Shell
Annual Report 2012

Plain-text annual report

R o y a l D u t c h S h e l l p l c a n n u a l R e p o R t a n D F o R m 2 0 - F F o R t h e y e a R e n D e D D e c e m b e R 3 1 , 2 0 1 2 BUILDING AN ENERGY FUTURE ANNUAL REPORT Royal Dutch Shell plc annual RepoRt anD FoRm 20-F FoR the yeaR enDeD DecembeR 31, 2012 all ouR RepoRtS aRe available at http://RepoRtS.Shell.com  comprehensive financial information on our activities throughout 2012  Detailed operational information including maps  Report on our progress in contributing to sustainable development DownloaD ouR appS at www.Shell.com/mobile_anD_appS  company news  interactive stories about innovation  Service-station locations check ouR lateSt newS  Follow @shell on twitter  www.facebook.com/shell OUR bUsiNEssEs builDinG an eneRGy FutuRe Global eneRGy DemanD iS RiSinG anD So aRe conSumeR expectationS – moRe people want eneRGy FRom cleaneR SouRceS. at Shell we woRk with otheRS to unlock new eneRGy SouRceS anD Squeeze moRe FRom what we have. we Do thiS in ReSponSible anD innovative wayS. in builDinG a betteR eneRGy FutuRe we all have a paRt to play. Shell iS DoinG itS paRt. exploring for oil and gas producing oil and gas mining oil sands extracting bitumen Refining oil into fuels and lubricants Developing fields liquefying gas by cooling (lnG) Shipping and trading Shipping and trading producing petrochemicals Supply and distribution converting gas to liquid products (Gtl) producing biofuels Regasifying lnG Retail sales Generating wind power b2b sales chEmicAL PRODUcTs for plastics, coatings, detergents Retail sales b2b sales FUELs AND LUbRicANTs for transport gAs for cooking, heating, electrical power REgisTERED OFFicE Royal Dutch Shell plc Shell centre london Se1 7na united kingdom Registered in england and wales company number 4366849 Registered with the Dutch trade Register under number 34179503 hEADQUARTERs Royal Dutch Shell plc carel van bylandtlaan 30 2596 hR the hague the netherlands shAREhOLDER RELATiONs Royal Dutch Shell plc carel van bylandtlaan 30 2596 hR the hague the netherlands +31 (0)70 377 1365 +31 (0)70 377 4088 +31 (0)70 377 3953 (fax) or Royal Dutch Shell plc Shell centre london Se1 7na united kingdom +44 (0)20 7934 3363 +44 (0)20 7934 7515 (fax) royaldutchshell.shareholders@shell.com www.shell.com/shareholder iNVEsTOR RELATiONs Royal Dutch Shell plc po box 162 2501 an the hague the netherlands +31 (0)70 377 4540 or Shell oil company investor Relations 910 louisiana Street, 4580b houston, tx 77002 uSa +1 713 241 1042 +1 713 241 0176 (fax) ir-europe@shell.com ir-usa@shell.com www.shell.com/investor shARE REgisTRATiON equiniti aspect house Spencer Road lancing west Sussex bn99 6Da united kingdom 0800 169 1679 (uk) +44 (0)121 415 7073 +44 (0)1903 833 113 (fax) For online information about your holding and to change the way you receive your company documents: www.shareview.co.uk AmERicAN DEPOsiTARy shAREs (ADs s) the bank of new york mellon po box 358516 pittsburgh, pa 15252-8516 uSa +1 888 737 2377 (uSa) +1 201 680 6825 (international) shrrelations@bnymellon.com www.bnymellon.com/shareowner REPORT ORDERiNg order@shell.com +31 (0)72 567 1001 annual Report/20-F service for uS residents +1 888 301 0504 Designed by Studio Dumbar printed by tuijtel under iSo 14001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2012 Commission file number 1-32575 Royal Dutch Shell plc (Exact name of registrant as specified in its charter) England and Wales (Jurisdiction of incorporation or organisation) Carel van Bylandtlaan 30, 2596 HR, The Hague, The Netherlands Tel. no: 011 31 70 377 9111 royaldutchshell.shareholders@shell.com (Address of principal executive offices) Securities registered pursuant to Section 12(b) of the Act Title of Each Class American Depositary Shares representing two A ordinary shares of the issuer with a nominal value of €0.07 each American Depositary Shares representing two B ordinary shares of the issuer with a nominal value of €0.07 each 1.875% Guaranteed Notes due 2013 4.0% Guaranteed Notes due 2014 0.625% Guaranteed Notes due 2015 3.1% Guaranteed Notes due 2015 3.25% Guaranteed Notes due 2015 1.125% Guaranteed Notes due 2017 5.2% Guaranteed Notes due 2017 4.3% Guaranteed Notes due 2019 4.375% Guaranteed Notes due 2020 2.375% Guaranteed Notes due 2022 2.25% Guaranteed Notes due 2023 6.375% Guaranteed Notes due 2038 5.5% Guaranteed Notes due 2040 3.625% Guaranteed Notes due 2042 Name of Each Exchange on Which Registered New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: none Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: none Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. Outstanding as of December 31, 2012: 3,706,535,798 A ordinary shares with a nominal value of €0.07 each. 2,599,337,678 B ordinary shares with a nominal value of €0.07 each. ‘ No Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. If this report is an annual or transition report, indicate by check mark if the registrant is not required to file to Section 13 pursuant reports Í No or 15(d) of the Securities Exchange Act of 1934. Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has ‘ No been subject to such filing requirements for the past 90 days. Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): ‘ Yes Í Yes Í Yes Í Yes ‘ No Large accelerated filer Í Accelerated filer ‘ Non-accelerated filer ‘ Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP ‘ International Financial Reporting Standards as issued by the International Accounting Standards Board If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ‘ If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Copies of notices and communications from the Securities and Exchange Commission should be sent to: Royal Dutch Shell plc Carel van Bylandtlaan 30 2596 HR, The Hague, The Netherlands Attn: Michiel Brandjes Other ‘ Item 18 ‘ ‘ Yes Í Í No acre b(/d) boe(/d) MMBtu mtpa per day scf(/d) PRODUCTS GTL LNG LPG NGL 2 Shell Annual Report and Form 20-F 2012 reports.shell.com About this Report ABBREVIATIONS CURRENCIES $ € £ CHF UNITS OF MEASUREMENT US dollar euro sterling Swiss franc approximately 0.004 square kilometres barrels (per day) barrels of oil equivalent (per day); natural gas volumes are converted to oil equivalent using a factor of 5,800 scf per barrel million British thermal units million tonnes per annum volumes are converted to a daily basis using a calendar year standard cubic feet (per day) gas to liquids liquefied natural gas liquefied petroleum gas natural gas liquids American Depositary Share Annual General Meeting current cost of supplies carbon dioxide Deferred Bonus Plan euro medium-term note earnings per share health, safety, security and environment Interpretation(s) issued by the IFRS Interpretations Committee International Financial Reporting Standard(s) Long-term Incentive Plan oil mining lease Organization of the Petroleum Exporting Countries oil prospecting licence production-sharing contract Performance Share Plan research and development Remuneration Committee Restricted Share Plan United States Securities and Exchange Commission total recordable case frequency total shareholder return West Texas Intermediate MISCELLANEOUS ADS AGM CCS CO2 DBP EMTN EPS HSSE IFRIC IFRS LTIP OML OPEC OPL PSC PSP R&D REMCO RSP SEC TRCF TSR WTI reports.shell.com Shell Annual Report and Form 20-F 2012 About this Report 3 ABOUT THIS REPORT This Report serves as the Annual Report and Accounts in accordance with UK requirements and as the Annual Report on Form 20-F as filed with the SEC for the year ended December 31, 2012, for Royal Dutch Shell plc (the Company) and its subsidiaries (collectively known as Shell). It presents the Consolidated Financial Statements of Shell (pages 99-137), the Parent Company Financial Statements of Shell (pages 159-167) and the Financial Statements of the Royal Dutch Shell Dividend Access Trust (pages 171-174). Cross references to Form 20-F are set out on pages 175-176 of this Report. In this Report “Shell” is sometimes used for convenience where references are made to the Company and its subsidiaries in general. Likewise, the words “we”, “us” and “our” are also used to refer to subsidiaries in general or to those who work for them. These expressions are also used where no useful purpose is served by identifying the particular company or companies. “Subsidiaries” and “Shell subsidiaries” as used in this Report refer to companies over which the Company, either directly or indirectly, has control through a majority of the voting rights or the right to exercise control or to obtain the majority of the benefits and be exposed to the majority of the risks. The Consolidated Financial Statements consolidate the financial statements of the Company and all subsidiaries. The companies in which Shell has significant influence but not control are referred to as “associates” and companies in which Shell has joint control are referred to as “jointly controlled entities”. Joint ventures are comprised of jointly controlled entities and jointly controlled assets. In this Report, jointly controlled entities and associates are also referred to as “equity- accounted investments”. The term “Shell interest” is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in a venture, partnership or company, after exclusion of all third-party interests. Except as otherwise specified, the figures shown in the tables in this Report represent those in respect of subsidiaries only, without deduction of the non-controlling interest. However, the term “Shell share” is used for convenience to refer to the volumes of hydrocarbons that are produced, processed or sold through both subsidiaries and equity-accounted investments. All of a subsidiary’s share of production, processing or sales volumes are included in the Shell share, even if Shell owns less than 100% of the subsidiary. In the case of equity-accounted investments, however, Shell-share figures are limited only to Shell’s entitlement. In all cases, royalty payments in kind are deducted from the Shell share. The financial statements contained in this Report have been prepared in accordance with the provisions of the Companies Act 2006 and with International Financial Reporting Standards (IFRS) as adopted by the European Union. As applied to the financial statements, there are no material differences from IFRS as issued by the International Accounting Standards Board (IASB); therefore, the financial statements have been prepared in accordance with IFRS as issued by the IASB. IFRS as defined above includes IFRIC. Except as otherwise noted, the figures shown in this Report are stated in US dollars. As used herein all references to “dollars” or “$” are to the US currency. The Business Review and other sections of this Report contain forward- looking statements (within the meaning of the US Private Securities Litigation Reform Act of 1995) concerning the financial condition, results of operations and businesses of Shell. All statements other than statements of historical fact are, or may be deemed to be, forward- looking statements. Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among other things, statements concerning the potential exposure of Shell to market risks and statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions. These forward- looking statements are identified by their use of terms and phrases such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “goals”, “intend”, “may”, “objectives”, “outlook”, “plan”, “probably”, “project”, “risks”, “scheduled”, “seek”, “should”, “target”, “will” and similar terms and phrases. There are a number of factors that could affect the future operations of Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this Report, including (without limitation): (a) price fluctuations in crude oil and natural gas; (b) changes in demand for Shell’s products; (c) currency fluctuations; (d) drilling and production results; (e) proved reserves estimates; (f) loss of market share and industry competition; (g) environmental and physical risks; (h) risks associated with the identification of suitable potential acquisition properties and targets, and successful negotiation and completion of such transactions; (i) the risk of doing business in developing countries and countries subject to international sanctions; (j) legislative, fiscal and regulatory developments including regulatory measures as a result of climate changes; (k) economic and financial market conditions in various countries and regions; (l) political risks, including the risks of expropriation and renegotiation of the terms of contracts with government entities, delays or advancements in the approval of projects and delays in the reimbursement for shared costs; and (m) changes in trading conditions. Also see “Risk factors” for additional risks and further discussion. All forward-looking statements contained in this Report are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Readers should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of this Report. Neither the Company nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information. In light of these risks, results could differ materially from those stated, implied or inferred from the forward-looking statements contained in this Report. This Report contains references to Shell’s website and to the Shell Sustainability Report. These references are for the readers’ convenience only. Shell is not incorporating by reference any information posted on www.shell.com or in the Shell Sustainability Report. Documents on display Documents concerning the Company, or its predecessors for reporting purposes, which are referred to in this Report have been filed with the SEC and may be examined and copied at the public reference facility maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, USA. For further information on the operation of the public reference room and the copy charges, call the SEC at 1-800-SEC-0330. All of the SEC filings made electronically by Shell are available to the public on the SEC website at www.sec.gov (commission file number 001-32575). This Report is also available, free of charge, at www.shell.com/annualreport or at the offices of Shell in The Hague, the Netherlands and London, UK. Copies of this Report also may be obtained, free of charge, by mail. 4 Shell Annual Report and Form 20-F 2012 reports.shell.com About this Report TABLE OF CONTENTS 5 6 8 8 10 11 13 16 20 35 41 42 46 47 51 52 55 56 60 77 89 96 97 98 138 157 158 168 169 170 175 177 178 Chairman’s message Chief Executive Officer’s review Business Review Performance indicators Selected financial data Business overview Risk factors Summary of results and strategy Upstream Downstream Corporate Liquidity and capital resources Our people Environment and society Section 13(r) of the US Securities Exchange Act of 1934 disclosure The Board of Royal Dutch Shell plc Senior Management Report of the Directors Directors’ Remuneration Report Corporate governance Additional shareholder information Report on the Annual Report and Accounts Report on the Annual Report on Form 20-F Consolidated Financial Statements Supplementary information – oil and gas (unaudited) Independent Auditors’ Report to the Members of Royal Dutch Shell plc Parent Company Financial Statements Independent Auditors’ Report to Computershare Trustees (Jersey) Limited as Trustee of the Royal Dutch Shell Dividend Access Trust Report of Independent Registered Public Accounting Firm Royal Dutch Shell Dividend Access Trust Financial Statements Cross reference to Form 20-F Exhibits Signatures reports.shell.com Shell Annual Report and Form 20-F 2012 Chairman’s message 5 CHAIRMAN’S MESSAGE In 2012, we continued to deliver on our strategy in the face of an uncertain economic environment. At Shell, we naturally pay close attention to short-term economic conditions, but we take a long-term, strategic view of the Company’s development. We continue to invest in, and maintain, a diverse portfolio of assets, despite economic headwinds. This gives us a resilience that enables us to build for the future: we can continue to develop major projects to help meet rising energy demand, while operating a global network of refineries and chemical plants that help us derive maximum value from the resources we produce. We balance growth opportunities and investment returns, while continuously seeking to improve operational safety standards, competitiveness and innovation. The global economic growth rate for the year fell slightly, to an estimated 3.2% from 3.9% for 2011. The average Brent crude oil price for the year was $112 per barrel, very close to the figure for 2011. Our dividends in 2012 increased to approximately $11 billion, making them the largest in our sector. We expect to increase dividends for the first quarter of 2013 by 4.7%, compared with the same quarter of 2012. Energy and climate Our solid foundations and strategy will enable us to continue to grow in a volatile world facing many difficult challenges. One of the greatest of these challenges is how to meet rising energy demand, while significantly reducing carbon dioxide (CO2) emissions. Shell estimates that by 2050, global energy demand could increase by up to 80%, as living standards rise and the world’s population grows from seven to nine billion. Renewable energy, including biofuels, will play a role. Our Raízen joint venture in Brazil turns sugar cane into ethanol, which could reduce overall CO2 emissions significantly compared with the gasoline it replaces. By 2050, renewable sources could provide about 30% of the world’s energy. However, fossil fuels are still likely to meet about two-thirds of energy demand. gas supplies there, as a result of the shale gas revolution, has lowered prices and brought other advantages. When used to displace coal in electricity generation, it could reduce CO2 emissions by about half. Now the benefits of tight and shale gas are spreading to other parts of the world, such as China, and we are at the forefront of this development. The world will also need to address tensions between supplies of the linked essentials of water, energy and food, which could become critical as the population grows. Energy is needed to produce food, and water is needed to produce energy. Shell is leading efforts to understand these stresses, and we are finding ways to recycle and use water more efficiently. Innovation has a vital role to play in the challenges we face. Since 