Royal Dutch Shell Plc (RDS.A) Ben van Beurden on Q4 2015 Results - Earnings Call Transcript

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Royal Dutch Shell Plc (NYSE:RDS.A)

Q4 2015 Earnings Call

February 04, 2016 8:30 am ET

Executives

Ben van Beurden - Chief Executive Officer & Executive Director

Simon P. Henry - Chief Financial Officer & Executive Director

Analysts

Thomas Y. Adolff - Credit Suisse Securities (Europe) Ltd.

Theepan Jothilingam - Nomura International Plc

Jon Rigby - UBS Ltd. (Broker)

Martijn P. Rats - Morgan Stanley & Co. International Plc

Asit Sen - CLSA Americas LLC

Alastair R. Syme - Citigroup Global Markets Ltd.

Lydia R. Rainforth - Barclays Capital Securities Ltd.

Biraj Borkhataria - RBC Europe Ltd. (Broker)

Irene Himona - Société Générale SA (Broker)

Christopher Kuplent - Bank of America Merrill Lynch

Iain S. Reid - Macquarie Group

Gordon M. Gray - HSBC Bank Plc (Broker)

Bert Van Hoogenhuyze - Stroeve

David Gamboa - Tudor, Pickering, Holt & Co. International LLP

Operator

Welcome to the Royal Dutch Shell Q4 2015 and Full-Year Results Announcement Call. There will be a presentation followed by a Q&A session.

I'd like to introduce your host, Mr. Ben van Beurden. Please go ahead, sir.

Ben van Beurden - Chief Executive Officer & Executive Director

Thank you very much, operator, and welcome to today's presentation, ladies and gentlemen. So you will have seen that we pre-released our fourth quarter 2015 results earlier in the year, the 20th of January. We wanted to do that ahead of the shareholder vote on the BG transaction. And this morning we've confirmed our fourth quarter results.

But before we go there, let me highlight again the disclaimer statement to you. So again, our integrated business mix is helping to support our results in what is a quite challenging industry environment today. So we're pulling on powerful financial levers to manage the company in the industry downturn. We are reducing cost and capital investment as we refocus the company and we respond to lower oil prices.

So the combination with BG, the completion of the transaction, expected to take place on the 15th of February, will mark the start of a new chapter in Shell to rejuvenate the company and to aim to improve shareholder returns.

So Shell is becoming a company that is more focused on its core strength, a company that is more resilient and competitive at all points in the oil price cycle and has a more predictable development pipeline.

Let me first update you on our HSSE performance because as you know the health and safety of our people and our neighbors and our environmental performance remain the top priorities for Shell. And I believe that we have the right safety culture in the company, a track record that is improving and is competitive. But also in 2015 we did regrettably have fatalities and other safety incidents, so we'll continue with our safety drive, which is Goal Zero to also further improve here.

Shell's crew and cost of supply earnings for the year, excluding identified items, were $10.7 billion. Now results are, of course, lower with the lower oil and gas prices. But as I said, our business mix is also offsetting some of that. And integrated gas and downstream are delivering a strong performance. And the balance sheet gearing remained low at year-end 2015 despite the downturn.

So pulling on powerful financial levers in the oil price downturn to maintain a strong balance sheet, to protect our ability to pay dividends and to keep a sensible and high-value investment program under way for the future. And this is a substantial package of measures, and I think we have achieved a lot in 2015.

We have identified major commitments to improve performance further over the next few years, including from the combination with BG as we get under the hood there following expected completion on the 15th of February.

We've reduced our operating and capital cost by a combined $12.5 billion in 2015. Our operating costs fell by $4 billion in 2015 as our sustainable cost-reduction programs got a pace, and Shell's costs should further reduce in 2016 by some $3 billion.

And on the capital investment side, we delivered 2015 capital investment at around $29 billion, and that's almost 25% or an $8.5 billion reduction from the 2014 levels, and more than 35% less than the recent peak in 2013.

If I then look into 2016, we're expecting combined spending to be lower this year, to be around $33 billion, with options on the table to further reduce as planning again should conditions warrant that.

Impactful decisions on capital investments are driving the right outcomes here. Only the most competitive projects are going ahead. Just four major investment decisions in 2015, of which three in the downstream, and many potential projects have been purposely delayed, rephased or canceled altogether, and this is to manage affordability and to get better value from the supply chain in this downturn.

So you will have heard earlier this year that we have also halted work on the Bab sour gas project in Abu Dhabi. This simply didn't rank in our portfolio. And we are postponing the final investment decision on LNG Canada, likely the end of this year, and Bonga South West in deepwater Nigeria to 2017.

If I then turn to asset sales for 2014 and 2015, we have delivered over $20 billion of divestments, and that exceeded our earlier $15 billion target that we set for that same period. And we have still further deals in the pipeline such as Showa Shell, Denmark marketing, and the sale of our shareholding in Shell refining company in Malaysia.

We are executing plans for a $30 billion divestment program for 2016 to 2018 as we consolidate BG in our portfolio. And this will build over the next three-year period. And 2016 is likely to see asset sales below $10 billion. The buyers are there, particularly in the Downstream and some local gas markets, and then more non-traditional routes such as MLP, private equity, and some other oil and gas companies. Our MLP Shell midstream practice is set to deliver between 10% to 15% of the total disposal target as we've said over three years.

Then if I turn to project flow, which is an important element of improving our free cash flow position. There are, of course, relatively few start-ups from the Shell portfolio in 2015, as we said earlier at the beginning of this year.

At the same time, though, it was good to see BG successfully starting up two LNG trains in Queensland and continuing to ramp up in non-operated Brazil. And this resulted in around 16% volume growth for BG in 2015, and of course underlines why we like that combination of BG and Shell.

These BG growth projects will be a strong complementary fit to the Shell project flow where we should see more fundamental growth in the 2016 to 2019 timeframe as the next wave of large projects comes onstream.

Restructuring in underperforming parts of the company is and will remain an important lever to improve our financial performance. There is more to come in the Downstream. But at the same time, we've also achieved a lot there already. So we've delivered almost $10 billion of clean earnings, $14 billion of cash from operations and over 20% return from the Downstream in 2015.

So compare that to 2007, as you see in this chart, that is an 18% increase in earnings from a 20% smaller portfolio and a broadly similar refining margin environment. And I think there's an important read through to the Upstream here as we launch a more fundamental review of portfolio and capital allocation there going forward.

So the BG transaction is now close to completion following widespread support from both Shell and BG shareholders at the shareholder meetings last week. As I said, the effective date is anticipated to be the 15th of February and integration planning is well underway. We had meetings of the key management teams of both companies here in The Hague in the last few days.

