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

We are continually enhancing our approach to assessing and managing risks and opportunities resulting from climate change. This includes considering different time horizons and their relevance to risk identification and business planning. We 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 those prepared for the IPCC AR6) guide how we set our strategic direction, capital allocation and carbon emission reduction targets.

The process for identifying and assessing climate-related risks and opportunities is set out in the "Climate Risk Management" section. Shell has identified climate change and the associated energy transition as a material risk based on societal concerns and developments related to climate change and managing GHG emissions. The risks could potentially result in changes to the demand for our products, supply chains and markets; further changes to the regulatory environment in which we operate, and increased litigation (see Note 31 to the Consolidated Financial Statements "Legal proceedings and other contingencies"). The risks are composed of a combination of complex and interrelated elements that affect Shell's overall business value chain, and our asset, product and business portfolio. The risk landscape is evolving rapidly. To achieve our emissions reduction targets, active holistic management of all climate-related risk components is important. The composite risk is broken down into the following sub-components:

  • commercial risk;
  • regulatory risk;
  • societal risk (including litigation risk); and
  • physical risk.

Overall, we mitigate climate-related risks through our Powering Progress strategy to deliver more value with less emissions. With our focus on performance, discipline and simplification, we believe that we are in a better position to achieve both our financial targets and climate-related targets and ambitions. This approach includes:

  • reducing the GHG emissions from our operations (Scope 1 and 2) by improving our energy efficiency, deploying renewable electricity, managing flaring and reducing methane emissions from our assets and projects;
  • growing our world-leading liquefied natural gas (LNG) business, while decarbonising our LNG portfolio in two main ways: by growing our portfolio with a lower carbon intensity, and by focusing on reducing emissions of methane;
  • managing our Upstream portfolio to support a balanced energy transition by cutting emissions from oil and gas production, while keeping oil production stable. Oil production is increasingly from our deep-water business which, through innovation, produces higher-margin and lower-carbon barrels; and
  • transforming our businesses in Downstream and Renewables and Energy Solutions to offer more low-carbon solutions while reducing sales of oil products.

In addition, we are working to effectively adapt our assets and activities to enhance our resilience to the physical risks related to climate change where needed.

See below for more details of Physical risks.

We are also working with governments on their climate policies to help establish regulatory frameworks that will enable society to reach the goals of the Paris Agreement.

We signed up to the Oil and Gas Decarbonisation Charter announced at COP28, within which organisations have pledged to achieve near-zero methane emissions by 2030 and zero routine flaring by no later than 2030. We also intend to contribute to the World Bank's Global Flaring and Methane Reduction Fund, which was launched at COP28.

As a leading global energy business, Shell seeks to identify opportunities in the energy transition. These risks and opportunities are described below. Climate-related risks are also summarised in the "Risk factors" section of the Strategic Report.

Time horizons: short, medium and long

Due to the inherent uncertainty and pervasive risks across our strategy and business model, we monitor climate-related risks and opportunities across multiple time horizons.

  • Short term (up to three years): we develop detailed financial projections and use them to manage performance and expectations on a three-year cycle. These projections incorporate decarbonisation measures required to meet our short-term targets.
  • Medium term (generally three to 10 years): these are embedded within our operating plan, with our continued focus on the customer, the investments and portfolio shifts required in the medium term that will reshape Shell's portfolio.
  • Long term (generally beyond 10 years): it is expected that our portfolio and product mix will look very different.

Transition risks

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.


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.

Physical risks

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.

Transition opportunities

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).

Impact of climate-related risks and opportunities on Shell's businesses, strategy and financial planning

The transformation of the energy system to net-zero emissions will require simultaneous action in three areas:

  • an unprecedented improvement in the efficiency with which energy is used;
  • a sharp reduction in the carbon intensity of the energy mix; and
  • the mitigation of residual emissions using technology and natural sinks.

While it is difficult to predict the exact combination of actions that will deliver the net-zero goal, scenarios help us to consider the variables and the potential direction and pace of the transition needed. Scenarios are not intended to be predictions of likely future events or outcomes and, therefore, are not the basis for Shell's operating plans and financial statements.

We have been developing scenarios within Shell for almost 50 years, helping Shell leaders to explore ways forward and make better decisions. Shell Scenarios are designed to stretch management's thinking when it comes to considering events that may be remotely possible. Scenarios help management make choices in times of uncertainty and transition as we grapple with tough energy and environmental issues. They are aligned to different energy transition pathways and help in decision-making by guiding the identification of risks and opportunities.