2007, we have spent more than $1 billion a year on research and development, and continue to deploy new technology. For example, we have formed Sirius Well Manufacturing Services, an international well services company, in partnership with China National Petroleum Corporation. The 50:50 joint venture was incorporated in 2012, and will use advanced techniques to drill multiple wells for tight, shale and coalbed gas extraction in an efficient, repeatable way. It has potential across the world. B U S I N E S S R E V I E W We continue to invest in the quality of our people. Our graduate and experienced recruitment programmes, supported by structured learning and development, are focused on providing the capability we need for success in the future. Learning lessons As more accessible resources are depleted, those in challenging environments will be essential in meeting global energy demand in the decades ahead. In 2012, we took the first steps in exploring for new resources off the coast of Alaska. Later events involving our drilling ships were most regrettable. We have since decided to pause exploration drilling in 2013, to prepare plans and equipment for activity at a later stage. Alaska remains an area of high potential for Shell in the long term. We will learn lessons from our experience, and continue to explore for resources there in a careful and measured way. We will also continue to invest in developing capabilities that help us explore for energy resources in the right way: safely and responsibly, with respect for the environment and the communities we operate alongside. Natural gas, the cleanest burning fossil fuel, is central to our long-term business strategy. Shell is a major supplier of natural gas that powers homes and businesses. In North America, we are unlocking gas trapped in tight and shale rock formations. The dramatic increase in Jorma Ollila Chairman 6 Shell Annual Report and Form 20-F 2012 reports.shell.com Chief Executive Officer’s review CHIEF EXECUTIVE OFFICER’S REVIEW We made good progress in 2012 toward improving our performance, even as we dealt with continued volatile economic conditions. We are on target to meet strategic objectives. And we are delivering the projects that form the foundation of our aim to become the world’s most competitive and innovative energy company. Still, there is work to do. We are focused on further improving our operating performance in key areas, such as oil and gas production and internal processes that influence customer satisfaction. Let me highlight some of 2012’s milestones and achievements. Our overall safety performance in 2012 matched that of 2011. And we continued our strong focus on ensuring our facilities are safely run and maintained. The Shell Sustainability Report has details on our safety and environmental performance. For 2012 our earnings on a current cost of supplies basis attributable to shareholders were $27 billion. Cash flow from operating activities was $46 billion and, excluding working capital movements, was $43 billion. Net capital investment was $30 billion, as we build a solid foundation for future growth. We produced 3.3 million barrels of oil equivalent per day in 2012, up 3% from 2011 excluding the effect of divestments and exits, with important contributions from our Pearl GTL plant in Qatar, which is now ramped up, and the Pluto LNG Project in Australia, through our participation in Woodside Petroleum Ltd. Equity LNG sales volumes of 20.2 million tonnes were up 7% compared with 2011. In exploration, we continue to expand our portfolio, adding 120,000 square kilometres of new exploration acreage in 2012, including positions in liquids-rich shales. We participated in seven notable conventional exploration discoveries and appraisals, and 10 successful unconventional appraisals. Harnessing innovation We are building on our heritage as innovators and gaining public recognition for our accomplishments. Shell was one of 50 innovation leaders worldwide identified by the MIT Technology Review. We also received industry awards for our Perdido deep-water project in the Gulf of Mexico and our Prelude floating LNG project. We continue to fine-tune our global network of technology centres to support future business opportunities. That includes increasing our capabilities in India and China. In November, we laid the foundation stone for a new technology centre in Bangalore, India, which we aim to build into a world-class technology hub. Our Downstream business had a good operating performance for the year, with reduced levels of unplanned downtime. We continued to build on the strength of Shell’s brand in markets with growth potential. In Brazil our Raízen biofuels joint venture is making good progress. In its first full year of operation, the venture made a notable contribution to Downstream earnings. Last year we broke ground on Shell’s seventh lubricants blending plant in mainland China, to meet rising demand there. And we also announced plans to build a blending plant in Indonesia, another expanding market in Asia. Our accomplishments in 2012 helped underpin Shell’s strong track record since 2010. Over the last three years, our earnings on a current cost of supplies basis attributable to shareholders increased by 45% and our cash flow from operating activities increased by 69%. Compared with our major competitors, over the past three years we have delivered the highest rates of growth in earnings per share and cash flow from operating activities. Building our future Looking to the future, the projects that will help drive growth are advancing well. We have about 30 projects under construction. We produced the first oil from the Gumusut-Kakap project off the coast of Malaysia and that will ramp up once a floating production facility is in place. We added a new development phase to our Changbei tight-gas operation in China, adding nearly 1,700 square kilometres, as well as agreeing with our partner, China National Petroleum Corporation, to potentially develop the main reservoir. In October, we cut the first steel for the hull of our ground-breaking Prelude floating LNG project. In November, the hull for the Mars B project was completed in South Korea and shipped to Texas for installation in the Gulf of Mexico. And we took the final investment decision on the Quest carbon capture and storage project associated with our oil sands operations in Canada, which will reduce our environmental footprint. In all, we took final investment decisions on seven projects during the year. With our progress in 2012, the growth agenda set out at the beginning of the year is on track. It includes $175-200 billion of cash flow from operating activities, excluding working capital movements, for 2012-2015, assuming the Brent oil price remains in the range of $80-100 per barrel and conditions for North American natural gas and downstream margins improve relative to 2012. It also includes net capital investment of $120-130 billion, and a competitive dividend for shareholders. Looking further ahead, we are considering about 30 additional projects, giving us an attractive set of options for the longer term. We are now more constrained by capital than by opportunities, which allows us to focus resources where the potential for growth is greatest. Gas leadership Let me highlight one area where we are already industry leaders and that has great potential for the future: integrated gas projects, which include LNG and gas-to-liquids (GTL), such as our Pearl plant. Integrated gas projects contributed approximately 40% of our total earnings in 2012. Integrated gas builds on our strengths in exploration and production, our downstream expertise in creating and marketing high-value products, and our know-how in managing huge projects. Growth will come from Australia, where we have an additional 7 million tonnes per year under construction. Longer term, we are studying projects with capacity of another 20 million tonnes per year, so there is significant growth potential. North America is one region of opportunity. The shale gas revolution there has unlocked vast resources that provide an attractively priced feedstock. We will soon supply LNG for long-haul trucks in Canada. And we have other LNG, GTL and chemicals options on the drawing board. reports.shell.com Shell Annual Report and Form 20-F 2012 Chief Executive Officer’s review 7 B U S I N E S S R E V I E W In February 2013, we agreed to acquire part of Repsol S.A.’s LNG portfolio, subject to regulatory approval and other conditions precedent. This acquisition will extend our international LNG portfolio. I expect our strength in integrated gas projects will be one of the drivers of our earnings and cash flow in the coming decades. Strategic priorities As we push ahead with our strategy, we have taken a fresh look at how we manage our portfolio. Going forward we are using a clear set of strategic themes to drive our choices about investment, people and innovation. First we have our upstream and downstream ”engines”, which are mature businesses. They generate much of our cash flow. We will continue to invest to keep them running smoothly and to extract additional value. Next we have our growth priorities, which are three areas of great opportunity for us in the years ahead, thanks to our superior technology and innovation. They are integrated gas, deep water and resources plays, such as shale oil and gas. Finally we have future opportunities for the longer term, including the Arctic, Iraq, Kazakhstan, Nigeria, and heavy oil. We also continue to ramp up our conventional exploration activities, which we think is a cost-effective way of identifying new resources. To conclude, we are making good progress toward our objectives. We continue to work hard to improve our operating performance. And we have clear strategic priorities to drive growth and value for our shareholders. Peter Voser Chief Executive Officer 8 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Performance indicators BUSINESS REVIEW PERFORMANCE INDICATORS Key performance indicators Total shareholder return 2012 -0.2% 2011 17.1% Refinery and chemical plant availability 2012 92.9% 2011 91.2% Total shareholder return (TSR) is the difference between the share price at the start of the year and the share price at the end of the year, plus gross dividends delivered during the calendar year (reinvested quarterly), expressed as a percentage of the year-start share price. The TSRs of major publicly traded oil and gas companies can be directly compared, providing a way to determine how Shell is performing against its industry peers. Refinery and chemical plant availability is the weighted average of the actual uptime of plants as a percentage of their maximum possible uptime. The weighting is based on the capital employed adjusted for cash and non-current liabilities. It excludes downtime due to uncontrollable factors, such as hurricanes. This indicator is a measure of operational excellence of Shell’s Downstream manufacturing facilities. Net cash from operating activities ($ billion) 2011 37 2012 46 Total recordable case frequency (injuries per million working hours) 2012 1.3 2011 1.2 Total recordable case frequency (TRCF) is the number of staff or contractor injuries requiring medical treatment or time off for every million hours worked. It is a standard measure of occupational safety. Net cash from operating activities is the total of all cash receipts and payments associated with our sales of oil, gas, chemicals and other products. The components that provide a reconciliation from income for the period are listed in the “Consolidated Statement of Cash Flows”. This indicator reflects Shell’s ability to generate cash for both investment and distribution to shareholders. Project delivery 2012 90% 2011 79% Project delivery reflects Shell’s capability to complete major projects on time and within budget on the basis of targets set in the annual Business Plan. The set of projects consists of at least 20 Shell-operated capital projects that are in the execution phase (post final investment decision). Production available for sale (thousand boe/d) 2011 3,215 2012 3,262 Production is the sum of all average daily volumes of unrefined oil and natural gas produced for sale by Shell subsidiaries and the Shell share of equity-accounted investments. The unrefined oil comprises crude oil, natural gas liquids, synthetic crude oil and bitumen. The gas volume is converted into equivalent barrels of oil to make the summation possible. Changes in production have a significant impact on Shell’s cash flow. Equity sales of liquefied natural gas (million tonnes) 2012 20.2 2011 18.8 Equity sales of liquefied natural gas (LNG) is a measure of the operational performance of Shell’s Upstream business and the LNG market demand. reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Performance indicators 9 Additional performance indicators Earnings on a current cost of supplies basis attributable to Proved oil and gas reserves attributable to Royal Dutch Shell plc Royal Dutch Shell plc shareholders ($ million) 2012 27,044 2011 28,625 shareholders (million boe) 2012 13,556 2011 14,250 B U S I N E S S R E V I E W Proved oil and gas reserves attributable to Royal Dutch Shell plc shareholders are the total estimated quantities of oil and gas from Shell subsidiaries (excluding reserves attributable to non-controlling interest) and the Shell share of equity-accounted investments that geoscience and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs, as at December 31, under existing economic conditions, operating methods and government regulations. Gas volumes are converted into barrels of oil equivalent (boe). Reserves are crucial to an oil and gas company, since they constitute the source of future production. Reserves estimates are subject to change based on a wide variety of factors, some of which are unpredictable. See “Risk factors”. Operational spills of more than 100 kilograms 2012 204 2011 211 The operational spills indicator reflects the total number of incidents in which 100 kilograms or more of oil or oil products were spilled by a Shell-operated entity as a result of its operations. The number for 2011 was updated from 207 to reflect completion of investigations into spills. Employees (thousand) 2012 87 2011 90 The employees indicator consists of the annual average full-time employee equivalent of the total number of people on full-time or part- time employment contracts with Shell subsidiaries. Earnings per share on a current cost of supplies basis ($) 2012 4.32 2011 4.61 Earnings on a current cost of supplies (CCS) basis attributable to Royal Dutch Shell plc shareholders is the income for the period, adjusted for the after-tax effect of oil-price changes on inventory and non-controlling interest. CCS earnings per share is calculated by dividing CCS earnings attributable to shareholders by the average number of shares outstanding. See page 16 and Note 2 to the “Consolidated Financial Statements”. Net capital investment ($ million) 2012 29,803 2011 23,503 Net capital investment is defined as capital expenditure, adjusted for: proceeds from disposals; exploration expense excluding exploration wells written off; investments in equity-accounted investments; and leases and other items. See Notes 2 and 4 to the “Consolidated Financial Statements” for further information. Return on average capital employed 2012 12.7% 2011 15.9% Return on average capital employed (ROACE) is defined as annual income, adjusted for after-tax interest expense, as a percentage of average capital employed during the year. Capital employed is the sum of total equity and total debt. ROACE measures the efficiency of Shell’s utilisation of the capital that it employs and is a common measure of business performance. See page 45. Gearing 2012 9.2% 2011 13.1% Gearing is defined as net debt (total debt less cash and cash equivalents) as a percentage of total capital (net debt plus total equity), at December 31. It is a measure of the degree to which Shell’s operations are financed by debt. For further information see Note 15 to the “Consolidated Financial Statements”. 10 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Selected financial data SELECTED FINANCIAL DATA The selected financial data set out below is derived, in part, from the Consolidated Financial Statements. This data should be read in conjunction with the Consolidated Financial Statements and related Notes, as well as the Business Review in this Report. CONSOLIDATED STATEMENT OF INCOME AND OF COMPREHENSIVE INCOME DATA Revenue Income for the period Income attributable to non-controlling interest Income attributable to Royal Dutch Shell plc shareholders Comprehensive income attributable to Royal Dutch Shell plc 2012 467,153 26,840 248 26,592 2011 470,171 31,185 267 30,918 2010 368,056 20,474 347 20,127 2009 278,188 12,718 200 12,518 $ MILLION 2008 458,361 26,476 199 26,277 shareholders 27,178 29,727 20,131 19,141 15,228 All results are from continuing operations. CONSOLIDATED BALANCE SHEET DATA Total assets Total debt Share capital Equity attributable to Royal Dutch Shell plc shareholders Non-controlling interest EARNINGS PER SHARE Basic earnings per €0.07 ordinary share Diluted earnings per €0.07 ordinary share SHARES 2012 360,325 37,754 542 188,494 1,433 2011 345,257 37,175 536 169,517 1,486 2010 322,560 44,332 529 148,013 1,767 2009 292,181 35,033 527 136,431 1,704 2012 4.25 4.24 2011 4.98 4.97 2010 3.28 3.28 2009 2.04 2.04 2012 2011 2010 2009 $ MILLION 2008 282,401 23,269 527 127,285 1,581 $ 2008 4.27 4.26 NUMBER 2008 Basic weighted average number of A and B shares 6,261,184,755 6,212,532,421 6,132,640,190 6,124,906,119 6,159,102,114 Diluted weighted average number of A and B shares 6,267,839,545 6,221,655,088 6,139,300,098 6,128,921,813 6,171,489,652 OTHER FINANCIAL DATA Net cash from operating activities Net cash used in investing activities Dividends paid Net cash used in financing activities Increase/(decrease) in cash and cash equivalents Earnings/(losses) by segment [A] Upstream Downstream Corporate Total segment earnings Attributable to non-controlling interest Earnings on a current cost of supplies basis attributable to 2012 46,140 28,453 7,682 10,630 7,258 22,162 5,350 (209) 27,303 (259) 2011 36,771 20,443 7,315 18,131 (2,152) 24,455 4,289 86 28,830 (205) 2010 27,350 21,972 9,979 1,467 3,725 15,935 2,950 91 18,976 (333) 2009 21,488 26,234 10,717 829 (5,469) 8,354 258 1,310 9,922 (118) $ MILLION 2008 43,918 28,915 9,841 9,394 5,532 26,506 5,309 (69) 31,746 (380) Royal Dutch Shell plc shareholders [B] 27,044 28,625 18,643 9,804 31,366 Net capital investment [A] Upstream Downstream Corporate Total [A] See Notes 2 and 4 to the “Consolidated Financial Statements”. [B] See table on page 16. 