining Adjusted Earnings were covered by Group wide procedures.

The Parent Company is located in the United Kingdom and audited directly by the Group engagement team

Group evaluation, review and oversight of component teams

The group engagement partner and Senior Statutory Auditor, Gary Donald, has overall responsibility for the direction, supervision and performance of the Shell audit engagement in compliance with professional standards and applicable legal and regulatory requirements. He is supported by segment and function partners, who are based in the Netherlands and the UK, and who together with related staff comprise the integrated group engagement team. This group engagement team established the overall group audit strategy, communicated with component auditors, performed work on the consolidation process, and evaluated the conclusions drawn from the audit evidence as the basis for forming EY's opinion on the group financial statements.

The group engagement team is responsible for directing, supervising, evaluating and reviewing the work of EY global network firms operating under their instruction (local EY teams) to assess whether:

• the local EY audit team had the appropriate level of experience;
• the work was performed and documented to a sufficiently high standard;
• the local EY audit team demonstrated that they had challenged management sufficiently and had executed their audit procedures with an appropriate level of scepticism; and
• there is sufficient appropriate audit evidence to support the conclusions reached.

Members of the group engagement team provide direct oversight, review, and coordination of our BSC audit teams. Our BSC teams performed centralised testing in the BSCs for certain accounts, including revenue, cash and payroll. In establishing our overall approach to the group audit, we determined the type of work that needed to be undertaken at each of the operating units or BSCs by the group engagement team or by auditors from other local EY teams.

For the operating units where the work was performed by local EY auditors, we determined the appropriate level of involvement of the group engagement team to enable us to conclude that sufficient appropriate audit evidence had been obtained, as a basis for our opinion on the Group as a whole.

The group engagement team provided detailed instructions to our component teams to drive the audit strategy and execution in a coordinated manner. Group audit partners physically visited India, Philippines Poland, Singapore and the USA, covering operating units, functions and BSCs. The Group audit partners also performed virtual site visits in Australia, Brazil and Nigeria. Our visits covered all of the T&S component teams and Shell's trading locations. The Senior Statutory Auditor physically visited India, Poland and the USA and virtually visited Australia and Nigeria. During the USA site visit, the Senior Statutory Auditor accompanied the Audit and Risk Committee on their visit to a number of operations, including Shell Polymers Monaca, the Shell Norco facility, the Shell – operated Vito floating production facility in the Gulf of Mexico (virtual visit from New Orleans) and the Houston trading floor.

During our visits, we exercised direction, supervision, oversight and review of our overseas EY audit teams. We were satisfied that we have had adequate involvement in their work and that we exercised sufficient and appropriate direction to the component teams.

Our oversight of component teams included maintaining a continuous and open dialogue with our global component teams, as well as holding formal closing meetings quarterly, to ensure that we were fully aware of their progress and results of their procedures.