Different socio-economic and technological parameters are used to construct these scenarios, such as:

  • sectoral and regional energy demand;
  • future trajectory of oil consumption and demand for natural gas;
  • renewable electricity demand and the pace of the electrification of the global energy system;
  • supply of solar and wind energy;
  • pace of uptake of electric vehicles;
  • demand for biofuels;
  • growth of the hydrogen economy;
  • level of carbon capture and storage (CCS);
  • deployment of lower-carbon energy technologies; and
  • global trade of oil and gas.

Management consideration of different climate change outcomes informs a range of areas, including but not limited to the setting of the long-term strategy, business planning, and investment and divestment decisions. The outcomes considered by management vary in relation to the extent and pace of the energy transition.

Impact on strategic planning

The application of scenario analysis informs our assessment of the impact of a wide range of risks and opportunities, including climate-change-related issues, on our strategy and business planning at the Group and business levels. At the Group level, the potential impacts of the energy transition on our business model are discussed and assessed by the Board and the Executive Committee as part of the annual strategic and business planning cycle. This assessment allows us to challenge accepted ways of thinking, identify material risks and opportunities, and identify key tensions and trade-offs.

Key financial and non-financial components of business planning

The Board approves our annual business plan. The plan contains operational and financial metrics, and its objective is to drive the delivery of our Powering Progress strategy.

Decarbonisation targets are key to our business planning process. Each business owner offers viable Scope 1, 2 and 3 reduction opportunities as part of this process, in line with the CMF (see "Governance of climate-related risks and opportunities").

The business plan is underpinned by assumptions about internal and external parameters and includes:

  • commodity prices;
  • refining margins;
  • production levels and product demand;
  • exchange rates;
  • future carbon costs;
  • the schedules of capital investment programmes; and
  • risks and opportunities that may have material impacts on free cash flow.

These assumptions are developed with input from our scenarios and internal estimates and outlooks. The level of uncertainty around these assumptions increases over longer time horizons.

Impact on business and financial planning

There is no single scenario that underpins Shell's business and financial planning. Scenarios are not intended to be predictions of likely future events or outcomes and, therefore, are not the basis for Shell's operating plans and financial statements. Our scenarios help in developing our future oil and gas pricing outlooks. The oil and gas pricing outlooks take account of factors relating to the energy transition, such as potential changes in supply and demand (see details of scenario parameters above). The low-, medium- and high-pricing outlooks are prepared by a team of experts, reviewed by the EC and approved by the CEO and CFO. The mid-pricing outlook represents management's reasonable best estimate and is the basis for Shell's financial statements, operating plans and impairment testing.

Shell's operating plan reflects Shell's energy transition strategy. We will continue to update our business plan, price outlooks and assumptions as we move towards net-zero emissions by 2050.

As described in "Climate-related risks and opportunities identified by Shell over the short, medium and long term", the low-pricing outlooks could result in increased commercial, regulatory and societal risks, as well as transition opportunities. How these risks are prioritised is described in "Shell's processes for identifying and assessing climate-related risks". Given our target to become a net-zero emissions energy business by 2050, the use of low-pricing outlooks is part of our resilience testing and resulting actions.

Our strategy and national net-zero commitments

In accordance with UK Listing Rule 9.8.6FG, we have considered the extent to which country-level net-zero commitments have been considered in developing our transition plan.

Our Powering Progress strategy aims to deliver a net-zero emissions energy business by 2050. The pace of the energy transition will be heavily influenced by government policy, creating a strong country and regional dimension in seeking to deliver the aims of the Paris Agreement. Our commitment is a global one and, as such, we look to deliver our strategy through a global lens.

We seek to translate our energy transition strategy into specific targets and plans at a business segment level, ensuring we take capital deployment and portfolio decisions in the context of the globally integrated nature of our operations. However, we continue to recognise the importance of engagement and collaboration in delivering the fundamental changes to the energy system that are required. This includes supporting and advocating for policies that aim to reduce carbon emissions and working with governments and other stakeholders in the development of policy that supports the transition to a low-carbon energy system. As national transition plans develop, consideration will be given to the impact on our operations and the associated implications for our energy transition strategy.

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