25,320 4,275 208 29,803 19,083 4,342 78 23,503 21,222 2,358 100 23,680 22,326 6,232 324 28,882 28,257 3,104 60 31,421 reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Business overview 11 BUSINESS OVERVIEW employ in our various businesses. In total, Shell currently has more than 14,000 granted patents and pending patent applications. History From 1907 until 2005, Royal Dutch Petroleum Company and The “Shell” Transport and Trading Company, p.l.c. were the two public parent companies of a group of companies known collectively as the “Royal Dutch/Shell Group”. Operating activities were conducted through the subsidiaries of these parent companies. In 2005, Royal Dutch Shell plc became the single parent company of Royal Dutch Petroleum Company and of The “Shell” Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited. Royal Dutch Shell plc (the Company) is a public limited company registered in England and Wales and headquartered in The Hague, the Netherlands. Activities Shell is one of the world’s largest independent oil and gas companies in terms of market capitalisation, operating cash flow and oil and gas production. We aim to sustain our strong operational performance and continue our investments primarily in countries that have the necessary infrastructure, expertise and remaining growth potential. Such countries include Australia, Brazil, Brunei, Canada, China, Denmark, Germany, Malaysia, the Netherlands, Nigeria, Norway, Oman, Qatar, Russia, the UK and the USA. We are bringing new oil and gas supplies on-stream from major field developments. We are also investing in growing our integrated gas activities. For example, our Pearl GTL plant completed its ramp-up at the end of 2012. In Downstream we seek innovative ways to market LNG, for example through the use of LNG in the transport sector. At the same time, we are exploring for oil and gas in prolific conventional geological formations, such as those found in Australia, Brazil and the Gulf of Mexico. But we are also exploring for hydrocarbons in formations, such as low-permeability reservoirs in the USA, Australia, Canada and China, which can be developed by fracturing techniques. We also have a focused portfolio of refineries and chemical plants. Furthermore, we are a leading biofuel producer and fuel retailer in Brazil, through our Raízen joint venture. We have a strong retail position not only in the major industrialised countries, but also in the developing ones. The distinctive Shell pecten, (a trademark in use since the early part of the twentieth century), and trademarks in which the word Shell appears, support this marketing effort throughout the world. A strong patent portfolio underlies the technology that we B U S I N E S S R E V I E W Businesses Upstream International manages the Upstream businesses outside the Americas. It explores for and recovers crude oil, natural gas and natural gas liquids, liquefies and transports gas, and operates the upstream and midstream infrastructure necessary to deliver oil and gas to market. Upstream International also manages Shell’s LNG and GTL businesses. Since January 2013, it manages its operations primarily by line of business, with this structure overlaying individual country organisations. This organisation is supported by activities such as Exploration and New Business Development. Previously activities were organised primarily by geographical location. Upstream Americas manages the Upstream businesses in North and South America. It explores for and recovers crude oil, natural gas and natural gas liquids, transports gas and operates the upstream and midstream infrastructure necessary to deliver oil and gas to market. Upstream Americas also extracts bitumen from oil sands that is converted into synthetic crude oil. Additionally, it manages the US-based wind business. It manages its operations by line of business, supported by activities such as Exploration and New Business Development. Downstream manages Shell’s refining and marketing activities for oil products and chemicals. These activities are organised into globally managed classes of business, although some are managed regionally or provided through support units. Refining includes manufacturing, supply and shipping of crude oil. Marketing sells a range of products including fuels, lubricants, bitumen and liquefied petroleum gas (LPG) for home, transport and industrial use. Chemicals produces and markets petrochemicals for industrial customers, including the raw materials for plastics, coatings and detergents. Downstream also trades Shell’s flow of hydrocarbons and other energy-related products, supplies the Downstream businesses, governs the marketing and trading of gas and power, and provides shipping services. Additionally, Downstream oversees Shell’s interests in alternative energy (including biofuels but excluding wind) and CO2 management. Projects & Technology manages the delivery of Shell’s major projects and drives the research and innovation to create technology solutions. It provides technical services and technology capability covering both Upstream and Downstream activities. It is also responsible for providing functional leadership across Shell in the areas of safety and environment, and contracting and procurement. 12 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Business overview Segmental reporting Upstream combines the operating segments Upstream International and Upstream Americas, which have similar economic characteristics, products and services, production processes, types and classes of customers, and methods of distribution. Upstream and Downstream earnings include their respective elements of Projects & Technology and of trading activities. Corporate represents the key support functions comprising holdings and treasury, headquarters, central functions and Shell’s self-insurance activities. REVENUE BY BUSINESS SEGMENT (INCLUDING INTER-SEGMENT SALES) 2012 2011 2010 $ MILLION Upstream Third parties Inter-segment Total Downstream Third parties Inter-segment Total Corporate Third parties Total 43,431 51,119 94,550 42,260 49,431 91,691 32,395 35,803 68,198 423,638 427,864 335,604 772 782 612 424,410 428,646 336,216 84 84 47 47 57 57 REVENUE BY GEOGRAPHICAL AREA (EXCLUDING INTER-SEGMENT SALES) $ MILLION Europe 184,223 39.4 187,498 39.9 137,359 37.3 2012 % 2011 % 2010 % Asia, Oceania, Africa USA 156,310 33.5 148,260 31.5 110,955 30.2 91,571 19.6 91,946 19.6 77,660 21.1 Other Americas 35,049 7.5 42,467 9.0 42,082 11.4 Total 467,153 100.0 470,171 100.0 368,056 100.0 reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Risk factors 13 B U S I N E S S R E V I E W RISK FACTORS The risks discussed below could have a material adverse effect separately, or in combination, on our operational performance, earnings, cash flows and financial condition. Accordingly, investors should carefully consider these risks. We are exposed to fluctuating prices of crude oil, natural gas, oil products and chemicals. Prices of oil, natural gas, oil products and chemicals are affected by supply and demand, both globally and regionally. Moreover, prices for oil and gas can move independently from each other. Factors that influence supply and demand include operational issues, natural disasters, weather, political instability, conflicts, economic conditions and actions by major oil-exporting countries. Price fluctuations could have a material effect. For example, in a low oil and gas price environment, Shell would generate less revenue from its Upstream production, and as a result certain long-term projects might become less profitable, or even incur losses. Additionally, low oil and gas prices could result in the debooking of proved oil or gas reserves, if they become uneconomic in this type of environment. Prolonged periods of low oil and gas prices, or rising costs, could also result in projects being delayed or cancelled, as well as in the impairment of certain assets. In a high oil and gas price environment, we could experience sharp increases in cost and under some production-sharing contracts our entitlement to proved reserves would be reduced. Higher prices could also reduce demand for our products. Lower demand for our products might result in lower profitability, particularly in our Downstream business. Our ability to achieve strategic objectives depends on how we react to competitive forces. We face competition in each of our businesses. While we seek to differentiate our products, many of them are competing in commodity- type markets. If we do not manage our expenses adequately, our cost efficiency could deteriorate and our unit costs may increase. This in turn could erode our competitive position. Increasingly, we compete with government-run oil and gas companies, particularly in seeking access to oil and gas resources. Today, these government-run companies control vastly greater quantities of oil and gas resources than the major, publicly held oil and gas companies. Government-run entities have access to significant resources and may be motivated by political or other factors in their business decisions, which may harm our competitive position or hinder our access to desirable projects. As our business model involves trading and treasury risks, we are affected by the global macroeconomic environment as well as financial and commodity market conditions. Shell subsidiaries and equity-accounted investments are subject to differing economic and financial market conditions throughout the world. Political or economic instability affects such markets. Shell uses debt instruments such as bonds and commercial paper to raise significant amounts of capital. Should our access to debt markets become more difficult, the potential impact on our liquidity could have an adverse effect on our operations. Commodity trading is an important component of our supply and distribution function. Trading and treasury risks include, among others, exposure to movements in commodity prices, interest rates and foreign exchange rates, counterparty default and various operational risks (see also page 83). As a global company doing business in more than 70 countries, we are exposed to changes in currency values and exchange controls. While we undertake some currency hedging, we do not do so for all of our activities. See Notes 6 and 21 to the “Consolidated Financial Statements”. Shell has significant financial exposure to the euro and could be materially affected by a significant change in its value or any structural changes to the European Union (EU) or the European Economic and Monetary Union affecting the euro. While we do not have significant direct exposure to sovereign debt, it is possible that our partners and customers may have exposure which could impair their ability to meet their obligations to us. Therefore, a sovereign debt downgrade or default could have a material adverse effect on Shell. Our future hydrocarbon production depends on the delivery of large and complex projects, as well as on our ability to replace proved oil and gas reserves. We face numerous challenges in developing capital projects, especially large ones. Challenges include uncertain geology, frontier conditions, the existence and availability of necessary technology and engineering resources, availability of skilled labour, project delays, expiration of licences and potential cost overruns, as well as technical, fiscal, regulatory, political and other conditions. These challenges are particularly relevant in certain developing and emerging market countries, such as Iraq and Kazakhstan, and in frontier areas, such as the Arctic. Such potential obstacles may impair our delivery of these projects, as well as our ability to fulfil related contractual commitments. Future oil and gas production will depend on our access to new proved reserves through exploration, negotiations with governments and other owners of proved reserves and acquisitions, as well as developing and applying new technologies and recovery processes to existing fields and mines. Failure to replace proved reserves could result in lower future production. OIL AND GAS PRODUCTION AVAILABLE FOR SALE MILLION BOE [A] Shell subsidiaries Shell share of equity-accounted investments Total 2012 2011 2010 825 369 811 362 855 355 1,194 1,173 1,210 [A] Natural gas volumes are converted to oil equivalent using a factor of 5,800 scf per barrel. PROVED DEVELOPED AND UNDEVELOPED OIL AND GAS RESERVES [A][B] (AT DECEMBER 31) MILLION BOE [C] Shell subsidiaries 2012 2011 2010 9,873 10,320 10,176 Shell share of equity-accounted investments 3,701 3,946 4,097 Total 13,574 14,266 14,273 Attributable to non-controlling interest [D] 18 16 24 Attributable to Royal Dutch Shell plc shareholders 13,556 14,250 14,249 [A] We manage our total proved reserves base without distinguishing between proved reserves from subsidiaries and those from equity-accounted investments. [B] Includes proved reserves associated with future production that will be consumed in operations. [C] Natural gas volumes are converted to oil equivalent using a factor of 5,800 scf per barrel. [D] Represents proved reserves attributable to non-controlling interest in Shell subsidiaries. An erosion of our business reputation would have a negative impact on our brand, our ability to secure new resources and our licence to operate. Shell is one of the world’s leading energy brands, and its brand and reputation are important assets. The Shell General Business Principles and Code of Conduct govern how Shell and its individual companies conduct their affairs. It is a challenge for us to ensure that all employees and contractors, well above 100,000 in total, comply with 14 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Risk factors the principles. Failure – real or perceived – to follow these principles, or other real or perceived failures of governance or regulatory compliance, could harm our reputation. This could impact our licence to operate, damage our brand, harm our ability to secure new resources and limit our ability to access the capital market. matters often change and are likely to become more stringent over time. We could incur significant additional costs in the future complying with such requirements or as a result of violations of, or liabilities under, HSSE laws and regulations, such as fines, penalties, clean-up costs and third-party claims. Our future performance depends on the successful development and deployment of new technologies. Technology and innovation are essential to Shell. If we do not develop the right technology, do not have access to it or do not deploy it effectively, the delivery of our strategy and our licence to operate may be adversely affected. We operate in environments where the most advanced technologies are needed. While these technologies are regarded as safe for the environment with today’s knowledge, there is always the possibility of unknown or unforeseeable environmental impacts that could harm our reputation, licence to operate or expose us to litigation or sanctions. Rising climate change concerns could lead to additional regulatory measures that may result in project delays and higher costs. In the future, in order to help meet the world’s energy demand, we expect our production to rise and more of our production to come from unconventional sources than at present. Energy intensity of production of oil and gas from unconventional sources can be higher than that of production from conventional sources. Therefore, it is expected that both the CO2 intensity of our production, as well as our absolute Upstream CO2 emissions, will increase as our business grows. Examples of such developments are our expansion of oil sands activities in Canada and our gas-to-liquids project in Qatar. Additionally, as production from Iraq increases, we expect that CO2 emissions from flaring will rise. We are working with our partners on finding ways to capture the gas that is flared. Over time, we expect that a growing share of our CO2 emissions will be subject to regulation and carry a cost. If we are unable to find economically viable, as well as publicly acceptable, solutions that reduce our CO2 emissions for new and existing projects or products, we may incur additional costs, delayed projects or reduced production in certain projects. Moreover, continued public and political attention to climate change concerns, including existing and future regulatory frameworks to reduce greenhouse gas emissions, could result in increasing production costs, lengthening project implementation times and reducing demand for hydrocarbons. The nature of our operations exposes us to a wide range of health, safety, security and environment risks. The health, safety, security and environment (HSSE) risks to which we are potentially exposed cover a wide spectrum, given the geographic range, operational diversity and technical complexity of Shell’s daily operations. We have operations, including oil and gas production, transport and shipping of hydrocarbons, and refining, in difficult geographies or climate zones, as well as environmentally sensitive regions, such as the Arctic or maritime environments, especially in deep water. These and other operations expose us to the risk, among others, of major process safety incidents, effects of natural disasters, social unrest, personal health and safety lapses, and crime. If a major HSSE risk materialises, such as an explosion or hydrocarbon spill, this could result in injuries, loss of life, environmental harm, disruption to business activities and, depending on their cause and severity, material damage to our reputation and eventually loss of licence to operate. In certain circumstances, liability could be imposed without regard to Shell’s fault in the matter. Requirements governing HSSE Shell mainly self-insures its risk exposures. Shell insurance subsidiaries provide insurance coverage to Shell entities, generally up to $1.15 billion per event and usually limited to Shell’s percentage interest in the relevant entity. The type and extent of the