The chart here shows some of the key numbers and commitments around the BG deal and really there is no change here. These commitments support all the statements made in the prospectus, which remain unchanged.

We are planning that following completion 2016 will be the integration year as we drive these programs forward. And we'll update you on the progress in these areas in the future and I'm really looking forward to that as well. The chart here shows the capital investment that we are planning for 2016 on a combined Shell and BG basis.

Now you may understand these allocations may change in the detail as we get in more insight in the BG portfolio, of course. In Downstream, we see growth prospects, particularly in Chemicals. The conventional oil and gas portfolio spans areas such as the North Sea, Kazakhstan, Nigeria onshore, Southeast Asia, and we are reviewing all of this.

Integrated gas and deepwater, which have been growth priorities for Shell in recent years, will reach significant scale with BG's positions included, really accelerating the delivery of the growth we had targeted there. And Shell will have the oil remain with long-term potential with reduced spending following restructuring programs in recent years.

All of this means that with BG in the portfolio we anticipate having more predictability in the company and a lot smarter sequencing of the project opportunity funnel in each of the themes.

Now let me hand you over to Simon.

Simon P. Henry - Chief Financial Officer & Executive Director

Thanks, Ben. Now getting on results in summary from the 20th of January, and the figures here today confirm that update. There are no real changes. So you'll see a series of waterfall charts at the end of today's slide pack that will give you some of the moving parts. And I'd be delighted to take any questions on that later.

So in summary on the quarter, excluding identified items, Shell's current cost of supply, or CCS, earnings were $1.8 billion. That's a 44% decrease in earnings per share from the fourth quarter of 2014. On a Q4-to-Q4 basis, we saw significantly lower earnings in Upstream, similar earnings in the Downstream. Return on average capital employed was 4.8%. That's excluding identified items. And the cash flow from operations is over $5 billion. Our dividend distributed for the fourth quarter of 2015, similar to year-ago levels, at $3 billion or $0.47 per share.

Turning now to reserves, our Securities and Exchange Commission, or SEC, proved reserves at the end of 2015 were 11.7 billion barrels of oil equivalent. That's a reduction of 1.4 billion barrels from the end of 2014. Falling oil prices have reduced Shell's reserves in 2015, a 47% decline in oil price, that's a fall to $53 compared with 2014. Net year average price effect was 1.7 billion barrels, although that did include 0.4 billion barrels for the debooking of Carmon Creek in Canada which would not have survived on a price check. But in fact, that project of course we subsequently cancelled in 2015.

There were some offsets to the negatives. I think it was good to see that the impact of cost-reduction programs elsewhere in Canada at the oil sands mining operation where the actual cash operating costs have come down to $29 a barrel by the fourth quarter last year.

Integrated Gas earnings for 2015 were $5.2 billion. That's a decrease of 50% because of the LNG prices tracked down in line with the oil price. However, global gas demand has been growing at 2.3% per annum over the last decade. And the LNG demand within that has grown at 8% per year. But LNG is still only 10% of the overall total gas demand. It's becoming clear that although the medium-term outlook for LNG demand growth in China is robust, in the near term the LNG demand growth is slowing there and potentially in some other countries. But it's really important to look at the development of the global LNG market overall.

In recent years, both the LNG demand and supply have substantially diversified; today, 30 importing and 20 exporting countries, that's 30 different markets. And that's expected to grow to as many as 50 importing countries, 25 exporting by early next decade.

Some highlights during the past year, during 2015. We did sign new LNG sales deals at approximately 4 million tons per annum, typically 10 years or longer contract length, and linked to oil prices. We closed over 10 scheduled contractual price reviews across the Asia Pacific joint ventures that reinforce traditional oil-linkage levels of LNG contracts, and simultaneously made progress at Shell in accessing new markets such Myanmar, India, the Philippines, Jordan, Malta and Gibraltar.

Turning now to the financial framework, I can't reiterate often enough that we've planned the financial framework on a long-term basis – multiyear, not for any given year or quarter. We aim to balance cash in and cash out across the cycle. Now you see on the chart here that we are largely delivering on that strategy, five years, three years, one year. And the oil price break-even point does of course move with the oil price. It does that linked with the time lag to the industry costs.

Our breakeven has fallen in the last year. You can see that here. We have options to further reduce that level such as asset sales, capital spending, and there's no change to our guidance on dividends. $1.88 per share was declared 2015, and we confirm our intention to pay at least that amount, $1.88 per share, for 2016.

Now you will see enhanced financial disclosures from the company from the first quarter of 2016. In practice, the first quarter results will include two months of BG's performance. Effective from the start of this year, we already have a new Upstream organization that reflects recent changes in the portfolio and that's the platform for integration with BG. The organization, it will help speed up the streamlining of the portfolio following the closure of the deal.

And we'll therefore report Integrated Gas earnings separately from Upstream rather than as a memo item and in more detail than in the past. In the Downstream, we will give earnings splits for the combination of refining and trading, which we see as closely linked, and the contributions from marketing separately. This should help investors understand the earnings drivers in the Downstream in more detail. So let me also flag to you there are some indicators from the first quarter results in the announcement this morning. And then also in the backup slides in the pack today.

So with that, let me hand you back to Ben.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks, Simon. So before we close, let's have a quick look on the competitive position. You know that we take a dashboard approach here, and we are looking for more competitive performance on a range of metrics and over time, so not single-point outcomes. You can see the trends here are downwards, tracking oil prices, and our aim is to be competitive across the price cycle. And we realize that there is still a lot to do here as well.

So let's quickly sum up. First of all, we're pulling on powerful financial levers to manage the company in the industry downturn and Shell is becoming a company now that is more focused on its core strength, a company that is more resilient and competitive at all points in the oil price cycle while having a more predictable development pipeline, and this will improve our shareholder returns.

And with that, let's take your questions. So can I, as usual, have just one or two of each so that everyone has the opportunity to ask a question in the time remaining? And operator, can you please poll for questions?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. We will now take our first question from Thomas Adolff of Credit Suisse. Please go ahead. Your line is open.

Thomas Y. Adolff - Credit Suisse Securities (Europe) Ltd.

Hi, guys. Two questions for me, please. The first one for Simon, and I guess the second one as well. Simon, in your own words from earlier this year, you said Shell has been good at spending and not so good at earning and that change is on its way from within. So I guess my question is what is the size of the price for Shell stand-alone if you become less bureaucratic, more lean and efficient by, say, 2017 and 2018, and I guess more linked to return on the return profile whether it could be as good Exxon's?

