Climate-related risks and opportunities identified by Shell over the short, medium and long term

Climate-related commercial risk

• The transition to a low-carbon economy may lead to lower sales volumes and/or margins due to a general reduction or elimination of demand for oil and gas products, possibly resulting in underutilised or stranded oil and gas assets, and a failure to secure new opportunities.
• Changing preferences of investors and financial institutions could reduce access to and increase the cost of capital.

Relevant time horizon:

medium and long

Potential material impacts on the organisation

Lower demand and margins for oil and gas products

Changing customer sentiment towards renewable and sustainable energy products may reduce demand for our oil and gas products. An excess of supply over demand could reduce fossil fuel prices. This could be a factor contributing to additional provisions for our assets and result in lower earnings, cancelled projects and potential impairment of certain assets.

Changing preferences of investors and financial institutions

Financial institutions are increasingly aligning their portfolios to a low-carbon and net-zero world, driven by both regulatory and broader stakeholder pressures. A failure to decarbonise the business portfolios in line with investor and lender expectations could have a material adverse effect on our ability to use financing for certain types of projects. This could also adversely affect our partners' ability to finance their portion of costs, either through equity or debt.

Sensitivity analysis of a 1% shift in Shell's weighted average cost of capital on asset carrying values is presented in the section "Carbon pricing and discount rate sensitivities".

Remaining in step with the pace and extent of the energy transition

The energy transition provides us with significant opportunities, as described in "Transition opportunities" below. If we fail to stay in step with the pace and extent of change or customers' and other stakeholders' demand for low-carbon products, this could adversely affect our reputation and future earnings. If we move much faster than society, we risk investing in technologies, markets or low-carbon products that are unsuccessful. Therefore we cannot transition too quickly or we will be trying to sell products that customers do not want. This could also have a material adverse effect on financial results.

Technology and innovation are essential to our efforts to help meet the world's energy demands competitively. 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 an adverse effect on our future earnings.

Climate-related regulatory risk

The transition to a low-carbon economy will likely increase the cost of compliance for our assets and/or products, and may include restrictions on the use of hydrocarbons. The lack of net-zero-aligned global and national policies and frameworks increases the uncertainty around this risk.

Relevant time horizon:

short, medium and long

Potential material impacts on the organisation

Increased compliance costs

Some governments have introduced carbon pricing mechanisms, which we believe can be an effective way to reduce GHG emissions across the economy at the lowest overall cost to society.

Shell's cost of compliance with the EU Emissions Trading Scheme (ETS) and related schemes was around $493 million in 2023, as recognised in Shell's Consolidated Statement of Income for 2023. A further $3,133 million of costs were incurred in respect of biofuels ($2,581 million) and renewable power ($552 million) programmes (see Note 5 to the "Consolidated Financial Statements").

Shell's annual carbon cost exposure is expected to increase over the next decade because of evolving carbon regulations. The forecast annual cost exposure is estimated to be around $1 billion in 2024 and around $4 billion in 2033. This estimate is based on a forecast of Shell's equity share of emissions from operated and non-operated assets, and real-term carbon cost estimates using the mid-price scenario (see Note 4 to the "Consolidated Financial Statements" for more information). This exposure also takes into account the estimated impact of free allowances as relevant to assets based on their location.

Restrictions on use of hydrocarbons

As of June 2023, more than 90% of the global economy was signed up to net-zero commitments, according to the Net Zero Stocktake 2023 report from Net Zero Tracker. This brings an increasing risk that governments may set future regulatory frameworks that further restrict exploration and production of hydrocarbons, and introduce controls to limit the use of such products. Failure to replace proved reserves could result in an accelerated decrease of future production, which could have a material adverse effect on our earnings, cash flows and financial condition.

Lack of net-zero-aligned global and national policies and frameworks

The lack of net-zero-aligned global and national policies and frameworks increases the uncertainty around how carbon pricing and other regulatory mechanisms will be implemented in the future. This makes it harder to determine the appropriate assumptions to be taken into account in our financial planning and investment decision processes.

Climate-related societal risk (including litigation risk)

As societal expectations develop around climate change, there is a potential impact on Shell's licence to operate, reputation, brand and competitive position. This is likely to include litigation.

Relevant time horizon:

short, medium and long

Potential material impacts on the organisation

Decline in reputation and brand

Societal expectations of businesses are increasing, with a focus on business ethics, quality of products, contribution to society, safety and minimising damage to the environment. There is an increasing focus on the role of the oil and gas sector in the context of climate change and the energy transition. This could negatively affect our brand, reputation and licence to operate, which could limit our ability to deliver our strategy, reduce consumer demand for our branded and non-branded products, harm our ability to secure new resources and contracts, and restrict our ability to access capital markets or attract staff.