coverage provided is equal to that which is otherwise commercially available in the third-party insurance market. While from time to time the insurance subsidiaries may seek reinsurance for some of their risk exposures, such reinsurance would not provide any material coverage in the event of an incident like BP Deepwater Horizon. Similarly, in the event of a material environmental incident, there would be no material proceeds available from third-party insurance companies to meet Shell’s obligations. An erosion of the business and operating environment in Nigeria would adversely impact Shell. We face various risks in our Nigerian operations. These risks include: security issues surrounding the safety of our people, host communities, and operations; our ability to enforce existing contractual rights; limited infrastructure; and potential legislation that could increase our taxes or costs of operation. The Nigerian government is contemplating new legislation to govern the petroleum industry which, if passed into law, would likely have a significant adverse impact on Shell’s existing and future activities in that country. We operate in more than 70 countries, with differing degrees of political, legal and fiscal stability. This exposes us to a wide range of political developments that could result in changes to laws and regulations. In addition, Shell subsidiaries and equity-accounted investments face the risk of litigation and disputes worldwide. Developments in politics, laws and regulations can – and do – affect our operations. Potential developments include: forced divestment of assets; expropriation of property; cancellation or forced renegotiation of contract rights; additional taxes including windfall taxes, restrictions on deductions and retroactive tax claims; import and export restrictions; foreign exchange controls; and changing environmental regulations and disclosure requirements. Certain governments, states and regulatory bodies have, in the opinion of Shell, exceeded their constitutional authority by attempting unilaterally to amend or cancel existing agreements or arrangements; by failing to honour existing contractual commitments; and by seeking to adjudicate disputes between private litigants. As a result of the financial crisis, US regulators have adopted regulations that require disclosure of information on payments to governments that we believe is immaterial to investors, but that could compromise confidential commercial arrangements and create conflicting legal requirements. EU regulators have also proposed similar regulations. Additional regulations targeted at the financial sector could have unintended consequences for our trading, treasury and pension operations. In our Upstream activities these developments can and do affect land tenure, re-writing of leases, entitlement to produced hydrocarbons, production rates, royalties and pricing. Parts of our Downstream activities are subject to price controls in some countries. From time to time, cultural and political factors play a role in unprecedented and unanticipated judicial outcomes that could adversely affect Shell. If we do not comply with policies and regulations, it may result in regulatory investigations, litigation and ultimately sanctions. reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Risk factors 15 of operation of joint ventures or associates. Despite not having control, we could still be exposed to the risks associated with these operations. For example, our partners or members of a joint venture or an associate (particularly local partners in developing countries) may not be able to meet their financial or other obligations to the projects, threatening the viability of a given project. Violations of antitrust and competition law carry fines and expose us or our employees to criminal sanctions and civil suits. Antitrust and competition laws apply to Shell subsidiaries and equity- accounted investments in the vast majority of countries in which we do business. Shell subsidiaries and equity-accounted investments have been fined for violations of antitrust and competition law. These include a number of fines by the European Commission Directorate- General for Competition (DG COMP). Due to the DG COMP’s fining guidelines, any future conviction of Shell subsidiaries or equity- accounted investments for violation of EU competition law could result in larger fines. Violation of antitrust laws is a criminal offence in many countries, and individuals can be either imprisoned or fined. Furthermore, it is now common for persons or corporations allegedly injured by antitrust violations to sue for damages. B U S I N E S S R E V I E W Shell is currently subject to a Deferred Prosecution Agreement with the U.S. Department of Justice for violations of the Foreign Corrupt Practices Act. In 2010, a Shell subsidiary agreed to a Deferred Prosecution Agreement (DPA) with the U.S. Department of Justice (DOJ) for violations of the Foreign Corrupt Practices Act (FCPA), which arose in connection with its use of the freight-forwarding firm Panalpina. Also, the Company has consented to a Cease and Desist Order from the U.S. Securities and Exchange Commission (SEC) for violations of the record keeping and internal control provisions of the FCPA as a result of another Shell subsidiary’s violation of the FCPA, which also arose in connection with the use of Panalpina in Nigeria. The DPA requires Shell to continue to implement a compliance and ethics programme designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws throughout Shell’s operations. The DPA also requires the Company to report to the DOJ, promptly, any credible evidence of questionable or corrupt payments. Any violations of the DPA, or of the SEC’s Cease and Desist Order, could have a material adverse effect on the Company. The Company’s Articles of Association determine the jurisdiction for shareholder disputes. This might limit shareholder remedies. Our Articles of Association generally require that all disputes between our shareholders in such capacity and the Company or our subsidiaries (or our Directors or former Directors) or between the Company and our Directors or former Directors be exclusively resolved by arbitration in The Hague, the Netherlands, under the Rules of Arbitration of the International Chamber of Commerce. Our Articles of Association also provide that, if this provision is for any reason determined to be invalid or unenforceable, the dispute may only be brought to the courts of England and Wales. Accordingly, the ability of shareholders to obtain monetary or other relief, including in respect of securities law claims, may be determined in accordance with these provisions. See “Corporate governance” for further information. Our operations expose us to social instability, terrorism, acts of war, piracy and government sanctions that could have an adverse impact on our business. As seen recently in north Africa and the Middle East, social and civil unrest, both within the countries in which we operate and internationally, can – and does – affect Shell. Potential developments that could impact our business include international sanctions, conflicts including war, acts of political or economic terrorism and acts of piracy on the high seas, as well as civil unrest and local security concerns that threaten the safe operation of our facilities and transport of our products. For example, EU sanctions have prohibited us from producing oil and gas in Syria, and the USA and the EU have imposed sanctions relating to transactions involving Iran and Sudan, among other countries. If such risks materialise, they could result in injuries and disruption to business activities. We rely heavily on information technology systems for our operations. The operation of many of our business processes depends on the availability of information technology (IT) systems. Our IT systems are increasingly concentrated in terms of geography, number of systems, and key contractors supporting the delivery of IT services. Shell, like many other multinational companies, has been the target of attempts to gain unauthorised access through the internet to our IT systems, including more sophisticated attempts often referred to as advanced persistent threat. Shell seeks to detect and investigate all such security incidents, aiming to prevent their recurrence. Disruption of critical IT services, or breaches of information security, could have adverse consequences for Shell. We have substantial pension commitments, whose funding is subject to capital market risks. Liabilities associated with defined benefit plans can be significant, as can the cash funding of such plans; both depend on various assumptions. Volatility in capital markets, and the resulting consequences for investment performance and interest rates, may result in significant changes to the funding level of future liabilities. In case of a shortfall, Shell might be required to make substantial cash contributions, depending on the applicable local regulations. The estimation of proved oil and gas reserves involves subjective judgements based on available information and the application of complex rules, so subsequent downward adjustments are possible. The estimation of proved oil and gas reserves involves subjective judgements and determinations based on available geological, technical, contractual and economic information. The estimate may change because of new information from production or drilling activities, or changes in economic factors, including changes in the price of oil or gas and changes in the taxation or regulatory policies of host governments. It may also alter because of acquisitions and divestments, new discoveries, and extensions of existing fields and mines, as well as the application of improved recovery techniques. Published proved oil and gas reserves estimates may also be subject to correction due to errors in the application of published rules and changes in guidance. Any downward adjustment would indicate lower future production volumes. Many of our major projects and operations are conducted in joint ventures or associates. This may reduce our degree of control, as well as our ability to identify and manage risks. A significant share of our capital is invested in joint ventures or associates. In cases where we are not the operator we have limited influence over, and control of, the behaviour, performance and costs 16 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Summary of results and strategy SUMMARY OF RESULTS AND STRATEGY INCOME FOR THE PERIOD Earnings by segment [A] Upstream Downstream Corporate Total segment earnings $ MILLION 2012 2011 2010 22,162 24,455 15,935 5,350 4,289 2,950 (209) 86 91 27,303 28,830 18,976 Attributable to non-controlling interest (259) (205) (333) Earnings on a current cost of supplies basis attributable to Royal Dutch Shell plc shareholders 27,044 28,625 18,643 Current cost of supplies adjustment [A] (463) 2,355 1,498 Non-controlling interest 11 (62) (14) Income attributable to Royal Dutch Shell plc shareholders Non-controlling interest Income for the period 26,592 30,918 20,127 248 267 347 26,840 31,185 20,474 [A] Segment earnings are presented on a current cost of supplies basis. See Note 2 to the “Consolidated Financial Statements” for further information. Earnings 2012-2010 On average, 2012 realised liquids and gas prices remained stable compared with 2011. The increase in Asia-Pacific realised gas prices approximately offset the decrease in Americas realised gas prices. Average realised synthetic crude oil prices for 2012 decreased compared with 2011. Oil and gas production available for sale in 2012 was 3,262 thousand barrels of oil equivalent per day (boe/d), compared with 3,215 thousand boe/d in 2011. Excluding the impact of divestments and exits, production volumes were 3% higher than in 2011. Refining margins were generally higher in 2012 than in 2011 in key refining hubs, except Asia. This increase was driven by the closure of some refining capacity and then refinery outages later in the year, partly offset by an unfavourable economic environment and geopolitical tensions. Earnings on a current cost of supplies basis attributable to shareholders in 2012 were $27,044 million, 6% lower than in 2011, which, in turn, were 54% higher than in 2010. In 2012, Upstream earnings were $22,162 million, compared with $24,455 million in 2011 and $15,935 million in 2010. The 9% decrease from 2011 to 2012 reflected higher depreciation charges, increased operating and exploration expenses, lower gains associated with the fair-value accounting of certain gas and derivative contracts and additional tax charges, partly offset by higher contributions from our integrated gas activities (LNG and GTL). In 2011, earnings increased by 53% compared with 2010, reflecting higher realised oil and gas prices, together with higher equity LNG sales volumes, increased trading contributions and a reduced level of impairment, partly offset by higher operating expenses, lower production volumes and increased taxes. Downstream earnings are presented on a current cost of supplies basis (CCS earnings). On this basis, the purchase price of the volumes sold during a period is based on the current cost of supplies during the same period, after making allowance for the tax effect. CCS earnings therefore exclude the effect of changes in the oil price on inventory valuation. Downstream earnings in 2012 were $5,350 million, compared with $4,289 million in 2011 and $2,950 million in 2010. The 25% increase from 2011 to 2012 reflected higher realised refining margins, lower operating expenses and a reduced level of impairment. These items were partly offset by lower trading contributions, lower Chemicals earnings, lower divestment gains and lower gains associated with the fair-value accounting of commodity derivatives. Earnings increased between 2010 and 2011 as a result of higher chemical margins, increased trading contributions and lower operating expenses, partly offset by a larger loss in refining and lower sales volumes. Balance sheet and net capital investment Shell’s strategy to invest in the development of major growth projects primarily in Upstream, explains the most significant changes to the balance sheet in 2012. Property, plant and equipment increased by $20 billion. Net capital investment was $30 billion, 27% higher than in 2011; see Note 4 to the “Consolidated Financial Statements”. The effect of net capital investment on property, plant and equipment was partly offset by depreciation, depletion and amortisation of $15 billion. Of the 2012 net capital investment, approximately 85% related to Upstream projects, providing growth over the long term. They include multibillion dollar, integrated facilities that are expected to provide significant cash flows in the coming decades. In 2012, equity attributable to Royal Dutch Shell plc shareholders increased by $19 billion, to $188 billion, principally as a result of increased retained earnings. Gearing was 9.2% at the end of 2012, compared with 13.1% at the end of 2011. The change reflects the increase in total equity and in cash and cash equivalents. Market overview We estimate that global economic growth weakened to 3.2% in 2012, down from 3.9% the previous year, largely as a result of the recession in the eurozone and a slowdown in most emerging markets. In our view, global economic growth in 2013 is estimated to be 3.4%, below the annual average of 3.8% of the last 10 years. Within the eurozone, uncertainty and austerity measures weighed heavily on economic sentiment and consumer and business spending. In January 2013, the International Monetary Fund (IMF) projected the eurozone economy to have contracted by 0.4% in 2012. According to the same projections, growth of gross domestic product (GDP) in China slowed to 7.8% in 2012, down from 9.3% in 2011, mainly due to lower export growth and slower domestic demand growth. Other emerging economies including Brazil, Russia and India also had lower GDP growth rates. Brazil decelerated most to a rate of 1.0% in 2012, down from 2.7% in 2011. The USA was a notable exception in this environment; its GDP growth rate accelerated in 2012 to 2.3%, compared with 1.8% in 2011. Reflecting the state of the global economy, global oil demand rose by 0.9% (0.8 million b/d) in 2012 according to the International Energy Agency December 2012 Oil Market Report. A 1.2 million b/d demand increase in emerging economies offset a decline of 0.4 million b/d in developed economies. We estimate that global gas demand grew by about 3% in 2012 with approximately two-thirds of that growth coming from countries outside the Organisation for Economic Co-operation and Development (OECD). Demand grew strongest in Asia-Pacific, the Middle East and North America, while demand in Europe contracted by an estimated 1% overall, and particularly in electricity generation. reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Summary of results and strategy 17 B U S I N E S S R E V I E W OIL A N D N A TU RA L GA S P RIC E S The following table provides an overview of the main oil and gas price markers that Shell is exposed to: OIL AND GAS AVERAGE INDUSTRY PRICES [A] Brent ($/b) West Texas Intermediate ($/b) Henry Hub ($/MMBtu) 2012 2011 111.67 111.26 94.13 95.04 2.76 4.01 UK National Balancing Point (pence/therm) 59.74 56.35 Japan Customs-cleared Crude ($/b) 114.91 109.10 [A] Yearly average prices are based on daily spot prices. 