The second question, I guess, is on CapEx, the $33 billion and you say further reduction if it warrants. And if it does, I wondered where it is coming from since I can't really see any FIDs being included really in that $33 billion. And yet you're still spending about $10 billion more than Exxon. Thank you.

Simon P. Henry - Chief Financial Officer & Executive Director

Thanks, Thomas. I'll have a go. But Ben might want to comment on the second one – the first one, sorry. It's two separate questions really. The better at spending than earning, I'm not going to verify that quote. The point was it has been, on occasion, recognizing performance on spending or generating new opportunities more than operating. And that was a comment about internal culture, which is what your second point is about.

The idea that Shell is bureaucratic relative to other players in the industry is an utter and complete myth. Believe me, we deal with all other players in the industry, and we are more than capable of moving quickly, decisively and acting. And just as a proof point, exactly 12 months ago, we were accused of exactly that and not getting to grips with the reality of the macro environment as we saw it. Since then, we said we will do what we needed to do in that environment. Since then, we took $8.5 billion out of the capital relative to the previous year and $4 billion out of the OpEx. So we don't include energy costs in that. And I would challenge you to find any of our more agile, nimble competitors that got anywhere near that figure.

And so the size of the price, yes, it's material because what we took out was not slash and burn. It was, as we stated 12 months ago, sustainable. It was acceleration, if anything, of existing cost improvement, performance improvement and operational excellence improvement programs. That's why there's more to come this year, another $3 billion out of Shell. And let's see where we get in terms of return on capital. Of course we have to absorb the capital from the BG acquisition.

And like with the life cycle, it's active some of the balance sheet that we carry. For example, the $100 billion on Shell's balance sheet today, $31 billion of cash, $46 billion of assets under construction and $20-odd billion of exploration-related assets. As that capital becomes productive, it will more than offset the impact of the BG capital. And, yes, we would expect to move to a more competitive and long-term sustainable position on return on capital.

CapEx reductions below $33 billion. Well, just like the world we come from, in 2013 the pro forma Shell plus BG was $58 billion. In 2014, it was $47 billion. And in 2015, it was $36 billion. The $33 billion reflects our best estimate. But as we said last year, there are still some decisions to make as we go forward both on live projects, and we said today that Bonga South West, LNG Canada, they are effectively pushed out into the future as new investment decisions and we've taken cost out in the supply chain last year.

We expect to take more out this year. So, yes, there is potential but our approach in the next three months, four months is safe, successful integration, link it up to those synergies and we'll update on what the CapEx looks like and we'll run through – we'll take all the right decisions and move quickly while we need to on the CapEx between now and then and we'll update in the middle of the year.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks for that, Simon. I can't think of anything to add to that first one. Okay. Can I have the next question, please, operator?

Operator

Certainly. Our next question comes Theepan Jothilingam of Nomura. Please go ahead.

Theepan Jothilingam - Nomura International Plc

Yeah. Hi, good afternoon, gentlemen. Could you just remind us again how you think about the credit rating from here? How important is the single A and what's the right balance between protecting the balance sheet and the dividend? Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Simon?

Simon P. Henry - Chief Financial Officer & Executive Director

Thanks, Theepan. The credit rating is important. We need to be able to continue business whether access the capital markets or counterparty in the trading business. So it does matter. An A rating doesn't preclude us from either of those, the more general reputational importance on working with partners and governments.

It is, however, important that we do protect an investment-grade rating and that we manage the balance sheet accordingly. We talked quite a lot previously about the importance of the dividend and the cash, the priorities for use of cash. And we have no changes to say today. So essentially, the dividend comes first, and we need to address the – effectively the gearing that provides the capital on the balance sheet, the financing. And then the choice is between reinvestment and buyback. And that is our stated approach and no changes.

We expect post-BG the gearing will increase from around 14%, which is the lowest in the industry at the moment for the big players, to below 20%. It's not clear exactly because we'll need to complete the accounting, but somewhere in the low 20%. And it is important as I think I have made clear before that thereafter we do what we can to turn that number downwards again before we start to make other choices about allocation of capital. But the dividend is underwritten. And the dividend policy remains standalone for this year. And the policy remains unchanged.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks, Theepan. Thanks, Simon. Can I have the next question, please?

Operator

Certainly. Our next question comes from Jon Rigby of UBS.

Jon Rigby - UBS Ltd. (Broker)

Yeah. Thank you. Sort of two related questions, actually. I mean, you noted the high votes approving the deal on both sides, although I know there was a reasonable percentage that voted against on the Shell side. So given that you were very active in meeting institutional investors and dealing with the market through January in the run-up to the vote, could you perhaps sort of talk a little bit about where you felt there were misgivings in maybe how were articulating the benefits of the deal or maybe where you needed to push further in persuading people that the deal worked and was good for you?

And then sort of the second follow-up, as I understand I think as we widely reported in the press, there was a get-together of the senior executives from both sides of the company I think last weekend. And I just wondered whether there was anything, any impressions, anything you can talk about that came out of that vis-à-vis the combination going forward?

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks, Jon. Let me take both of them. Indeed, we were very happy with the high vote on both sides. I thought 83% was a very strong endorsement in a, shall we say, very nervous market environment that we're operating in. I think in terms of misgivings, as you call them, I think there is indeed concern about the oil price outlook. I think that was on people's mind, and I think in general sort of nervousness and concern with the market was growing in that period. I think that's behind us now. I think we move forward. It's now for us to demonstrate that the majority of the shareholders who voted for this were right, and we will do that.

The meeting that we had on Friday, Saturday, Sunday was a very good meeting. We had all the key country managers, top managers from both organizations in areas that are affected together in this preparation for day one. I think the atmosphere was really good. It was one of let's make this happen. I was incredibly impressed with the quality of the preparations already but also the enthusiasm and the excitement of certainly the BG staff and the Shell staff equally matched going forward. We now have, of course, all the follow-on work as we really make sure that we get ready for day one, all the practicalities of stakeholder management on day one, the delivery of the value plans that we have set out that now need to be populated.

And we are all looking forward to that day when we will, as an executive team, be spread out over key locations around the globe to celebrate together with our new colleagues the birth of the most exciting energy company in the world.

So Simon and I we were reflecting on it actually at the end of the weekend, wouldn't it be great if we had a few of our investors, analysts, and media commentators. I think it would have left a deep impression on all of you.

Anyway, thanks, Jon. Operator, can we have the next question, please?

Operator

Thank you. Our next question comes from Martijn Rats of Morgan Stanley.