Deteriorating relationships with key stakeholders

Failure to decarbonise Shell's value chain in line with societal, governmental and investor expectations is a material risk to Shell's reputation as a responsible and market-leading energy company. The impact of this risk includes shareholder divestment, greater regulatory scrutiny and potential asset closure resulting from public interest groups' protests.

Litigation

There is an increasing risk to oil and gas companies from public, private and governmental lawsuits. Such action may have wide-ranging consequences, including forcing entities to hand over strategic autonomy in part to regulators, divest from hydrocarbon technologies, denial of regulatory approvals and/or paying fines/penalties or large compensation packages to the plaintiff.

In some countries, governments, regulators, organisations and individuals have filed lawsuits of a wide variety, including seeking to hold oil and gas companies liable for costs associated with climate change, or seeking court-ordered reductions in emissions, challenging the regulatory approvals and operating licences, or challenging energy transition strategies and plans. 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, the Netherlands, ruled that by end 2030, Shell must reduce its aggregate net Scope 1, 2 and 3 emissions by 45%, compared with 2019 levels. The Scope 1 component is a results-based obligation and the Scope 2 and 3 components are a significant best-efforts obligation.

We have appealed the ruling but continue to implement our Powering Progress strategy to become a net-zero emissions energy business by 2050, regardless of the outcome of the appeal.

Climate-related physical risk

The potential physical effects of climate change may impact Shell's assets, operations, supply chains, employees and markets.

Relevant time horizon:

short, medium and long

Potential material impacts on the organisation

Types of physical risk

Mitigation of physical risks, whether or not related to climate change, is considered and embedded in the design and construction of our projects, and/or operation of our assets to minimise the risk of adverse incidents to our employees and contractors, the communities where we operate, and our equipment.

The potential impact of physical changes comes from both acute and chronic physical risks. Acute risks, such as flooding and droughts, wildfires and more severe tropical storms, and chronic risks, such as rising temperatures and rising sea levels, could potentially impact some of our facilities, operations and supply chains. The frequency of these hazards and impacts is expected to increase in certain high-risk locations. Extreme weather events, whether or not related to climate change, could have a negative impact on our earnings, cash flows and financial condition.

Shell's 2023 assessment

In 2023 we carried out a detailed review to assess the impact of a range of changing climatic conditions including changes in temperature, precipitation, wind and sea levels across segments and geographies for our significant assets. We used IPCC climate modelling data covering three future climate scenarios (RCP2.6, RCP4.5 and RCP8.5 [A]) across the time horizons 2025, 2030 and 2050.

In the short to medium term, the risks were found to be related to factors that Shell is already aware of (whether or not related to climate change) and the assets are actively managing to mitigate, e.g. hurricane impacts in the US Gulf Coast, rising air temperatures in the Middle East and water scarcity in Europe and Asia. As an example, in recent years the Rhine river in Europe has seen historic lows during the summer months leading to challenges in the use of barges for transportation of our products. Dredging of harbours and investment in shallower-draft barges have helped to mitigate the risk.

In the long term, the results of the exercise indicated that while we have evaluated against current known risk factors and our current asset portfolio, the frequency and severity of the identified risk factors may increase by 2050. The level of predictability is such that the need for investment in climate adaptation measures at the assets is not immediate and the results mean we are in a position to monitor the assets and determine whether there is any need for adaptation action, e.g. the impact of potential water scarcity on various assets.

We tested over 70% of the carrying value of our physical assets as at December 31, 2022, to assess the potential impact of climate-related changes on our significant assets. 13% (based on the carrying value) of physical assets tested are considered to be exposed to climate-related physical risks in the short to medium term which the assets are already actively managing to mitigate. In addition, we reviewed significant acquisitions made in 2023 of which none are considered to be exposed to climate-related physical risks in the short to medium term.

Our plan reflects the impact of mitigating actions in the short to medium term. We will continue to monitor and assess the future exposure of our assets in the longer term to changing climatic conditions to establish the need for any further adaptation actions and related metrics.

Additionally, the impact of physical climate change on our operations is unlikely to be limited to the boundaries of our assets. The overall impact, including how supply chains, resource availability and markets may be affected, also needs to be considered for a holistic assessment of this risk. Our assets manage this risk as part of broad risk and threat management processes as required by our HSSE & SP Control Framework, part of the wider Shell Performance Framework.