2010 79.50 79.45 4.40 42.12 79.17 The Brent crude oil price, the international crude-oil benchmark, traded in a range of $88-128 per barrel during 2012, ending the year at $110 per barrel. Both the Brent and the West Texas Intermediate (WTI) average crude oil prices for 2012 were little changed compared with 2011. WTI continued to trade at a significant discount to Brent due to production in the US mid-continent exceeding pipeline capacity to clear the growing volumes. This resulted in crude oil being transported to the Gulf coast by less efficient modes of transport, such as rail, depressing prices in landlocked areas, such as Cushing, Oklahoma, where WTI is delivered. Unlike crude-oil pricing, which is global in nature, gas prices vary significantly from region to region. In the USA, the average natural gas price at Henry Hub was 31% lower in 2012 compared with 2011, and traded in a range of $1.91-3.90 per million British thermal units (MMBtu). Domestic production increased strongly, particularly from onshore gas, which more than offset increased demand, and led to lower prices. The daily Henry Hub spot price briefly dropped below $2 per MMBtu in April following an unusually warm winter, meaning that inventories were high and production had to be discouraged. The daily price recovered to a monthly average of $2.50 per MMBtu in May, and continued to recover due to warmer than normal summer temperatures stimulating gas-fired power generation demand due to its price advantage over coal. In Europe, prices rose. In the UK, the average price at the UK National Balancing Point was 6% higher compared with 2011. In continental Europe, price increases at the main gas trading hubs in Belgium, Germany and the Netherlands were similar to those at the UK National Balancing Point. These prices reflect a tightening of LNG markets and higher prices in Asia-Pacific. The use of oil-indexed gas pricing is decreasing in continental Europe, with many natural gas contracts now including spot market pricing as a major component. We also produce and sell natural gas in regions whose supply, demand and regulatory circumstances differ markedly from those in the USA or Europe. Long-term contracted LNG prices in Asia-Pacific are predominantly indexed to the price of Japan Customs-cleared Crude (JCC). In Japan, LNG import contracts have historically been indexed to the JCC benchmark, as burning crude and fuel oil is the alternative option for Japanese power utilities. OIL A N D N A TU RA L GA S P RIC E S FOR I N V E S TM E N T E V A LU A TION The range of possible future crude oil and natural gas prices used in project and portfolio evaluations within Shell is determined after an assessment of short-, medium- and long-term price drivers under different sets of assumptions. Historical analysis, trends and statistical volatility are considered in this assessment, as are analyses of possible future economic conditions, geopolitics, actions by the Organization of the Petroleum Exporting Countries (OPEC), supply costs and the balance of supply and demand. Sensitivity analyses are used to test the impact of low-price drivers, such as economic weakness, and high- price drivers, such as strong economic growth and low investment levels in new production capacity. Short-term events, such as relatively warm winters or cool summers affecting demand, and supply disruptions due to weather or politics, contribute to price volatility. We expect oil and gas prices to remain volatile. For the purposes of making investment decisions, generally we test the economic performance of long-term projects against price ranges of $70-110 per barrel for Brent oil and $3-5 per MMBtu for gas at Henry Hub. As part of our normal business practice, the range of prices used for this purpose is subject to review and change, and was last updated in the fourth quarter of 2012. RE FIN I N G A N D P E TROC HE M I C A L M A RK E T TRE N D S Industry refining margins were generally higher in 2012 than in 2011 in key refining hubs, except Asia. Support for margins in 2012 came from refinery closures in North America and Europe at the beginning of the year, and from unplanned refinery outages later in the year. Some demand growth, especially around the summer holiday driving season in the USA, also contributed, although the economic environment and geopolitical tensions dampened further gains. In the USA a surge of light sweet crude supply and infrastructure bottlenecks also acted to support margins. A key driver of refining margins in 2013 is expected to be middle distillate demand growth with some support from gasoline during the middle of the year. The overall outlook remains uncertain, with the economic environment remaining fragile, a structural overcapacity in global refining, and geopolitical tensions in some regions that could lead to supply disruptions. Industry chemical margins in Europe and Asia during 2012 were lower than in 2011 due to declining demand in Europe and lower demand growth in Asia. US ethane cracker margins rose significantly due to increased supply of natural gas liquids, and the wide price differential between crude oil and natural gas. The outlook for petrochemicals in 2013 remains uncertain as demand is strongly correlated to economic growth. Strategy and outlook STRATEGY Our strategy seeks to reinforce our position as a leader in the oil and gas industry, while helping to meet global energy demand in a responsible way. We aim to create competitive returns for shareholders. Safety and environmental and social responsibility are at the heart of our activities. Intense competition exists for access to upstream resources and to new downstream markets. But we believe that our technology, project delivery capability and operational excellence will remain key differentiators for our businesses. We expect about 80% of our capital investment in 2013 to be in our Upstream businesses. In Upstream we focus on exploration for new liquids and natural gas reserves, and on developing major new projects where our technology and know-how add value to the resources holders. We focus on a series of strategic themes, each requiring distinctive technologies and risk management: ▪ our upstream and downstream ”engines” are strongly cash- generative, mature businesses, which will underpin our financial 18 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Summary of results and strategy performance to at least the end of this decade. Here we only make investments in selective growth positions, and we apply Shell’s distinctive technology and operating performance to extend the productive lives of our assets and to enhance their profitability; ▪ our growth priorities are in three strategic themes, namely integrated gas, deep water and resources plays such as shale oil and gas. These will provide our medium-term growth, and we expect them to become core engines in the future. Here, we use the advantages of Shell’s technological know-how and global scale to unlock highly competitive resources positions; and ▪ our future opportunities include the Arctic, Iraq, Kazakhstan, Nigeria, and heavy oil, where we believe large reserves positions could potentially become available, with the pace of development driven by market and local operating conditions. Meeting the growing demand for energy worldwide in ways that minimise environmental and social impact is a major challenge for the global energy industry. We aim to improve energy efficiency in our own operations, support customers in managing their energy demands, and continue to research and develop technologies that increase efficiency and reduce emissions in liquids and natural gas production. Our commitment to technology and innovation continues to be at the core of our strategy. As energy projects become more complex and more technically demanding, we believe our engineering expertise will be a deciding factor in the growth of our businesses. Our key strengths include the development and application of technology, the financial and project-management skills that allow us to deliver large field development projects, and the management of integrated value chains. We aim to leverage our diverse and global business portfolio and customer-focused businesses built around the strength of the Shell brand. OUTLOOK We continuously seek to improve our operating performance, with an emphasis on health, safety and environment, asset performance and operating costs. Asset sales are a key element of our strategy – improving our capital efficiency by focusing our investment on the most attractive growth opportunities. Sale of non-core assets in 2010- 2012 generated $21 billion in divestment proceeds. Exits from further positions in 2013 are expected to generate up to $3 billion in divestment proceeds. We have initiatives underway that are expected to improve Shell’s integrated Downstream business, focusing on the profitability of our portfolio and growth potential. In early 2012, Shell set out a new growth agenda, to deliver $175-200 billion of cash flow from operations excluding working capital movements for 2012-2015 in aggregate, some 30-50% higher than in 2008-2011. This assumes that the Brent oil price is in the range of $80-100 per barrel and conditions for North American natural gas and downstream margins improve relative to 2012. This cash flow is to finance a 2012-2015 expected net capital investment programme of $120-130 billion, an increase of some 10-20% compared with the 2008-2011 level, and fund a competitive dividend for shareholders. Shell is on track to deliver these targets. In Upstream we have the potential to reach an average production of some 4.0 million boe/d in 2017-2018, compared with 3.3 million boe/d in 2012. Shell’s strategy in Upstream is designed to drive financial growth, with production growth regarded as a proxy for this over the long term. Our 2017-2018 production potential will be driven by the timing of investment decisions and the near-term macroeconomic outlook, and assumes some 250 thousand boe/d of expected asset sales and licence expiries from 2011 to 2017-2018. In Downstream we evaluate selective growth opportunities in chemicals, biofuels and growth markets. Shell has built up a substantial portfolio of options for a next wave of growth. This portfolio has been designed to capture energy price upside and manage Shell’s exposure to industry challenges from cost inflation and political risk. Key elements of these opportunities are in global exploration and established resources positions in the Gulf of Mexico, North American tight gas, liquids-rich shales and Australian LNG. These projects are part of a portfolio that has the potential to underpin production growth to the end of this decade. Shell is working to mature these projects, with an emphasis on financial returns. The statements in this Strategy and outlook section do not take into account the impact of the recently announced agreement to acquire part of Repsol S.A.’s LNG portfolio. See page 137. The statements in this Strategy and outlook section, including those related to our growth strategies and our expected or potential future cash flow from operations, net capital investment and production, are based on management’s current expectations and certain material assumptions and, accordingly, involve risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied herein. See page 3 and “Risk factors”. Proved reserves and production Shell subsidiaries’ and the Shell share of equity-accounted investments’ estimated net proved oil and gas reserves are summarised in the table on page 28 and are set out in more detail in “Supplementary information – oil and gas (unaudited)”. In 2012, Shell added 542 million boe of proved reserves before taking into account production, of which 408 million boe came from Shell subsidiaries and 134 million boe from the Shell share of equity-accounted investments. These additions were negatively impacted by lower commodity prices (431 million boe) and divestments (74 million boe). In 2012, total oil and gas production available for sale was 1,194 million boe. An additional 40 million boe were produced and consumed in operations. Production available for sale from subsidiaries was 825 million boe with an additional 30 million boe consumed in operations. The Shell share of the production available for sale of equity-accounted investments was 369 million boe with an additional 10 million boe consumed in operations. Accordingly, after taking into account total production, there was a decrease of 692 million boe in proved reserves, comprising 447 million boe from subsidiaries and 245 million boe from the Shell share of equity-accounted investments. Research and development Technology and innovation provide ways for Shell to stand apart from its competitors. They help our current businesses perform, and they make our future businesses possible. We have been spending more than any other international oil and gas company to research and develop innovative technology – more than $1 billion annually since 2007. In 2012, research and development (R&D) expenses were $1,314 million, compared with $1,125 million in 2011 and $1,019 million in 2010. Sustained investment in our key technologies continues to deliver results. In 2012, we launched new fuels and lubricant formulations reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Summary of results and strategy 19 B U S I N E S S R E V I E W meeting specific customer needs for improved efficiency and better performance. We also began construction of what is likely to be the world’s first floating LNG facility, more than 480 metres long and six times heavier than a fully loaded aircraft carrier. The facility is designed to produce natural gas from the Prelude field offshore Australia, cool it into a liquid and pump it onto LNG tankers – all done at sea. The idea was born and developed entirely within Shell as part of an innovation-stimulating programme called GameChanger. Also in 2012, Shell committed itself to design, build and operate the world’s first commercial-scale facility to capture and store safely underground CO2 emissions of an oil-sands project. The facility, based near Edmonton, Canada, will help develop Shell’s CO2 capture technology. The development of Shell technology is based on the needs of our customers and partners, and is intrinsically linked to our strategic objectives. In 2013, the key objectives of our R&D programme will remain unchanged. We will continue to focus strongly on technologies supporting our various businesses. For example: novel seismic acquisition systems that help reveal previously unnoticed geological details; methods based on the application of chemicals, heat or solvent gases to increase the amount of oil ultimately recovered from fields; and biofuels derived from non-edible plants or crop waste. We also continue to work on technologies to reduce the environmental footprint of our operations and products. We remain committed to further shortening the time taken for technology to move from the laboratory to deployment in the field. Our technology portfolio will maintain a healthy balance of new and mature developments. That will mean an increase in the number of proposed concepts, more rapid termination of less promising projects and increasing focus on larger-scale field tests and demonstrations. Our single, integrated R&D organisation will continue to bring together in-house technology development with external scientific, engineering and commercial partnerships. Such partnering helps to ensure a healthy influx of new ideas and to speed up their realisation. Key accounting estimates and judgements Refer to Note 3 to the “Consolidated Financial Statements” for a discussion of key accounting estimates and judgements. Legal proceedings Refer to Note 25 to the “Consolidated Financial Statements” for a discussion of legal proceedings. 20 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Upstream UPSTREAM KEY STATISTICS Segment earnings Including: $ MILLION 2012 2011 2010 22,162 24,455 15,935 Revenue (including inter-segment sales) 94,550 91,691 68,198 Share of profit of equity-accounted investments 8,001 7,127 4,900 Production and manufacturing expenses 16,474 15,606 13,697 Selling, distribution and administrative expenses Exploration 1,226 3,104 1,276 2,266 1,512 2,036 Depreciation, depletion and amortisation 11,387 8,827 11,144 Net capital investment [A] 25,320 19,083 21,222 Oil and gas production available for sale (thousand boe/d) 3,262 3,215 3,314 Equity LNG sales volume (million tonnes) 20.2 18.8 16.8 Proved oil and gas reserves at December 31 (million boe) [B] 13,556 14,250 14,249 [A] See Notes 2 and 4 to the “Consolidated Financial Statements”. [B] Excludes reserves attributable to non-controlling interest in Shell subsidiaries. Overview Our Upstream businesses explore for and extract crude oil and natural gas, often in joint ventures with international and national oil and gas companies. This includes the extraction of bitumen from mined oil sands which we convert into synthetic crude oil. We liquefy natural gas by cooling and transport the liquefied natural gas (LNG) to customers across the world. We also convert natural gas to liquids (GTL) to provide high quality fuels and other products, and we market and trade natural gas (including LNG) in support of our Upstream businesses. Business conditions According to the International Energy Agency, oil demand in 2012 increased by 0.9% (0.8 million b/d). Demand was impacted by further weakened global economic growth in 2012, largely as a result of a recession in the eurozone and a slowdown in most emerging markets. Increased production, particularly in North America, Libya and Iraq, helped meet this demand, partly offset by a fall in supply from some Middle Eastern countries, especially Iran and Syria. The average Brent crude oil price in 2012 was $112 per barrel, slightly higher than in 2011. Compared with 2011, segment earnings, excluding the items identified above, benefited from the increased contribution of integrated gas activities (LNG and GTL), reflecting the ramp-up of the Pearl GTL plant in Qatar, higher realised LNG prices as well as increased LNG trading contributions and equity LNG sales volumes. Earnings also reflected higher realised gas prices outside the Americas. These items were more than offset by reduced contributions from the Americas, mainly as a result of higher depreciation, increased operating expenses, higher exploration expenses and lower realised gas prices. During 2012, our earnings in the Americas were $512 million, excluding the related items identified at the beginning of the earnings section. However, our Americas onshore gas business reported a loss, mainly due to low North American gas prices, and higher depreciation and exploration costs. This was more than offset by earnings from our deep-water and heavy oil production. Realised global liquids prices were 1% higher than in 2011. In Canada, realised synthetic crude oil prices were 11% lower than in 2011. Realised global natural gas prices were 1% higher than in 2011, with a 31% decrease in the Americas and a 9% increase outside the Americas. In 2012, production was 3,262 thousand boe/d compared with 3,215 thousand boe/d in 2011. Liquids production was down 2% and natural gas production increased by 5% compared with 2011. Natural gas represented 50% of total production in 2012. Approximately 18% of our natural gas production in 2012 was in the Americas. Excluding the impact of divestments and exits, production volumes in 2012 were 3% higher than in 2011. New field start-ups and the continuing ramp-up of new projects, in particular the ramp-up of the Pearl GTL plant in Qatar and the Pluto LNG plant in Australia (Shell indirect interest 20.8%), contributed some 225 thousand boe/d to production in 2012, which more than offset the impact of field declines. Equity LNG sales volumes in 2012 were a record of 20.2 million tonnes, 7% higher than in 2011. The increase mainly came from the first full year of operations for Qatargas 4, the start-up of the Pluto LNG plant in the second quarter of 2012, and the continued strong operational performance of the Sakhalin-2 LNG plant. REALISED PRICE [A] International natural gas Americas natural gas $/BOE Oil Demand for gas, especially LNG, was robust in markets east of Suez. This was driven by economic growth across Asia-Pacific and nuclear power generation capacity still being offline following Japan’s natural disaster in March 2011. In Europe, gas demand was lower as a result of the ongoing recession and competition from cheap coal imports from the USA. Continued high levels of supply and warmer than normal weather at the beginning of 2012 weakened gas prices in North America by approximately 30% compared with 2011. $120 $100 $80 $60 $40 $20 $0 Earnings 2012-2011 Segment earnings of $22,162 million included a net gain of $2,137 million, mainly related to gains on divestments, partly offset by impairments for natural gas assets in the USA, net tax charges and decommissioning provisions. Segment earnings in 2011 of $24,455 million included a net gain of $3,855 million, mainly related to gains on divestments, the fair-value accounting of certain gas and derivative contracts, and the cost impact of the US offshore drilling moratorium. All gains and losses identified above relate to items that individually exceed $50 million. Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 [A] Includes subsidiaries and European equity-accounted investments. Excludes deemed transfer prices. Earnings 2011-2010 Segment earnings in 2011 of $24,455 million included a net gain of $3,855 million as described above. Segment earnings in 2010 of $15,935 million included a net gain of $1,493 million, mainly related to gains on divestments, partly offset by asset impairments, the reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Upstream 21 B U S I N E S S R E V I E W fair-value accounting of certain gas contracts and the cost impact of the US offshore drilling moratorium. All gains and losses identified above relate to items that individually exceed $50 million. Excluding these gains and losses, segment earnings in 2011 were 43% higher than in 2010, driven by continuing portfolio optimisation, higher realised oil, natural gas and LNG prices, higher equity LNG sales volumes and higher trading contributions, partly offset by higher operating expenses, mainly reflecting the start-up of new projects, lower production volumes and increased taxes. Net capital investment Net capital investment was $25 billion in 2012, compared with $19 billion in 2011 and $21 billion in 2010. Capital investment in 2012 was $31 billion (of which $14 billion was exploration expenditure, including acquisitions of unproved properties). Divestment proceeds were $6 billion in 2012. Portfolio actions and business development In Australia we increased our interest in the West Browse joint venture to 35% and in the East Browse joint venture to 25% in an exchange with Chevron for our 33.3% interest in Clio-Acme plus cash of approximately $0.5 billion. Also in Australia we formed a joint venture (Shell interest 82%) with Nexus Energy and Osaka Gas to operate the Crux gas and condensate field. In Norway we acquired BP’s 18.4% interest in the offshore Draugen field for a consideration of $0.2 billion. Shell is already the operator of the field and this transaction brought Shell’s interest to 44.6%. In the UK we acquired 75% of Hess Corporation’s interests in the Beryl area fields and Scottish Area Gas Evacuation system. This transaction was completed in January 2013, increasing Shell’s production in the Beryl area fields from 9 thousand boe/d to 20 thousand boe/d. In Italy we took the final investment decision on the onshore Tempa Rossa field (Shell interest 25%) in the Basilicata region. This project is expected to produce approximately 45 thousand boe/d at peak production. In Malaysia we took the final investment decision for the development of the Malikai deep-water oil field, part of the Block G PSC (Shell interest 35%), offshore Sabah. The Shell-operated project is expected to produce approximately 60 thousand boe/d at peak production. In Canada we took the final investment decision on the Quest carbon capture and storage project (Shell interest 60%) near Edmonton, Alberta. The Quest project is expected to capture and store deep underground more than 1 mtpa of CO2 produced in bitumen processing, and reduce direct emissions from the Scotford Upgrader by up to 35%. We continued to divest selected Upstream assets during 2012, including our 40% participating interest in the BS-4 oil and gas exploration block in the Santos Basin offshore Brazil; our interest in the Gassled natural gas transport infrastructure joint venture in Norway; our 30% interest in oil mining leases 30, 34 and 40 in the Niger Delta, Nigeria; our 50% interest in the Holstein field in the Gulf of Mexico; and our interest in the Seal area within the Peace River oil sands of Alberta, Canada. Also in Canada, we sold a 20% interest in our Groundbirch tight-gas project. In Australia we completed the sale of a 17.5% interest in the Prelude FLNG project to INPEX, and a 10% interest to KOGAS. We also completed the sale of a further 5% interest to CPC Corporation in the first quarter of 2013. Available-for-sale production In 2012, hydrocarbon production from new start-ups and the continuing ramp-up of new projects more than offset the impact of field declines, and the impact of divestments and exits. There was also further upside from new wells and improved reliability compared with 2011, partly offset by changes in contractual entitlements and other non-operational factors. Also in the UK we acquired Hess Corporation’s 15.7% interest in the Schiehallion field and its 12.9% interest in the Schiehallion floating production, storage and offloading (FPSO) facility for $0.5 billion. In February 2013, we also acquired an additional 5.9% interest in the offshore Schiehallion field from Murphy Schiehallion Ltd. bringing our interest in the field to 55%. Production growth was mainly driven by the continued ramp-up of new projects, notably our Pearl GTL plant in Qatar, the start-up of the Pluto LNG Project in Australia, and the first full year of production from Qatargas 4. Further additions also came from new start-ups such as Harweel in Oman, and the early first production from Gumusut-Kakap in Malaysia. Low North American gas prices led to an accelerated shift in exploration and appraisal activities, along with production, from existing dry gas fields to those rich in liquids. In the USA Shell acquired acreage in the Delaware Permian Basin, West Texas, from Chesapeake Energy Corporation for an announced consideration of $1.9 billion. The acreage of approximately 2,200 square kilometres, with an additional 300 square kilometres linked to contractual conditions, is expected to be rich in oil and natural gas liquids and currently produces approximately 26 thousand boe/d with growth potential. We also took the following final investment decisions during 2012. In Nigeria we took the final investment decision on the Forcados Yokri Integrated Project (Shell interest 30%) and the Southern Swamp Associated Gas Gathering Project (Shell interest 30%). These projects are expected to produce at peak production approximately 90 thousand boe/d and 85 thousand boe/d respectively, and reduce flaring intensity. In Qatar we achieved full GTL production at our Pearl GTL plant at the end of the fourth quarter of 2012, with both trains reaching 90% of capacity. This completed the ramp-up period for this project. The plant is designed to run at sustained operating rates of 90% or higher. In Malaysia the Gumusut-Kakap field, located about 120 kilometres offshore Sabah, began a phase of early production via the Murphy Sabah Oil operated Kikeh production facility. A dedicated floating production system is currently under construction for the Gumusut- Kakap field (Shell interest 33%), which is Shell’s first deep-water opportunity in the country, and is expected to produce approximately 135 thousand boe/d at peak production. In the USA first production was achieved at the Caesar/Tonga deep- water project (Shell interest 22.5%) in the Gulf of Mexico. At peak production, the project is expected to produce approximately 40 thousand boe/d. In Oman production began at the Harweel Enhanced Oil Recovery project, which is expected to produce approximately 30 thousand boe/d at peak production. 22 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Upstream Proved reserves Shell subsidiaries’ and the Shell share of equity-accounted investments’ estimated net proved oil and gas reserves are summarised in the table on page 28 and are set out in more detail in “Supplementary information - oil and gas (unaudited)”. After taking into account production of 379 million boe (of which 10 million boe were consumed in operations), the Shell share of equity-accounted investments’ proved reserves decreased by 245 million boe in 2012. In 2012, Shell added 542 million boe of proved reserves before taking into account production, of which 408 million boe came from Shell subsidiaries and 134 million boe from the Shell share of equity-accounted investments. The change in the yearly average commodity prices between 2011 and 2012 resulted in a net negative impact on the proved reserves of 431 million boe. Shell subsidiaries Before taking into account production, Shell subsidiaries added 408 million boe of proved reserves in 2012. This comprised 655 million barrels of oil and natural gas liquids and a reduction of 247 million boe (1,431 thousand million scf) of natural gas. Of the 408 million boe: 268 million boe were from the net effects of revisions and reclassifications; a net decrease of 69 million boe related to acquisitions and divestments; 196 million boe came from extensions and discoveries; and 13 million boe were from improved recovery. After taking into account production of 855 million boe (of which 30 million boe were consumed in operations), Shell subsidiaries’ proved reserves decreased by 447 million boe in 2012. Shell subsidiaries’ proved developed reserves increased by 19 million boe to 6,502 million boe, while proved undeveloped reserves decreased by 466 million boe to 3,371 million boe. The total addition of 408 million boe before taking into account production included a net negative impact from commodity price changes of 438 million boe of proved reserves. SYNTHETIC C RUDE OIL As part of the total proved reserves’ addition of 542 million boe, we added 131 million barrels to our synthetic crude oil proved reserves. In 2012, we had synthetic crude oil production of 48 million barrels of which 2 million barrels were consumed in operations. At December 31, 2012, we had total synthetic crude oil proved reserves of 1,763 million barrels, of which 1,271 million barrels were proved developed reserves and 492 million barrels were proved undeveloped reserves. B I T U M E N As part of the total proved reserves’ addition of 542 million boe, we added 1 million barrels of bitumen proved reserves. After taking into account production of 7 million barrels, bitumen proved reserves were 49 million barrels at December 31, 2012. Shell share of equity-accounted investments Before taking into account production, there was an increase of 134 million boe in the Shell share of equity-accounted investments’ proved reserves in 2012. This comprised 91 million barrels of oil and natural gas liquids and 43 million boe (248 thousand million scf) of natural gas. Of the 134 million boe: 129 million boe were from the net effects of revisions and reclassifications; a net decrease of 5 million boe related to acquisitions and divestments; 7 million boe came from extensions and discoveries; and 3 million boe were from improved recovery. The Shell share of equity-accounted investments’ proved developed reserves decreased by 5 million boe to 3,002 million boe, and proved undeveloped reserves decreased by 240 million boe to 699 million boe. The total addition of 134 million boe before taking into account production included a net positive impact from commodity price changes of 7 million boe of proved reserves. Proved undeveloped reserves In 2012, Shell subsidiaries’ and the Shell share of equity-accounted investments’ proved undeveloped reserves (PUD) decreased by 706 million boe to 4,070 million boe. This is the result of additions of 122 million boe of new PUD offset by the maturation of 828 million boe of PUD to proved developed reserves through project execution. During 2012, Shell spent $9.3 billion on development activities related to PUD maturation. Proved undeveloped reserves held for five years or more (PUD5+) at December 31, 2012, were 1,012 million boe. These relate to installation of gas compression and drilling of additional gas wells, which will be executed when required to support existing gas delivery commitments (Australia, the Netherlands, Nigeria, Norway, the Philippines and Russia); gas cap blow-down awaiting end-of-oil production (Nigeria); ongoing onshore oil and gas development (USA); Gulf of Mexico water-injection project execution in progress (USA); and major complex projects taking longer than five years to develop (such as in Kazakhstan). Most of the PUD5+ are held in locations where Shell has a proven track record of developing similar major projects or where project execution is ongoing but is taking longer than expected. Delivery commitments Shell sells crude oil and natural gas from its producing operations under a variety of contractual obligations. Most contracts generally commit Shell to sell quantities based on production from specified properties, although some natural gas sales contracts specify delivery of fixed and determinable quantities, as discussed below. In the past three years, Shell met all contractual delivery commitments. In the period 2013 to 2015, Shell is contractually committed to deliver to third parties and equity-accounted investments a total of approximately 4,600 thousand million scf of natural gas from Shell subsidiaries and equity-accounted investments. The sales contracts contain a mixture of fixed and variable pricing formulae that are generally referenced to the prevailing market price for crude oil, natural gas or other petroleum products at the time of delivery. The shortfall between Shell’s delivery commitments and its proved developed reserves is estimated at 24% of Shell’s total gas delivery commitments. This shortfall is expected to be met through the development of proved undeveloped reserves as well as new projects and purchases on the spot market. Exploration During 2012, Shell participated in seven notable conventional exploration discoveries and appraisals in Australia, Brazil, Malaysia, Nigeria and the USA, and 10 notable successful unconventional appraisals in Australia, Canada, China, and the USA. In 2012, Shell participated in 230 productive exploratory wells with proved reserves allocated (Shell share: 168 wells). See page 155 for further information. In 2012, Shell participated in a further 314 wells (Shell share: 214 wells) that remained pending determination at December 31, 2012. In 2012, Shell added acreage to its exploration portfolio mainly from new licences in Albania, Australia, Benin, Canada, China, Malaysia, New Zealand, Russia, South Africa, Tanzania, the UK and the USA. In total, Shell secured rights to 120,000 square kilometres of new exploration acreage, including positions in liquids-rich shales. This was offset by divestments and relinquishments of acreage, which took place in various countries (mainly Australia, China, Egypt, Germany, Italy, New Zealand, Norway and Tanzania). Business and property Shell subsidiaries and equity-accounted investments are involved in all aspects of Upstream activities, including matters such as land tenure, entitlement to produced hydrocarbons, production rates, royalties, pricing, environmental protection, social impact, exports, taxes and foreign exchange. The conditions of the leases, licences and contracts under which oil and gas interests are held vary from country to country. In almost all cases outside North America the legal agreements are generally granted by or entered into with a government, government entity or government-run oil and gas company, and the exploration risk usually rests with the independent oil and gas company. In North America these agreements may also be with private parties who own mineral rights. Of these agreements, the following are most relevant to Shell’s interests: ▪ licences (or concessions), which entitle the holder to explore for hydrocarbons and exploit any commercial discoveries. Under a licence, the holder bears the risk of exploration, development and production activities, and is responsible for financing these activities. In principle, the licence holder is entitled to the totality of production less any royalties in kind. The government, government entity or government-run oil and gas company may sometimes enter as a joint- venture participant sharing the rights and obligations of the licence but usually without sharing the exploration risk. In a few cases, the government entity, government-run oil and gas company or agency has an option to purchase a certain share of production; ▪ lease agreements, which are typically used in North America and are usually governed by similar terms as licences. Participants may include governments or private entities, and royalties are either paid in cash or in kind; and ▪ production-sharing contracts (PSCs) entered into with a government, government entity or government-run oil and gas company. PSCs generally oblige the