Martijn P. Rats - Morgan Stanley & Co. International Plc

Yeah. Good afternoon. I wanted to ask you two things. First of all, can you talk a bit about the Downstream? Because towards the tail end of 2015 and early 2016 now we've seen a fair bit of weakness in oil demand coming through. And it's very difficult to understand to what extent and by how much that impacts the earnings throughout the Downstream and particularly coming after such a strong year 2015. I was hoping you could provide some forward-looking comments on that.

The second thing I wanted to ask you goes back to, as of this time last year when we also talked about CapEx, and back then you indicated initially that your intention was to keep CapEx flat. And there was very much the impression, or at least it's sort of my reading of the situation, that a lot was locked in, and that in a short period of time you can't really do all that much. Yet if you then look at the actual amount of CapEx savings that have been realized this year are rather large. So clearly it seems that there was some flexibility that emerged during the course of the year that it seems you didn't foresee in January. And I was wondering where that flexibility is and what at some point made you able to make the reductions in CapEx that in January 2015 still looked more rigid, so to say?

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks, Martijn. I'll take the second one, and Simon can talk in a bit more detail to the Downstream point. I think sort of despite what Simon said in response to Thomas's first question, I do think before we got the messaging wrong in January, right? So we've said that since. Indeed, we did give the impression that we were not going to move from a number and that we were basically in a wait-and-see mode. I think that impression was wrongly created, was certainly not the intention of the messages that we had. Because in reality what we said is it's not going to be more than $35 billion, and we'll manage it down to a level that we think is appropriate for the year, but we will not prematurely cancel all sorts of things and incur your regrets on day one. We will make the decisions one decision at a time. And that's what we ended up doing.

And of course, a number of things happened during the year. First of all, we worked very hard on significant cost take-outs. We ended up just for the year reviewing 7,000 contracts in our contracting and procurement department mostly focused, of course, on the Upstream, representing about 80% of the Upstream project spend to see what we could gain there in terms of capital efficiencies. And we worked very, very hard on the individual project options. Do they make sense? Can we postpone them? Can we maybe, in some cases, rework unless we started doing? And is this project as competitive as it can be given the falling oil price environment and the room that is opening up in the supply chain? And a lot of that is, indeed, sort of back to the agility that Simon mentioned. We were very, very keen to make sure we made the right decisions one decision at a time rather than up front, regretting everything and then see what happens.

And it showed not only in our ability to act, but I think it also shows how much flex there really is in the system if you want to live within your means, which is exactly what we, of course, set out to do. Remember the gearing we didn't move at all in the first three quarters of the year. And then the last quarter it edged up 1.8 percentage points.

Now we will be pretty much in the same game in 2016. Don't ask me exactly how that will go because, again, it will be one decision at a time. But generally it will be the same recipe. Whatever we can postpone, we will postpone. And we will only go ahead with projects that are both affordable or it is use it or lose it, and they are going to be competitive in the environment that we envisage. But some of it is going to be a bit clear or rather unclear to see; take the spend on BG. We don't know exactly what it is. We don't know exactly what sits in there. So we will have to wait for the 15th or 16th of February before we start getting access to that.

We have decent ideas, so therefore we are okay to mention a $33 billion number at this stage. But what it really will be I'm afraid you will have to sort of wait for how the year plays out, bearing in mind that we have at least one year of pretty good track record in this space.

But let me hand over to Simon to talk a bit about the Downstream, which will be an important part of this year as well.

Simon P. Henry - Chief Financial Officer & Executive Director

Many thanks, Ben. Thanks for the question, Martijn. The Downstream had, I think, its best of the year in terms of underlying performance. It was aided by the, in practice, better refining margins then we've seen since maybe 2007, 2008 period. And towards the end of the year the refining margins did come off a bit, although they have come back a bit at the beginning of January in this year.

The actual impact for the quarter in margins then is maybe $100 million, $100 million-plus. But the actual performance of Shell refining, and chemicals for that matter, was less good in the fourth quarter than it had been during the year. And we also had a higher level of planned turnaround activity, which I think we had already flagged. It was partly because we declared some from the earlier part of the year when margins are more attractive. So overall we're probably a few $100 million down across refining and chemicals relative to where we have been earlier in the year for those two reasons.

Marketing margins were also under a bit of pressure in the fourth quarter. But over the year as a whole, marketing activity showed a very strong performance with new product introductions, V-Power Nitro, new lubricants, new markets. And we're about $500 million up on the year in the marketing performance year-on-year.

So quite solid, sustainable performance improvements from Downstream. Remember, around half of or maybe half of the – more than half of the total Downstream is not linked to that volatile refining margin. It's really solid, predictable, ratable income stream.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks, Simon. Thanks, Martijn. Can I have the next question, please, operator?

Operator

Certainly. We will now take our next question from Asit Sen of CLSA. Please go ahead.

Asit Sen - CLSA Americas LLC

Thanks. Hello, everyone. So two questions, one on Brazil and a second on Nigeria, if I may. You have a small project in Brazil that's starting, BC-10 Phase 3. And then Libra is in the works for a 2018 start. Could you talk about the current operating environment, how you see the outlook unfolding? So that's on Brazil.

And second on Nigeria, surprised by the postponement of Bonga South West given the relative size of the project and your footprint in the region. Could you speak to kind of the relative cost structure in Nigeria in the current operating environment, please?

Ben van Beurden - Chief Executive Officer & Executive Director

Yeah. Okay. Thank you very much. I'll have a first go at both of them. And perhaps Simon wants to add a few points as well. Yeah. Brazil is, of course, now becoming a key country for us. Of course, it was always an important country, a country that we have operated in for 104 years, so we know it quite well. Indeed, BC-10 and, of course, coming up Libra, very important projects. And of course it will be significantly more with the addition of the BG division.

So we do pay a lot of attention to the environment, what is happening in Brazil, not just the general macroeconomic environment but also what is happening in terms of fiscal stability and other factors. And of course we have been very, very close with the Brazilian government to understand what their intentions are to get assurances from them in areas where we needed them. And you will have seen in the media that quite a few of the plans that – or plans, the aspects that we're talking about over the Christmas period have now also gone away.

But Brazil will remain, of course, a key, critical country for us. So we will continue to pay great attention to what is happening there. In terms of our partner, Petrobras, yes, they go through a very difficult phase as well. But at the same time, they are a technically competent player. They have been very clear in all the restructuring and reprioritization that they have done within their portfolio that the pre-sold portfolio remains crucially important and that is also very clear within the government that that should be a priority.

In general, the entire industry is very clearly a priority for the executive branch because they realize that this is going to be a key element on which the economy will float. And therefore I think we are fundamentally still in a strong and advantaged position. It doesn't mean that we should be complacent, as we are never complacent in any of the big countries where we have significant positions.

