Resilience of Shell's strategy to different climate-related scenarios

Shell's financial strength and access to capital give us the ability to reshape our portfolio as the energy system transforms. They also allow us to withstand volatility in oil and gas markets.

As we work towards net-zero emissions, we continue to exercise focus and discipline to optimise our capital allocation, balancing energy security and demand, as well as internal and external transition considerations and opportunities. We will make clear, disciplined choices about where we can create the most value for our investors and customers through the energy transition.

Cash capital expenditure by segment for 2024 is expected to be approximately $8 billion for Upstream, $5 billion for Integrated Gas, $3 billion for Marketing, $3-4 billion for Chemicals and Products, and $4-5 billion for Renewables and Energy Solutions.

Movements in cash capital expenditure in 2023 versus 2022 were driven by:

• Non-energy products: 41% lower in 2023 than in 2022 due to the completion of Shell Polymers Monaca in 2022 and greater inorganic expansion in Lubricants and Convenience Retailing in 2022.
• Low-carbon energy solutions: increased by 30% mainly due to the acquisition of Nature Energy (nearly $2 billion) and the roll-out of electric vehicle charging.
• LNG, gas and power marketing and trading: comparable year on year.
• Oil, oil products and other: remained at a similar level to 2022.

Key aspects of Shell's financial resilience in the context of climate-related impacts are assessed and described in more detail in Note 4 to the "Consolidated Financial Statements". This describes how Shell has considered climate-related impacts in key areas of the financial statements and how this translates into the valuation of assets and measurement of liabilities. Shell's financial statements are based on reasonable and supportable assumptions that represent management's best estimate of the range of economic conditions that may exist in the foreseeable future.

Sensitivity analysis using external, and often normative, climate scenarios has been performed for the period covering asset life cycles. If these different price outlooks were used, this would impact the recoverability of certain assets recognised in the "Consolidated Balance Sheet" as at December 31, 2023.

As there is no single scenario that underpins our plans, sensitivity analysis has been conducted using a range of key assumptions to test the resilience of our asset base. This includes sensitivity analysis on asset carrying values using commodity price outlooks from external, and often normative, climate change scenarios; shifting trends in our portfolio, particularly exploration and evaluation, Upstream production and refineries; risks related to stranded assets; resilience of investments for transformation of our refining sites into energy and chemicals parks; carbon price sensitivities; chemicals and refining margins price sensitivities; discount rate sensitivities; demand sensitivities; onerous contracts; forecast taxable profits sufficient to recover deferred tax assets; dividend resilience; and limited risk on timing of decommissioning and restoration activities for Integrated Gas and Upstream.

Commodity price sensitivities

Oil and gas prices are one of the key assumptions that underpin Shell's financial statements, with the mid-price outlook informed by Shell's scenario planning representing management's best estimate. Price outlooks reflect a broad range of factors, including but not limited to future supply and demand, and the pace of growth of low-carbon solutions. The scenarios have been selected to illustrate the resilience of the asset base under a range of possible outcomes, including the price implications arising from the IEA Net Zero Emissions scenario which provides a potential path for the global energy system to net-zero emissions by 2050. Sensitivities of asset carrying amounts to prices are under the assumption that all other factors in the models used to calculate impacts remain unchanged.

Sensitivity analysis has been performed using price outlooks from:

1. Average prices from three 1.5-2 degrees Celsius external climate change scenarios: In view of the broad range of price outlooks across the various scenarios, the average of three external price outlooks was taken from IHS Markit/ACCS 2023; Woodmac WM AET-1.5 degree; and IEA NZE50.
   Applying these prices to Integrated Gas assets of $72 billion and Upstream assets of $84 billion as at December 31, 2023, shows recoverable amounts that are $12-16 billion and $3-5 billion lower, respectively, than the carrying amounts as at December 31, 2023.
2. Hybrid Shell Plan and IEA NZE50: for this Shell's mid-price outlook is applied for the next 10 years. Because of greater uncertainty, the IEA normative Net Zero Emissions scenario is applied for the period after 10 years. This gives less weight to the price-risk uncertainty in the first 10 years reflected in the Operating Plan period and applies more risk to the more uncertain subsequent periods.
   Applying this priceline to Integrated Gas assets of $72 billion and Upstream assets of $84 billion as at December 31, 2023, shows recoverable amounts that are $8-10 billion and $1-3 billion lower, respectively, than the carrying amounts as at December 31, 2023.
3. A 1.5 degree scenario, derived from IEA NZE50: This priceline applies the IEA normative Net Zero Emissions scenario over the whole period under review and reflects the sensitivity to a pure net-zero emissions scenario from the IEA.
   Applying this priceline to Integrated Gas assets of $72 billion and Upstream assets of $84 billion as at December 31, 2023, shows recoverable amounts that are $15-20 billion and $3-5 billion lower, respectively, than the carrying amounts as at December 31, 2023.

In addition, further sensitivities are provided of -10% or +10% to Shell's mid-price outlook, as an average percentage over the full period. A change of -10% or +10% to the mid-price outlook, as an average percentage over the full period, would result in around $5-8 billion impairment or some $2-5 billion impairment reversal, respectively, in Integrated Gas and Upstream as at December 31, 2023. Compared with the prior year, the higher impact of a 10% decrease in commodity prices is mainly driven by lower headroom for certain assets between carrying value and recoverable value at December 31, 2023.

Carbon pricing and discount rate sensitivities

The risk of stranded assets may increase in a higher-carbon-price scenario. Sensitivities of our asset carrying values to carbon prices have been based on an IEA NZE 2050 scenario to illustrate the resilience of asset carrying values to higher long-term carbon prices than those included in the Shell mid-price outlook.

Applying the IEA NZE 2050 carbon price scenario to Integrated Gas assets of $72 billion and Upstream assets of $84 billion, up to the end of life of these assets, shows recoverable amounts that are $2-4 billion and $1 billion lower, respectively, than the carrying amounts as at December 31, 2023.

Applying the IEA NZE 2050 carbon price scenario to Chemicals and Products assets of $44 billion shows recoverable amounts that are $3-4 billion lower than the carrying amounts as at December 31, 2023. For Chemicals and Products, increased carbon cost could potentially be recovered partially through increased product sale prices.

The discount rate applied for impairment testing is based on a nominal post-tax weighted average cost of capital (WACC) and is determined at 7.5%, except for power generation in the Renewables and Energy Solutions segment where 6% is applied. The discount rate includes systematic risk for energy transition risk. In addition, cash flow projections applied in individual assets include specific asset risks, including risk of transition. An increase in systematic climate risk could lead to a higher WACC and consequently to a higher discount rate to be applied in impairment testing. We have used a 1% shift in discount rate for sensitivity analysis purposes as an indicator of the resilience of our asset base to incremental increases in our cost of capital.

An increase of the WACC of 1% under the assumption that all other factors in the models used to calculate recoverability of carrying amounts remain unchanged would lead to a change in the carrying amount of $2-4 billion for Integrated Gas and Upstream and up to $1 billion in Chemicals and Products, and no significant impairment in other segments.