independent oil and gas company, as contractor, to provide all the financing and bear the risk of exploration, development and production activities in exchange for a share of the production. Usually, this share consists of a fixed or variable part that is reserved for the recovery of the contractor’s cost (cost oil). The remaining production is split with the government, government entity or government-run oil and gas company on a fixed or volume/revenue-dependent basis. In some cases, the government, government entity or government-run oil and gas company will participate in the rights and obligations of the contractor and will share in the costs of development and production. Such participation can be across the venture, or on a field-by-field basis. Additionally, as the price of oil or gas increases above certain predetermined levels, the independent oil and gas company’s entitlement share of reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Upstream 23 production normally decreases. Accordingly, its interest in a project may not be the same as its entitlement. E U ROP E Denmark We hold a non-operating interest in a producing concession covering the majority of our activities in Denmark. The concession was granted in 1962 and will expire in 2042. Our interest reduced to 36.8% from 46% in July 2012, when the government entered the partnership with a 20% interest and the government profit share of 20% was abolished. Ireland We are the operator of the Corrib Gas project (Shell interest 45%), which is currently at an advanced stage of construction. At peak production, Corrib is expected to supply a significant proportion of the country’s natural gas needs. The Netherlands Shell and ExxonMobil are 50:50 shareholders in Nederlandse Aardolie Maatschappij B.V. (NAM), the largest hydrocarbon producer in the Netherlands. An important part of NAM’s gas production comes from the onshore Groningen gas field, in which the Dutch government has a 40% interest, with NAM holding the remaining 60%. NAM also has a 60% interest in the Schoonebeek oil field, which has been redeveloped using enhanced oil recovery technology. NAM also operates a significant number of other onshore gas fields and offshore gas fields in the North Sea. B U S I N E S S R E V I E W Norway We are a partner in more than 20 production licences on the Norwegian continental shelf and are the operator in six of these, including the Ormen Lange gas field (Shell interest 17%) and the Draugen oil field, where we increased our interest to 44.6%. We have interests in the Troll, Gjøa, and Kvitebjørn fields, and have further interests in the Valemon field development and various other potential development assets. United Kingdom We operate a significant number of our interests on the UK Continental Shelf on behalf of a 50:50 joint venture with ExxonMobil. Most of our UK oil and gas production comes from the North Sea. We hold various non-operated interests in the Atlantic Margin area, principally in the West of Shetlands area. We have increased our interest in the non-operated Schiehallion field to 55%, and in the Beryl area fields, with interests ranging from 25% to 66%. Rest of Europe Shell also has interests in Albania, Austria, Germany, Greece, Hungary, Italy, Slovakia, Spain and Ukraine. A S I A ( I N C LUD I N G THE M I D D LE E A S T A N D RUS S I A ) Brunei Shell and the Brunei government are 50:50 shareholders in Brunei Shell Petroleum Company Sendirian Berhad (BSP). BSP holds long-term oil and gas concession rights onshore and offshore Brunei, and sells most of its natural gas production to Brunei LNG Sendirian Berhad (BLNG, Shell interest 25%). BLNG was the first LNG plant in Asia-Pacific, and sells most of its LNG on long-term contracts to customers in Asia. We are the operator for the Block A concession (Shell interest 53.9%), which is under exploration and development. We have a 35% interest in the Block B concession, where gas and condensate are produced 24 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Upstream from the Maharaja Lela Field. In addition, we have a 12.5% interest in exploration Block CA-2 under a PSC. Company, a joint venture between Shell and KazMunayGas, will manage production operations. First production is expected in 2013. China We operate the onshore Changbei tight-gas field under a PSC with PetroChina. The PSC was amended in July 2012 for developing tight gas in different geological layers of the same block. We have an interest of 55% in the Pearls PSC, covering an area of approximately 900 square kilometres located in the Kazakh sector of the Caspian Sea that includes two oil discoveries (Auezov and Khazar) and several exploration prospects. Shell and PetroChina have also agreed to appraise, develop and produce tight gas in the Jinqiu block under a PSC that expires in 2040 (Shell interest 49%) and signed a PSC in March 2012 for shale-gas exploration, development and production in the Fushun Yongchuan block (Shell interest 49%), both in Sichuan. Shell and PetroChina are also assessing opportunities in coalbed methane in the Ordos Basin. In 2012, Shell became a party to the Zitong PSC for tight gas exploration, development and production in Sichuan (Shell interest 44.1%). Shell has agreed with Chinese National Offshore Oil Corporation to appraise and potentially develop two offshore oil and gas blocks in the Yinggehai Basin under a PSC signed in July 2012 (Shell interest 49%). Indonesia We have a 30% participating interest in the offshore Masela block where INPEX Masela is the operator. The Masela block contains the Abadi gas field. The operator has currently selected a floating LNG (FLNG) concept for the field’s first development phase. Iran Shell transactions in Iran are disclosed in accordance with Section 13(r) of the US Securities Exchange Act of 1934. See page 51. Iraq We have a 45% interest in the Majnoon oil field that we operate under a technical service contract that expires in 2030. The other Majnoon shareholders are PETRONAS (30%) and the Iraqi government (25%), which is represented by the Missan Oil Company. Majnoon is located in southern Iraq and is one of the world’s largest oil fields. The first phase of the development is planned to bring production to approximately 175 thousand b/d from the level of 45 thousand b/d when the contract entered into effect in March 2010. We also have a 15% interest in the West Qurna 1 field. At the end of 2012, production was approximately 460 thousand b/d. According to the provisions of both contracts, Shell’s equity entitlement volumes will be lower than the Shell interest implies. In 2012, Shell continued to work in establishing Basrah Gas Company, a joint venture between Shell (44%), South Gas Company (51%) and Mitsubishi Corporation (5%). The Basrah Gas Company will gather, treat and process raw gas produced from the Rumaila, West Qurna 1 and Zubair fields. Currently, an estimated 700 million scf/d of gas is flared because of a lack of infrastructure to collect and process it. The processed natural gas and associated products, such as condensate and liquefied petroleum gas (LPG), will be sold primarily to the domestic market with the potential to export any surplus. Kazakhstan We have a 16.8% interest in the offshore Kashagan field, where the North Caspian Operating Company is the operator. This shallow- water field covers an area of approximately 3,400 square kilometres. Phase 1 development of the field is expected to lead to plateau production of approximately 300 thousand boe/d, increasing further with additional phases of development. NC Production Operations Malaysia We produce oil and gas located offshore Sabah and Sarawak under 19 PSCs, in which our interests range from 30% to 85%. In Sabah we operate four producing offshore oil fields with interests ranging from 50% to 80% as part of the 2011 North Sabah EOR PSC and SB1 PSC (the latter expired at the end of December 2012). We also have additional interests ranging from 30% to 50% in PSCs for the exploration and development of five deep-water blocks. These include the Gumusut-Kakap deep-water field (Shell interest 33%) and the Malikai field (Shell interest 35%). Both these fields are currently being developed with Shell as the operator. We started production from Gumusut-Kakap in November 2012, ahead of completion of a floating production system. We did this by connecting two wells to the Kikeh production facility, which is operated by Murphy Sabah Oil. We also have a 21% interest in the Siakap North-Petai field and a 30% interest in the Kebabangan field. In Sarawak we are the operator of 20 gas fields with interests ranging from 37.5% to 70%. Nearly all of the gas produced is supplied to Malaysia LNG in Bintulu where we have a 15% interest in each of the Dua and Tiga LNG plants. We also have a 40% interest in the 2011 Baram Delta EOR PSC and a 50% interest in Block SK-307. In 2012, we signed five new exploration PSCs: Deepwater Block 2B, SK318, SK319 and SK408, all offshore Sarawak, and SB311, offshore Sabah. We also operate a GTL plant (Shell interest 72%), which is adjacent to the Malaysia LNG facilities in Bintulu. Using Shell technology, the plant converts natural gas into high-quality middle distillates, drilling fluids, waxes and other speciality products. Oman We have a 34% interest in Petroleum Development Oman (PDO), the operator of an oil concession expiring in 2044. In 2012, production began at its Harweel Enhanced Oil Recovery project, which is expected to produce approximately 30 thousand boe/d at peak production. We are also participating in the development of the Mukhaizna oil field (Shell interest 17%) where steam flooding, an enhanced oil recovery method, is being applied on a large scale. We have a 30% interest in Oman LNG, which mainly supplies Asian markets under long-term contracts. We also have an 11% indirect interest in Qalhat LNG, another Oman-based LNG facility. Qatar Pearl in Qatar is the world’s largest GTL plant. Shell operates the plant under a development and production-sharing contract with the government of Qatar. The fully integrated facility includes production, transport and processing of approximately 1.6 billion scf/d of well-head gas from Qatar’s North Field with installed capacity of about 140 thousand boe/d of high-quality liquid hydrocarbon products and 120 thousand boe/d of NGL and ethane. Ramp-up of the project was completed in the fourth quarter of 2012. The plant delivered its 100th cargo in mid-December and produced GTL Jet fuel, with its first commercial market introduction in January 2013. We have a 30% interest in Qatargas 4, which comprises integrated facilities to produce approximately 1.4 billion scf/d of natural gas from Qatar’s North Field, an onshore gas-processing facility and an LNG train with a collective production capacity of 7.8 mtpa of LNG and 70 thousand boe/d of NGL. The train delivered its first LNG in 2011 and has been operating at full capacity in 2012. The LNG is shipped mainly to markets in North America, China, Europe and the United Arab Emirates. We are the operator of Block D under the terms of an exploration and production-sharing contract with Qatar Petroleum, representing the national government. We have a 75% interest, with PetroChina holding the remaining 25% interest. Russia We have a 27.5% interest in Sakhalin-2, one of the world’s largest integrated oil and gas projects. Located in a subarctic environment, the project produced approximately 335 thousand boe/d in 2012. Following optimisation of the LNG plant, production from its two trains exceeded 10 million tonnes in 2012. We have a 50% interest in the Salym fields in western Siberia, where production was approximately 155 thousand boe/d during 2012. We also have a 100% interest in four exploration and production licences. They are for the East Talotinskiy area in the Nenets Autonomous District, the Barun-Yustinsky block in Kalmykia and the Arkatoitsky and the Lenzitsky blocks in the Yamalo Nenets Autonomous District. We also have an exploration licence in the North-Vorkutinsky area in the Komi Republic. United Arab Emirates In Abu Dhabi we hold a concessionary interest of 9.5% in the oil and gas operations run by Abu Dhabi Company for Onshore Oil Operations (ADCO). The licence expires in 2014. We also have a 15% interest in the licence of Abu Dhabi Gas Industries Limited (GASCO), which expires in 2028. GASCO exports propane, butane and heavier-liquid hydrocarbons that it extracts from the wet natural gas associated with the oil produced by ADCO. Rest of Asia (including the Middle East and Russia) Shell also has interests in India, Japan, Jordan, Kuwait, the Philippines, Saudi Arabia, Singapore, South Korea and Turkey. We suspended all exploration and production activities in Syria in December 2011. OC E A N I A Australia We have interests in offshore production and exploration licences in the North West Shelf (NWS) and Greater Gorgon areas of the Carnarvon Basin, as well as in the Browse Basin and Timor Sea. Some of these interests are held directly and others indirectly through a shareholding of approximately 23% in Woodside Petroleum Ltd (Woodside). All interests in Australian assets quoted below are direct interests. Woodside is the operator of the Pluto LNG Project which produced its first LNG in 2012. Woodside is also the operator on behalf of six joint- venture participants of the NWS gas, condensate and oil fields, which produced more than 470 thousand boe/d in 2012. Shell provides technical support for the NWS development. reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Upstream 25 We have a 50% interest in Arrow Energy Holdings Pty Limited (Arrow), a Queensland-based joint venture with PetroChina. Arrow owns coalbed methane assets, a domestic power business and the site for a proposed LNG plant on Curtis Island, near Gladstone. In January 2012, Arrow completed the acquisition of coalbed methane company Bow Energy Ltd (Shell-share consideration $0.3 billion). We have a 25% interest in the Gorgon LNG project, which involves the development of some of the largest gas discoveries to date in Australia, beginning with the offshore Gorgon (Shell interest 25%) and Jansz-lo (Shell interest approximately 20%) fields. It includes the construction of a 15.3 mtpa LNG plant on Barrow Island. We are the operator of a permit in the Browse Basin in which two separate gas fields were found: Prelude in 2007, and Concerto in 2009. We are developing these fields on the basis of our innovative FLNG technology. The Prelude FLNG project is expected to produce about 110 thousand boe/d of natural gas and NGL, delivering approximately 3.6 mtpa of LNG, 1.3 mtpa of condensate and 0.4 mtpa of LPG. During 2012, we commenced construction of the Prelude FLNG project and completed the sale of a 17.5% interest to INPEX and a 10% interest to KOGAS. We also completed the sale of a 5% interest to CPC Corporation in the first quarter of 2013, reducing our interest to 67.5%. B U S I N E S S R E V I E W We formed a joint venture to operate the Crux gas and condensate field (Shell interest 82%). We also operate the AC/P41 block (Shell interest 75%). We are also a partner in the Browse joint ventures covering the Brecknock, Calliance and Torosa gas fields. During 2012, we increased our interest in the West Browse joint venture to 35% and in the East Browse joint venture to 25%. The Browse resources are being assessed for development on the basis of an LNG export project. In the Timor Sea we have a 26.6% interest in the Sunrise gas field. The joint-venture partners have selected FLNG as the preferred development concept for Sunrise. The development is subject to approval from both the Australian and Timor-Leste governments. Shell is a partner in both Shell-operated and non-operated exploration joint ventures in multiple basins including the Bonaparte, Exmouth Plateau, Greater Gorgon, Outer Canning and South Exmouth. We also have a 6.4% interest in the Wheatstone LNG project, which includes the construction of two LNG trains with a combined capacity of 8.9 mtpa. Rest of Oceania Shell also has interests in New Zealand. A FRIC A Nigeria Shell-share production in Nigeria was approximately 365 thousand boe/d in 2012 compared with approximately 385 thousand boe/d in 2011. Security, crude oil theft and flooding in the Niger Delta were significant challenges in 2012. Onshore The Shell Petroleum Development Company of Nigeria Ltd (SPDC) is the operator of a joint venture (Shell interest 30%) that holds more than 25 Niger Delta onshore oil mining leases (OMLs), which expire in 2019. To provide funding, Modified Carry Agreements are in place for certain key projects and a bridge loan was drawn down by the Nigerian National Petroleum Company (NNPC) in 2010. The Modified Carry Agreements are being reimbursed, and in 26 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Upstream December 2012 NNPC repaid the bridge loan with interest. New financing agreements with NNPC are under discussion and are expected to be put in place during 2013. We have a 30% interest in the Gbaran-Ubie integrated oil and gas project in Bayelsa State, which delivered 0.9 billion scf/d of gas in 2012. Gas from Gbaran-Ubie is delivered to Nigeria LNG Ltd (NLNG) for export. In October 2012, SPDC declared force majeure on gas supplies, as a result of a security incident on the Bomu-Bonny trunkline and rain flooding. This force majeure was lifted the following month and the impact on SPDC gas production was very limited. In 2012, we sold our 30% interests in OMLs 30, 34 and 40 for a consideration of $1.1 billion. Offshore Our main offshore deep-water activities are carried out by Shell Nigeria Exploration and Production Company (Shell interest 100%) which holds interests in three deep-water blocks. We operate two of the blocks, including the Bonga field 120 kilometres offshore. Deep-water offshore activities are typically governed through PSCs. SPDC also holds an interest in six shallow-water offshore leases, of which five expired on November 30, 2008. However, SPDC satisfied all the requirements of the Nigerian Petroleum Act to be entitled to an extension. Currently, the status quo is maintained following a court order issued on November 26, 2008. SPDC is pursuing a negotiated solution with the federal government of Nigeria. Production from the EA field, in one of the disputed leases, continued throughout 2012. LNG Shell has a 