Nigeria, Bonga South West, indeed fundamentally ought to be a good project. It has very strong fundamentals. It will operate in existing PSC. It is taking advantage of very strong organizational and other infrastructure that we have in the country. But again, we need to get to a point that we believe not only is the project affordable – by the way, affordable for both the government and for Shell – but also competitive.

Bonga South West came back in its first presentation in the early part of 2015 when we saw a capital number which was sort of reminiscent of $100 oil, and we have to work that down to a level that is much more aligned with the outlook that we currently have, the environment that we are seeing. And we are very clear between not only the oil partners but also with the government that this is something that we want to do because the spend that you will have in this project, but of course because of the fact that it fits in PSC, so at the expense of government revenue. So I don't think we are at that point at this point in time, and therefore I think this will only materialize as a sort of rerun in 2017. But the fundamentals of the project, in my mind, as you rightly point out, they remain strong.

Asit Sen - CLSA Americas LLC

Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Operator, can I have the last question? Is there any further questions?

Operator

We have no further questions at this time. But again, ladies and gentlemen – apologies. We will now take our next question from Alastair Syme of Citi. Please go ahead.

Alastair R. Syme - Citigroup Global Markets Ltd.

Thank you. Hi, Ben and Simon. Can I clarify the mechanics of how you're going to put together the business plan ahead of the 7th of June, when I guess you get to see the assets from the 15th of February? You must do some sort of re-running of business plans. And I guess there's a macro assumption, a long-term planning assumption that will be implicit in that. I know you're not disclosing specific thoughts on the macro, but will you be using the same macro deck that you used for the business plan last summer?

Simon P. Henry - Chief Financial Officer & Executive Director

That one's probably for me, Alastair. It's a great question. Thank you. We obviously put our plan together back in October, November. We actually have more than one price line in there in terms of what we can do, what we need to do. I happen to know that BG has done pretty much the same thing with relatively similar price lines. So we're both working on one forward projection, which is quite similar, as the baseline, and both of those have – and what would we do if the price turns out to be at the lower level.

But legally and formally, we do not have access to the details of the BG planning information until the 15th of February. So we won't actually get under the hood. So the best estimates that we can make, pretty much the same as yourselves, and that probably goes for a few months is pro forma at the two companies reflects $1 billion of depreciation of the PPA, the purchase price premium, that we are going to pay. And we'll confirm that figure in the Q1 results I expect, as we won't know that until we've put the accounting systems together. But it's going to be about $1 billion a year.

Take off some synergies and add on a bit of costs for one-off activities associated with the integration, which you said the $1 billion and a little bit, $1.2 billion, $1.3 billion, not all incurred this year, though. The synergies, $3.5 billion by 2018, we should deliver some of them this year. It may not offset all of the one-off costs this year. But we should be in a good position to have a net positive contribution in 2017 and obviously the full contribution in 2018.

When we literally do, as you say, get together, and have spent the weekend, the three days, quite a bit of it was spent doing this, the qualitative identification of opportunities. So precisely how and who is going to deliver the cost synergy from both sides of the fence but also what are the value opportunities beyond, let's say, the cost synergy. And that is something that we're looking to nail down at least in qualitative and to the maximum extent possible quantitative terms by the Capital Markets Day in June. Some of it will be directional by then, but that essentially is going to be the process going forward.

Then of course we put our plans together towards the end of the year. And that actually is a bit of a watershed moment. It will be the last time people are talking about Shell and BG. We will be one company by then, and it will give us, as of 1st of January 2017, one view of the future and one collective sense of accountability to delivering it. And interestingly, going into that process, we know what the outcome needs to be because we've already made the commitment externally on things like earnings per share, accretion, the financial framework, the divestments, and where we expect to take the combined company in the coming years.

So I hope that helps, Alastair, and also gives a bit of a feel for what you might see Q1, Q2. It's not going to be easy to predict or to estimate even for the listeners on the call or for us in the company. I hope this is really ensuring that we are able to report for the first quarter with a full level of integrity and that we operate the asset base we have on day one.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks, Simon. Thanks, Alastair. I believe we have a few more questions. So, operator, can we have the next question, please?

Operator

Certainly. Our next question comes from Lydia Rainforth of Barclays. Please go ahead.

Lydia R. Rainforth - Barclays Capital Securities Ltd.

Thanks and good afternoon. A couple of questions if I could. The first one is just on OpEx, and the $3 billion cost-savings target.

Is it getting easier, do you think, to make those cost savings come true, or as the organization is just getting used to working in a slightly different way? Or is it actually getting just more difficult given how much you've already taken out?

And then the second one, it's an accounting one, and Simon, apologies, I should probably know the answer to it already. But within the fourth quarter cash flow numbers, was there any particular cash impact from any of the restructuring charges that are associated with the cost savings? Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks, Lydia. Let me take the first question and then maybe Simon wants to add his perspective to it and also talk about the second one.

I think in a way it's probably getting easier. First of all, the number that we mentioned, the $4 billion cost takeout for last year is an all-in number. It's a net number. At the end of the day, our costs have come down with it, of course all the one-offs, all the specials, all the redundancy costs, all the things that basically are the price you pay for taking cost out. Of course, some of it may also reoccur in 2016, but some of it also won't occur. So in terms of headline delivery, that is sort of a bit of following wind that we have.

But at the same time, yeah, I think it's not just a matter that people are getting more practiced at cost takeout. Believe me, we didn't discover the importance of cost takeout in 2015. We have been working on it, of course, for quite some time. But I do think and as we still see quite a challenging environment, I think people are more accustomed to challenging paradigms in the supply chain and are seeing more receptiveness on the supply chain as well. So I think that makes it easier, the fact that everybody is joined up and jointly committed to doing it because there is really no alternative. I think what gets also easier is to do more fundamental supply chain transformation.

So how can we work together with some of our core suppliers, not by just putting more competitive pressure on them but finding new ways of working, taking cost out through fundamental efficiencies across the enterprise that are going to be there for years to come, also when the oil price and therefore inflationary pressures come back again.

So I do think in that sense, yes, it is easier. And in that sense, in a way I also hope that we will have a period to complete all the things that we have in motion. And that is not because I'm afraid that Shell people will sort of lapse back into perceived old behavior. I think that's not the issue we're talking about. There is just more capacity to do things differently in the industry if there is collective pressure on all of us.

So, yeah. I therefore think the $3 billion is easily doable. And on top of it, bear in mind we also have a tremendous productivity improvement that we can realize as a result of the combination with BG. In this sense, BG will do two things for us. It will give us the best-ever benchmark that you can never expect in the industry. This is not going to be some sort of benchmarking report that people say, well, there seems to be an opportunity for you here because somebody else somehow is able to do something better. We will be able to not only get these numbers, but we'll be able to work with the people to see what their different practices may be around.