[A] Representative Concentration Pathway (RCP) refers to the greenhouse gas concentration (not emissions) trajectory adopted by the IPCC. The pathways describe different climate change scenarios, all of which are considered possible depending on the amount of GHG emitted in the years to come.

Climate-related opportunities

The transition to a low-carbon economy also brings significant opportunities for us to benefit from changing customer demands, given our position as a leading global energy provider.

Relevant time horizon:

short, medium and long

Potential material impacts on the organisation

As the global energy mix changes, our current infrastructure, know-how and global footprint put us in an ideal position to service the changing energy demands of the market. Our research and development (R&D) activities are key to achieving our net-zero emissions target.

As we work to deliver more value with less emissions we are focusing on:

1. Natural gas

Demand for liquefied natural gas (LNG) is expected to continue to grow. As one of the world's largest suppliers of LNG, with around 40 million tonnes of equity capacity, we can ship natural gas to where it is needed. LNG is critical to the energy transition and plays an important role in enabling countries to replace coal-fired power generation with a less carbon-intensive alternative, and provides grid stability alongside wind and solar power in electricity generation. Shell seeks to provide more affordable, reliable and cleaner energy to our customers.

In October 2023, we and our partners in the Oman LNG LLC (Oman LNG) venture signed an amended shareholders' agreement for Oman LNG, extending the business beyond 2024. We will remain the largest private shareholder in Oman LNG, with a 30% interest.

2. Continuing the transformation of our remaining integrated refineries into energy and chemicals parks

An important aim of our Powering Progress strategy is to continue to transform selected integrated refineries into energy and chemicals parks, which includes repurposing units to deliver more lower-carbon, high-value, sustainable products.

We are continuing to transform our refining business as part of our drive to create more value with less emissions. In early 2024, we announced our investment decision to convert the hydrocracker at our Energy and Chemicals Park Rheinland in Germany into a unit that will produce premium base oils, used to make high-quality lubricants, such as engine and transmission oils. The hydrocracker at the Wesseling site near Cologne will stop processing crude oil into petrol, diesel and jet fuel diesel by 2025. The planned changes are expected to reduce Shell's Scope 1 and 2 carbon emissions by around 620,000 tonnes a year.

3. Biofuels

Developing biofuels production is a key theme of our energy transition strategy. We are developing biofuels such as sustainable aviation fuel, biodiesel and renewable natural gas (RNG) to help our customers decarbonise without having to change their cars, trucks, planes or ships.

Shell and the non-operated joint venture Raízen (Shell interest 44%) are together one of the world's largest blenders and distributors of biofuels. Shell plans to continue to invest in and increase the production of these low-carbon fuels.​ Our low-carbon fuels projects and operations around the world form part of a wider commitment to provide a range of energy choices for customers. For example, we believe that sustainable aviation fuels (SAF) provide the most effective way of reducing emissions within the aviation sector, with wider adoption of SAF enabling us to provide more low-carbon fuels to our customers. Biofuels may also present opportunities in the shipping, road freight and other sectors. Together with our customers, we are working on changing energy demand and developing ways to help increase the use of low-carbon fuels and decrease carbon emissions from this sector.

Shell completed the acquisition of Nature Energy in February 2023, one of the largest producers of RNG in Europe. This acquisition supports Shell's ambitions to build an integrated RNG value chain at global scale and to profitably grow its low-carbon offerings to customers across multiple sectors.

In 2023, we announced a multi-year agreement to buy sustainable aviation fuel from Montana Renewables, the largest SAF producer in North America, and to work together on building blending and distribution capabilities to deliver SAF to customers. We also signed an agreement to supply SAF to Emirates airlines at Dubai International Airport, the first time that SAF has been used in the airport's fuelling system.

4. Downstream, Renewables and Energy Solutions

This encompasses our biofuels, charging for electric vehicles, renewable power, hydrogen and fuels of the future businesses as well as developing our carbon capture and storage business.

In March 2023, we entered into a joint venture with Eku Energy (Shell interest 45%) to deliver a utility-scale battery energy storage system in Australia. We have access to 100% of the battery system's offtake over a 20-year period. Completion of the project is expected in late 2024.

In June 2023, Hollandse Kust Noord, our offshore wind park in the Netherlands (Shell interest 79.9%), delivered its first megawatts of renewable electricity.

In 2023, Shell's spending on CCS opportunities (operating expenses and cash capital expenditure) amounted to around $340 million, an increase of 55% from the $220 million in 2022. Shell's equity share of captured and stored CO₂ was around 0.5 million tonnes in 2023 (0.4 million tonnes in 2022).