And I would fully expect that there are things that we can learn from BG as well as the other way around. So it is something else in terms of benchmarking. And on top of it, it's a great opportunity to look at productivity. Can we incorporate more operational activity without really increasing the supporting cost that we had? So economies of scale.

So I think that 2016 we'll indeed see continued momentum the same way that we have had in 2015. Simon?

Simon P. Henry - Chief Financial Officer & Executive Director

So I wouldn't augment that particular answer too much. Yeah, I agree, it is getting easier. Eventually it gets harder. But for the moment there's a sweet spot because of $35 oil. Nobody needs persuading what is the right thing to do. And the opportunity that comes with BG is another great catalyst to get the organization to a better place. And one day it will get harder but good momentum at the moment.

And Q4 cash impact of restructuring, Q4 did include the cash impact of some rig cancellations associated with the Alaska program, which we provided for in the third quarter and we took in the fourth in cash terms where we effectively did end the contract. There are some fees, some deal-associated spend but not that significant. And there is severance that we've associated with the 7,000 redundancies or field people that we've previously spoken about. But in total, not that significant other than the rigs.

And so most of the one-off costs start to be incurred going forward. And we'll always have one-offs moving forward, appraising of tax payments as well of course in the fourth quarter. So that does impact somewhat on the fourth quarter cash flow. But overall the fourth quarter cash flow and the annual cash flow showed good correlation with the earnings, though it's quite – it's a solid underlying performance that we've seen on the cash, $30 billion in, and it gave us the $7.5 billion of free cash flow in the year once we take investments and divestments into account.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks, Simon. Thanks, Lydia. Operator, can I have the next question, please?

Operator

Our next question comes from Biraj Borkhataria of Royal Bank of Canada. Please go ahead.

Biraj Borkhataria - RBC Europe Ltd. (Broker)

Hi. Thanks for taking my questions. Two, if I may. The first one, just a Q4-specific one. You had a particularly strong quarter for the Integrated Gas business. But I gather there's some FX impacts in there. But I was wondering if you could give any color on the actual trading performance in the fourth quarter, because one of your peers actually highlighted a particularly weak quarter in Q4.

And then the second question was looking ahead to 2016 and the gearing numbers, you've mentioned a few times that a low to mid-20% of gearing is about as far as you want to go. And I wonder, if the disposal market is not as strong as you would like it to be, how far would you be willing to let that drift upwards if you're not getting the value that you want for the assets you want to sell? Thanks.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks, Biraj. Simon, can I hand over to you?

Simon P. Henry - Chief Financial Officer & Executive Director

Thanks, Biraj. Yes, in Australia the deferred tax asset in Integrated Gas had a positive movement in the quarter, a couple of hundred million. Other than that, the gas business is a strong business. We have good long-term contracts in place.

Overall for the year, the realized price in LNG was just under $8 compared to something over $13 the year earlier. And it's the mix in that marketing – or the marketing mix that gives us the resilience and the diversity to be able to not only achieve good results in a tough environment in IG but also the platform to develop the new contracts, as I've talked about in the speech.

The gearing, low 20%, you're absolutely right. I mean, mid-20s% is about as far as I might like it to go. Looking at the credit rating metric themselves, we get stretched in the mid-20s%, but also in terms of the flexibility on the cash flow. And the opportunity that you could take, mid-20s% is probably as high as we feel comfortable. We do not intend to be giving assets away just to meet the gearing targets at all. Maybe Ben wants to take up some of that, the philosophical and value-driven elements of the divestment program.

But we need to make a balance, taking all factors into account. The first point of call has to be reduce the OpEx. Second point of call, manage carefully the CapEx and the divestments, most likely focused in the first instance on Downstream. And then whatever other levers we can pull. So Ben, I'm not being philosophical; it's an important thing.

Ben van Beurden - Chief Executive Officer & Executive Director

Yeah. I think that is indeed the philosophy that we also laid out in the context of the deal. I think on the disposals, I think it is probably fair to say that the $30 billion that we talk about for the next three years is most likely going to be a little bit more backend-loaded than frontend-loaded. So I don't think this is going to be $10 billion, $10 billion, $10 billion. It may well be a bit less than $10 billion in the first year. And definitely it will be more dominated by Downstream, Midstream assets in the beginning than in the end. But we do have a great handle on what sits in the $30 billion than we have the next $30 billion waiting. And here we're talking just about Shell legacy assets only.

And the first $10 billion, $15 billion that we are focusing, by and large these assets that have very low sensitivity to the oil price and indeed have a very large Downstream and Midstream component here. So I do think we can execute that program over a three-year period. Simon says there is every intention to have us full value for it. This is not a distress fire sale, and it's not the only lever we have. So I am indeed quite confident that the financial framework will stand that test over the next few years as well.

Okay. Thanks, Biraj. Can I ask the operator whether there's a next question?

Operator

Our next question comes from Irene Himona of SGS. Please go ahead.

Irene Himona - Société Générale SA (Broker)

Thank you. Good afternoon, gentlemen. On slides 29 and 30 you show the split of cost cutting in Upstream and Downstream. You show $1.7 billion Upstream, $1.6 billion Downstream. I presume these reconcile to the $4 billion overall reduction. But clearly, relative to the smaller size of the Downstream business, it seems that the cost cutting was much more intense there. And I know that over the years Downstream free cash flow was around $7 billion; actually it paid 80% of your cash dividend cost.

So I had two related questions. Firstly, do you see this balance of cost between Upstream and Downstream changing after BG? Do you expect more of the $3 billion targeted cost cutting this year from the Upstream? And then secondly, given those quite intense obviously Downstream cost reductions, are you maintaining the targeted 10% to 12% sort of normalized return at midcycle margins? Or do you think the portfolio can actually do better than that, which is material in an environment of margins sort of coming off some pretty record levels last year? Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks, Irene. Let me just give you one clarification. The $3 billion that we talk about is legacy Shell cost. We do not know in great detail of course what the cost structure and makeup and allocation is within the BG portfolio. So that will only come a little bit later. What we do of course know is that there is synergies between these two that can be added on top of that $3 billion. Then of course there will be quite a few moving parts because these synergies will also come with some one-off charges. So it will be, I'm afraid, of course in this transition year a few puts and takes and we will try to explain it as best as we can as the year goes on. But $3 billion is the number that we talked to on the Shell side of the merger.

Simon, you want to talk a little bit more about these waterfalls that we have in charts 29 and 30?

Simon P. Henry - Chief Financial Officer & Executive Director

Sure. You're absolutely right, Irene, the performance, and this is a net performance remember in 2015, looks better in Downstream than in the Upstream. Remember this is all-in. It includes a bit of FX, and the FX was more of a contributor in Downstream than the Upstream, but also includes the one-offs, and the one-offs were more heavily in the Upstream than the Downstream.

So in terms of underlying improvement, it's about $3 billion like-for-like and half is in 2015 and that's the figure for 2016. In practice, it is loaded towards the Upstream in 2015. And that's just about the phasing of the programs that I talked about earlier, right? A lot of good groundwork than in the Upstream in 2015, but this should start to make more of a difference and therefore proportionately higher contributions in 2016. And of course any synergies or other improvements in the BG combination would also appear in the Upstream side. In terms of performance improvement, the Upstream have the greater potential in that sense. And the 10% to 12%, I think we had a good year last year in Downstream. It's fair to say the same. So back to refining margins, we've learned in the past you need to take advantage of those margins.

In 2015 we did capture the margins and a little bit more following some of the changes we made, or Ben made actually, to the way we managed the value chain in the Downstream back in 2012, 2013. So that's a structural improvement. That was always intended to support the 10% expectation or, in fact, the $10 billion of cash flow from ops that the Downstream is expected to make through cycle.

No changes also in strategic intent or the capability of the portfolio. I think last year I was talking in greater confidence in delivery in a more challenging environment. But last year was relatively benign, and we don't know what it is going to be today, but we are sure we are in a much better place to capture what margin is available in the market, not just in refining but in the marketing business as well. If there is any update, this is something I think we'll come out later in the year.

Ben van Beurden - Chief Executive Officer & Executive Director

Yeah. Okay. Thanks, Simon. Thanks, Irene. Operator, can I have the next question, please?

Operator

Certainly. Our next question comes from Christopher Kuplent of Bank of America Merrill Lynch.

Christopher Kuplent - Bank of America Merrill Lynch

Yeah. Thank you. I'll keep it to just one question. Just wanted to ask whether there is a particular reason why you in your presentation, Ben, dropped the reference to future ambitions regarding share buybacks. Just wanted to see where your head is on that topic at the moment and particularly how you're thinking about continuing with the script going forward, maybe linked to oil prices or not. Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks, Chris. Don't read anything in the fact that it wasn't on the slide. It is there. We will do it. There's quite a few other commitments and statements that we made in the original $2.7 billion and in the prospectus that were not on that particular slide. The entire package of commitments and promises is still completely intact.

Christopher Kuplent - Bank of America Merrill Lynch

Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Operator, can I have the next question, please?

Operator

Our next question comes from Iain Reid of Macquarie. Please go ahead.

Iain S. Reid - Macquarie Group

Yeah. Hi, gentlemen. Ben, just coming back on the previous question in terms of commitments, et cetera. I noticed on the dividend you called that an intention rather than a commitment, and I wonder whether you're prepared to reiterate that even if oil prices remain at this sort of level you still intend or commit, perhaps better, to pay a similar level of dividends, say, in 12 months' time as you are paying today.

And on the second question, just interested on the startup date you've got on your project, that slide there. Has Prelude gone back? You're now showing it as a 2018-plus project. It was not that long ago when you were telling us that 2016 was more likely the startup date.

Ben van Beurden - Chief Executive Officer & Executive Director

Yeah. Thanks, Iain. On dividend, really no change. No change in the commitments that we have made. We have said we underwrite the dividends for seven quarters in a row. $1.88 for last year, at least the demand for this year. There is no change to that. And in terms of our overall dividend policy after this year, also no change to the dividend policy that we had before.

So don't read anything in it. There is in that sense no change from the promises that we made as well as no change from the way we have approached the dividend in the past. We understand the importance of the dividends. We understand our own capacity to pay the dividend. And therefore there is no change in whatever it is that we have said before.

On Prelude, we always said material cash in 2018. And that is pretty much what we are saying today. So also there no real change. Okay. Thanks, Iain. Can I have the next question, please?

Operator

Our next question comes from Gordon Gray of HSBC.

Gordon M. Gray - HSBC Bank Plc (Broker)

Thanks. Good afternoon, gentlemen. It's a Downstream question actually. You've been through a process of rationalizing part of your Downstream business, pushing through capital efficiency. My question is if I look at your slide on CapEx, it looks like in rough terms you're planning to spend about $7 billion across the whole Downstream business, which is compares I guess to a long-run history of more like $5 billion. So maybe you can just let us know how much of that increase is maybe dependent on the FID in Pennsylvania and/or what else is leading to what looks like an underlying increase in investment in the Downstream.

Ben van Beurden - Chief Executive Officer & Executive Director

Yeah. Thanks, Gordon. Indeed, it's – Downstream typically has, by and large, its capital budget made up of sort of stay-in business CapEx, so rather high-asset-integrity type CapEx. Turnarounds that we capitalize, catalyst change that we capitalize, and then of course a whole raft of small projects that are basically also there to sort of defend value. So it is continuing to invest in our retail network, it's continuing to invest in our lubricant blending plants, refineries, chemical plants, to just basically stand still or to capture a little bit of value here and there by debottlenecking, et cetera.

If you add all of that up, and if you add on top of that a little bit of value growth, you do indeed come to about $5 billion. Sometimes there is slightly bigger projects in there, sort of like $80 million, $100 million, $200 million projects. And by and large, it's made up of much smaller projects.

Now we have indeed a few opportunities to invest in very advantaged projects. They are predominantly in petrochemicals. So you mentioned one, the Pennsylvania cracker. There's another one we are working on, which is the expansion of the Nanhai complex in Guangdong. There are opportunities that we have just taken FID on in the Gulf of Mexico. Again, on the basis of very strong advantage that we already enjoy also on a very strong foundation that we have built over the last years.

And therefore you will see a little bit more sort of value growth in that portfolio going forward. Depending a little bit on what we will do with some of these projects that will indeed come up for investment decision, you will see a step-up in spend in the Downstream predominantly really in petrochemicals, although there are a few strong refining projects that we have take on as well.

Earlier in 2015, we took an investment decision on a hydrocracking de-bottlenecking in Scotford, a project that sort of blows the lights out in terms of their returns simply because again the advantaged position that that refinery has upgrading further synthetic crude. We are going to invest in furnace. Again, a modest investment in terms of absolute capital numbers. But it's going to significantly improve the group flexibility because we are going to open up the operating window to take heavy crudes for heavy conversion.

So very efficient investment, and there will be more of these things that we are now confident to do because we know that we have brought our asset base back to an asset base that is structurally sound and fundamentally advantaged, provided indeed we put the investment in there to capture that advantage. So a little bit of both in the Downstream in my mind is the sensible thing to do. And it also doesn't sit badly next to of course a major growth spurt that we will have taken in expanding our Upstream capital vis-à-vis the acquisition.

Gordon M. Gray - HSBC Bank Plc (Broker)

Okay. That's great. Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks, Gordon. Can I have the next question, please?

Operator

Our next question comes from Bert van Hoogenhuyze of Stroeve. Please go ahead.

Bert Van Hoogenhuyze - Stroeve

Good afternoon, gentlemen. Two questions. First, your working capital has been reduced by $1.6 billion. And in view of the things you said about suppliers showing more receptiveness on the one hand; on the other hand of course some suppliers are more or less on the brink of bankruptcy. So the ability to suffer more cost reductions is probably limited. In that respect, would you expect further working capital reduction in the same record for the coming quarters? That's the first question.

And the second question was, I was a little bit surprised by the number, the gas prices you made in Asia. Does this mean that indeed contract prices are adapting much faster than we really thought to the lower oil prices?

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks very much, Bert. Let me make a few comments on the first question and then I'll ask Simon to complete it and take the next one. You're absolutely right that we need to be – we need to take a long-term view on how we deal with the supply chain. And so again, as I said earlier on, this is not a matter of taking our – all our competitive rates in the current environment that we have and put more pressure on our suppliers because ultimately we suffer from that as well, either because it will quickly bounce back because it is temporal or more fundamentally, we basically destroy capability that we all desperately need again when the oil price springs up and we will all be wanting to pursue a more aggressive growth path as an industry. So, therefore, the need to really work together with our supply chain partners to come with more structural solutions.

Working capital reduction will remain an important focus, but it's not just working capital reduction looking at accounts payable and receivable. It's also working on stocks, and there are still more we can do there, particularly in the non-trading area. There are still areas where we can bring inventory levels down in the supply chain by operating more efficiently.

Simon referred earlier on to the fact that we have been changing the operating model in the Downstream where a lot of our working capital sits in oil and product stocks. Basically we take advantage of our trading capability to really optimize these supply chains. And then on top of it, we trade around these supply chains. There is more we can do to do that with a lower inventory level in general. But we have to be careful that we do not take out too much working capital because actually our trading model of course relies on making a return on working capital. So too much working capital reduction basically also takes the resource away to make money with. But in the main, I would expect there to be further areas for us to harvest working capital reductions also in 2016. Simon?

Simon P. Henry - Chief Financial Officer & Executive Director

Just on the gas price movement, remember in the LNG market where 85% of our sales are linked to long-term contracts and within that probably around 70% is directly linked to oil, or 70% of the 100. So there's a very close relationship with some time lag, sometimes three-month to six-month time lag. And I think the prices have pretty much followed that route. Some of the realized prices that we report in the supplementary information actually are not linked to LNG, they are domestic gas prices so they don't necessarily fall as far as the oil price has gone or impact with the same phasing. So gas pricing is quite a mix over a period and is rather less overall than the oil production to price movements because of the different elements. I can't say too much more about that on specific pricing.

Other than that, as we integrate BG some of these dynamics will change and we'll need to be more helpful in terms of guiding as to what the impact of changes that you can see could be on the performance of the company.

Ben van Beurden - Chief Executive Officer & Executive Director

Thanks, Simon. Thanks, Bert. Operator, can I have the next question?

Operator

Our final question comes from David Gamboa of TPH. Please go ahead.

David Gamboa - Tudor, Pickering, Holt & Co. International LLP

Thanks. Good afternoon. I have two questions, please. One on the Downstream side of things. So looking at Q4 cash flow in the Downstream, it was quite weak excluding working capital benefits coming that you just recently talked about. I'm just wondering if you could provide some color around if we stay at current refining and pet-chem margin levels, what is the cash flow expected in 2016 from chemicals and Downstream? I appreciate we will get more visibility on this when you change your reporting structure, but if you could provide a bit of color on the 2016 development of the Downstream cash flow.

And on the CapEx side of things, could you break down out of this $33 billion how much is going into the Upstream base spend? And what is your expected underlying managed decline rate taking into account BG? Thank you.

Ben van Beurden - Chief Executive Officer & Executive Director

Thank you, David. Simon, why don't you take them?

Simon P. Henry - Chief Financial Officer & Executive Director

So Q4 cash flow, you note, you generally don't need to just look at the working capital, you need to put in adjustments in for the cost of sales adjustment as well for any short-term period in terms of site cleaning up. The difference between cash flow reported in the earnings and I think the differential is maybe not so high if you look at it in that sense.

The go-forward, by and large, cash from ops tracks earnings in the Downstream, other than working capital on the inventory, the total inventory, the pace of argument is roughly 100 million barrels impacted and this will lead you therefore to use the average price in the last month of the quarter to approximate what's the working capital impact on inventory. So that's maybe helpful.

Upstream CapEx, it's not a dry line cut-off between asset integrity, care and maintenance. But a small project has been running around the $8 billion to $9 billion level. It's coming down I think it's fair to say over time partly because the nature of the portfolio has changed and on average becoming a less mature portfolio because we've been divesting assets or actually just decommissioning some of the older assets or taking a significant amount of cost out of that activity, such as in the North Sea.

The decline rate typically has been, and we always say absent new investments, 4% to 5% across the portfolio. But that varies. It can be 15% in deepwater. It can be close to 0% on an LNG project. As BG comes in, I'll reserve judgment until we actually have the numbers. But the key part of that portfolio, if it's LNG for example in Australia, while you have the deep drilling it's technically decline-free. And in Brazil, many of the individual wells are almost decline-free. So just at least in principle, to be confirmed in practice, the BG portfolio is on average less mature and less declined than the Shell portfolio. So it should help our average decline rates.

So today we talk about 4% to 5%. In practice it's been closer to 4% recently. And one would hope that we'll see that reduce a little further as we go forward. It will also be helped by the nature of some of our own Shell projects coming onstream such as Gorgon, Kashagan and the North Sea projects, Galleon, all of which are long-life assets would help stem the decline rate.

Ben van Beurden - Chief Executive Officer & Executive Director

Okay. Thanks, Simon. David, thank you very much. And thank you all for your questions and indeed for joining the call today. So we'll have first quarter results. They are scheduled to be announced in the 4th of May.

And then, as has been already mentioned a few times earlier in this call, we will have the Capital Markets Day on the 7th of June as well. And then of course Simon and myself and other members of the executive team will be there. And we'll all be looking forward to talking to you by then.

So thank you very much. Have a good day.

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