25.6% interest in NLNG, which operates six LNG trains with a total capacity of 22.0 mtpa. NLNG continued production near full capacity during 2012. Rest of Africa Shell also has interests in Benin, Egypt, Gabon, Ghana, Libya, South Africa, Tanzania and Tunisia. N ORTH A ME RICA Canada We hold more than 2,200 mineral leases in Canada, mainly in Alberta and British Columbia. We produce and market natural gas, NGL, synthetic crude oil and bitumen. In addition, we hold significant exploration acreage offshore. Bitumen is a very heavy crude oil produced through conventional methods as well as through enhanced oil-recovery methods. Synthetic crude oil is produced by mining bitumen-saturated sands, extracting the bitumen from the sands, and transporting it to a processing facility where hydrogen is added to produce a wide range of feedstocks for refineries. Gas and liquids-rich shale We hold rights to more than 10,000 square kilometres of conventional gas, tight gas and liquids-rich shale acreage. We own and operate four natural gas processing and sulphur-extraction plants in southern and south-central Alberta. We continued to develop conventional gas, tight gas and liquids-rich shale fields in west-central Alberta and east-central British Columbia during 2012, through drilling programmes and investment in infrastructure facilitating new production. Synthetic crude oil We operate the Athabasca Oil Sands Project (AOSP) in north-east Alberta as part of a joint venture (Shell interest 60%). The AOSP’s bitumen production capacity is 255 thousand boe/d. The bitumen is transported by pipeline for processing at the Scotford Upgrader, which is operated by Shell and located in the Edmonton area, Alberta. The first phase of the AOSP debottlenecking project comes online in 2013, and is expected to add an additional 10 thousand boe/d at peak production. We also took the final investment decision on the Quest carbon capture and storage project (Shell interest 60%), which is expected to capture and permanently store more than 1 mtpa of CO2 from the Scotford Upgrader. Shell also holds a number of other minable oil sands leases in the Athabasca region with expiry dates ranging from 2018 to 2025. By completing a certain minimum level of development prior to their expiry, leases may be extended. Bitumen We produce and market bitumen in the Peace River area of Alberta, and have a steam-assisted gravity drainage project in operation near Cold Lake, Alberta. Additional heavy oil resources and advanced recovery technologies are under evaluation on approximately 1,200 square kilometres in the Grosmont oil sands area, also in northern Alberta. Offshore We have a 31.3% interest in the Sable Offshore Energy project, a natural-gas complex offshore eastern Canada. We also have a 100% operating interest in frontier deep-water acreage offshore Nova Scotia, a 20% non-operating interest in an exploration asset off the east coast of Newfoundland, and a number of exploration licences in the Mackenzie Delta in the Northwest Territories. United States of America We produce oil and gas in the Gulf of Mexico, heavy oil in California and primarily tight gas and associated liquid hydrocarbons in Louisiana, Pennsylvania, Texas and Wyoming. The majority of our oil and gas production interests are acquired under leases granted by the owner of the minerals underlying the relevant acreage (including many leases for federal onshore and offshore tracts). Such leases usually run on an initial fixed term that is automatically extended by the establishment of production for as long as production continues, subject to compliance with the terms of the lease (including, in the case of federal leases, extensive regulations imposed by federal law). Gulf of Mexico The Gulf of Mexico is the major production area in the USA, accounting for almost 50% of Shell’s oil and gas production in the country. We have approximately 420 federal offshore leases in the Gulf of Mexico, about one-fifth of which are producing. Our share of production in the Gulf of Mexico averaged almost 190 thousand boe/d in 2012. Key producing assets are Auger, Brutus, Enchilada, Mars, NaKika, Perdido, Ram-Powell and Ursa. Deferments resulting from the 2010 drilling moratorium, delivery of new-build drilling rigs and new regulatory requirements continued to affect the operational flexibility and delivery timing of our Gulf of Mexico activities in 2012. While the new regulatory regime has resulted in a longer and more complex permitting process, Shell continues to meet all deep-water regulatory permitting and environmental assessment requirements. Despite these challenges, we continued to grow our presence in the Gulf of Mexico, with the addition of two drilling rigs to our contracted offshore fleet in 2012. We also secured 24 blocks in the 2012 central lease sale for a sum of $400 million. Onshore We hold more than 15,000 square kilometres of tight-gas and liquids-rich shale acreage. This includes significant holdings in the Marcellus shale, centred on Pennsylvania in north-east USA, the Eagle Ford shale formation in south Texas, the Sand Wash and Niobrara Shale in north-west Colorado, as well as the Mississippi Line in south-central Kansas. In 2012, we also acquired approximately 2,200 square kilometres of mineral rights, with an additional reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Upstream 27 B U S I N E S S R E V I E W 300 square kilometres linked to contractual conditions, in the Delaware Permian Basin in west Texas. California We have a 51.8% interest in Aera Energy LLC (Aera), which holds assets in the San Joaquin Valley and Los Angeles Basin areas of southern California. Aera operates more than 15,000 wells, producing approximately 130 thousand boe/d of heavy oil and gas. Alaska We hold more than 410 federal leases for exploration in the Beaufort and Chukchi seas in Alaska. During the 2012 drilling season, we drilled two exploratory wells, one each in the Beaufort and Chukchi seas. These wells are known as top holes as they do not go deep enough to reach hydrocarbon reservoirs. After drilling they were safely capped in accordance with regulatory requirements. Rest of North America Shell also has interests in Greenland and Mexico. SOUTH A MERICA Brazil We are the operator of several producing fields offshore Brazil. They include the Bijupirá and Salema fields (Shell interest 80%) and the BC-10 field (Shell interest 50%). We also operate one offshore exploration block in the Santos Basin, BMS-54 (Shell interest 80%). We have interests in two offshore exploration blocks in the Espirito Santo basins, BMES-23 and BMES-27, with a 20% and 17.5% interest respectively. Shell also operates five blocks in the São Francisco onshore basin area. In 2012, we divested our 40% interest in the offshore Block BS-4 in the Santos Basin. We also have an 18% interest in Brazil Companhia de Gas de São Paulo (Comgás), a natural gas distribution company in the state of São Paulo. French Guiana We are the operator of an exploration block in the 24,000 square kilometres deep-water Guyane Maritime Permit (Shell interest 45%). Rest of South America Shell also has interests in Argentina, Colombia, Guyana and Venezuela. TRA D IN G We market a portion of our share of equity production of LNG and also trade LNG volumes around the world through our hubs in Dubai, the Netherlands and Singapore. We also market and trade natural gas, power and emission rights in the Americas and Europe. 28 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Upstream SUMMARY OF PROVED OIL AND GAS RESERVES OF SHELL SUBSIDIARIES AND SHELL SHARE OF EQUITY-ACCOUNTED INVESTMENTS [A] (AT DECEMBER 31, 2012) BASED ON AVERAGE PRICES FOR 2012 Oil and natural Natural gas Total gas liquids (thousand Synthetic crude oil Bitumen all products (million barrels) million scf) (million barrels) (million barrels) (million boe)[B] Proved developed Europe Asia Oceania Africa North America USA Canada South America Total proved developed Proved undeveloped Europe Asia Oceania Africa North America USA Canada South America 448 1,277 53 496 500 28 48 2,850 345 429 121 192 403 5 39 11,599 14,454 1,424 1,012 1,674 872 84 31,119 2,569 1,857 5,186 1,229 678 139 15 Total proved undeveloped Total proved developed and undeveloped 1,534 11,673 Europe Asia Oceania Africa North America USA Canada South America Total 793 1,706 174 688 903 33 87 4,384 14,168 16,311 6,610 2,241 2,352 1,011 99 42,792 [A] Includes 18 million boe of reserves attributable to non-controlling interest in Shell subsidiaries. [B] Natural gas volumes are converted to oil equivalent using a factor of 5,800 scf per barrel. – – – – – 1,271 – 1,271 – – – – – 492 – 492 – – – – – 1,763 – 1,763 – – – – – 18 – 18 – – – – – 31 – 31 – – – – – 49 – 49 2,448 3,769 299 670 789 1,467 62 9,504 788 749 1,015 404 520 552 42 4,070 3,236 4,518 1,314 1,074 1,309 2,019 104 13,574 reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Upstream 29 CAPITAL EXPENDITURE ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES AND EXPLORATION EXPENSE OF SHELL SUBSIDIARIES BY GEOGRAPHICAL AREA [A] $ MILLION Asia Oceania Africa North America – USA North America – Other [B] South America Total 2012 3,175 3,412 5,534 2,277 11,344 3,475 907 2011 1,907 4,319 3,349 1,701 6,445 2,913 487 2010 2,033 3,137 1,804 1,629 9,400 3,455 373 30,124 21,121 21,831 [A] Capital expenditure is the cost of acquiring property, plant and equipment for exploration and production activities, and – under the successful efforts method of accounting for exploration costs – includes exploration drilling costs capitalised pending determination of commercial reserves. See also Note 2 to the “Consolidated Financial Statements” for further information. Exploration expense is the cost of geological and geophysical surveys and of other exploratory work charged to income as incurred. Exploration expense excludes depreciation and release of cumulative currency B U S I N E S S R E V I E W translation differences. [B] Comprises Canada and Greenland. LOCATION OF OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES [A] (AT DECEMBER 31, 2012) Development and/or Exploration production Shell operator[B] Europe Europe Albania Denmark Germany Ireland Italy The Netherlands Norway UK Ukraine Asia [C] Brunei China Indonesia Iraq Jordan Kazakhstan Malaysia Oman Philippines Qatar Russia Saudi Arabia Turkey United Arab Emirates Oceania Australia New Zealand Africa Benin Egypt Gabon Libya Nigeria South Africa Tanzania Tunisia North America USA Canada Greenland South America Argentina Brazil Colombia French Guiana Guyana Venezuela (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) [A] Includes equity-accounted investments. Where an equity-accounted investment has properties outside its base country, those properties are not shown in this table. [B] In several countries where “Shell operator” is indicated, Shell is the operator of some but not all exploration and/or production ventures. [C] Shell suspended all exploration and production activities in Syria in December 2011. 30 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Upstream Average realised price by geographical area OIL AND NATURAL GAS LIQUIDS 2012 Shell share of 2011 Shell share of $/BARREL 2010 Shell share of Europe Asia Oceania Africa North America – USA North America – Canada South America Total Shell equity-accounted Shell equity-accounted Shell equity-accounted subsidiaries investments subsidiaries investments subsidiaries investments 108.13 107.76 91.62 112.45 103.59 68.31 100.01 107.15 104.60 67.33 90.14[A] – 110.00 – 97.33 76.01 106.77 103.73 92.38 111.70 104.93 70.72 100.44 105.74 103.97 62.81 99.74[A] – 109.49 – 97.76 73.01 73.35 76.21 67.90 79.63 76.36 53.23 69.99 75.74 83.24 44.27 78.05[A] – 74.27 – 63.57 52.42 [A] Includes Shell’s ownership of 23% of Woodside Petroleum Ltd as from April 2012 (previously: 24% as from November 2010; 34% before that date), a publicly listed company on the Australian Securities Exchange. We have limited access to data; accordingly, the numbers are estimated. NATURAL GAS Europe Asia Oceania Africa North America – USA North America – Canada South America Total 2012 Shell share of 2011 Shell share of $/THOUSAND SCF 2010 Shell share of Shell subsidiaries equity-accounted investments Shell subsidiaries equity-accounted investments Shell subsidiaries equity-accounted investments 9.48 4.81 11.14 2.74 3.17 2.36 2.63 5.53 9.64 10.13 9.48[A] – 7.88 – 1.04 9.81 9.40 4.83 9.95 2.32 4.54 3.64 2.81 5.92 8.58 8.37 10.09[A] – 8.91 – 0.99 8.58 6.87 4.40 8.59 1.96 4.90 4.09 3.79 5.28 6.71 6.55 8.79[A] – 7.27 – – 6.81 [A] Includes Shell’s ownership of 23% of Woodside Petroleum Ltd as from April 2012 (previously: 24% as from November 2010; 34% before that date), a publicly listed company on the Australian Securities Exchange. We have limited access to data; accordingly, the numbers are estimated. SYNTHETIC CRUDE OIL North America – Canada BITUMEN North America – Canada 2012 Shell subsidiaries 81.46 2012 Shell subsidiaries 68.97 2011 Shell subsidiaries 91.32 2011 Shell subsidiaries 76.28 $/BARREL 2010 Shell subsidiaries 71.56 $/BARREL 2010 Shell subsidiaries 66.00 reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Upstream 31 Average production cost by geographical area OIL, NATURAL GAS LIQUIDS AND NATURAL GAS [A] 2012 Shell share of 2011 Shell share of $/BOE 2010 Shell share of Europe Asia Oceania Africa North America – USA North America – Canada South America Total Shell equity-accounted Shell equity-accounted Shell equity-accounted subsidiaries investments subsidiaries investments subsidiaries investments 14.50 7.53 9.06 9.52 20.09 19.47 16.36 12.47 3.56 4.71 16.97[B] – 18.24 – 11.01 6.05 12.17 6.92 8.50 8.45 17.91 18.12 12.50 11.00 3.12 4.60 14.46[B] – 17.63 – 12.25 5.60 10.09 6.07 5.85 7.09 12.90 17.48 8.88 9.10 2.78 4.68 8.37[B] – 16.47 – 25.05 5.29 [A] Natural gas volumes are converted to oil equivalent using a factor of 5,800 scf per barrel. [B] Includes Shell’s ownership of 23% of Woodside Petroleum Ltd as from April 2012 (previously: 24% as from November 2010; 34% before that date), a publicly listed company on the Australian Securities Exchange. We have limited access to data; accordingly, the numbers are estimated. SYNTHETIC CRUDE OIL North America – Canada BITUMEN North America – Canada 2012 Shell subsidiaries 40.40 2012 Shell subsidiaries 24.11 2011 Shell subsidiaries 46.19 2011 Shell subsidiaries 31.81 $/BARREL 2010 Shell subsidiaries 49.83 $/BARREL 2010 Shell subsidiaries 23.82 B U S I N E S S R E V I E W 32 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Upstream Oil and gas production (available for sale) CRUDE OIL AND NATURAL GAS LIQUIDS [A] 2012 Shell share of 2011 Shell share of THOUSAND B/D 2010 Shell share of Shell equity-accounted Shell equity-accounted Shell equity-accounted subsidiaries investments subsidiaries investments subsidiaries investments Europe Denmark Italy Norway UK Other [B] Total Europe Asia Brunei Malaysia Oman Russia United Arab Emirates Other [B] Total Asia Total Oceania Africa Gabon Nigeria Other [B] Total Africa North America USA Other [B] Total North America South America Brazil Other [B] Total South America Total 73 39 40 60 3 215 2 41 205 – – 59 307 27 38 240 12 290 155 15 170 34 1 35 – – – – 4 4 73 – – 104 145 23 345 18 – – – – 67 – 67 – 10 10 88 35 37 71 3 234 2 40 200 – – 40 282 30 44 262 20 326 141 18 159 45 1 46 – – – – 5 5 76 – – 117 144 20 357 18 – – – – 70 – 70 – 9 9 98 33 48 98 3 280 3 40 199 – – 29 271 30 34 302 20 356 163 20 183 53 1 54 – – – – 5 5 77 – – 117 135 1 330 29 – – – – 74 – 74 – 7 7 1,044 444 1,077 459 1,174 445 [A] Includes natural gas liquids. Royalty purchases are excluded. Reflects 100% of production attributable to subsidiaries except in respect of PSCs, where the figures shown represent the entitlement of the subsidiaries concerned under those contracts. [B] Comprises countries where 2012 production was lower than 20 thousand b/d or where specific disclosures are prohibited. NATURAL GAS [A] Europe Denmark Germany The Netherlands Norway UK Other [B] Total Europe Asia Brunei China Malaysia Russia Other [B] Total Asia Oceania Australia New Zealand Total Oceania Africa Egypt Nigeria Total Africa North America USA Canada Total North America Total South America Total reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Upstream 33 2012 Shell share of 2011 Shell share of MILLION SCF/D 2010 Shell share of Shell equity-accounted Shell equity-accounted Shell equity-accounted subsidiaries investments subsidiaries investments subsidiaries investments 202 217 – 713 328 43 1,503 51 131 572 – 795 1,549 352 182 534 141 740 881 1,062 616 1,678 44 6,189 – – 1,808 – – – 1,808 512 – – 374 317 1,203 243 – 243 – – – 5 – 5 1 3,260 256 253 – 618 403 41 – – 1,767 – – – 328 267 – 643 541 38 – – 1,997 – – – 1,571 1,767 1,817 1,997 52 174 763 – 363 1,352 373 175 548 133 707 840 961 570 1,531 51 5,893 524 – – 382 246 1,152 167 – 167 – – – 6 – 6 1 3,093 55 253 807 – 209 1,324 404 202 606 137 587 724 1,149 563 1,712 61 6,244 B U S I N E S S R E V I E W 497 – – 359 – 856 204 – 204 – – – 4 – 4 – 3,061 [A] Reflects 100% of production attributable to subsidiaries except in respect of PSCs, where the figures shown represent the entitlement of the companies concerned under those contracts. [B] Comprises countries where 2012 production was lower than 115 million scf/d or where specific disclosures are prohibited. SYNTHETIC CRUDE OIL North America – Canada BITUMEN North America – Canada 2012 Shell subsidiaries 125 2012 Shell subsidiaries 20 2011 Shell subsidiaries 115 2011 Shell subsidiaries 15 THOUSAND B/D 2010 Shell subsidiaries 72 THOUSAND B/D 2010 Shell subsidiaries 18 34 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Upstream LNG and GTL plants at December 31, 2012 LNG LIQUEFACTION PLANTS IN OPERATION Australia North West Shelf Australia Pluto 1 Brunei LNG Malaysia LNG (Dua and Tiga) Nigeria LNG Oman LNG Qalhat (Oman) LNG Qatargas 4 Sakhalin LNG [A] Interest may be held via indirect shareholding. [B] As reported by the operator. [C] Our interests in the Dua and Tiga plants are due to expire in 2015 and 2023 respectively. LNG LIQUEFACTION PLANTS UNDER CONSTRUCTION Gorgon Prelude Wheatstone Location Karratha Karratha Lumut Bintulu Bonny Sur Sur Ras Laffan Prigorodnoye Shell 100% capacity interest (%)[A] (mtpa)[B] 21 21 25 15 26 30 11 30 27.5 16.3 4.3 7.8 17.3[C] 22.0 7.1 3.7 7.8 9.6 Shell 100% capacity Location Barrow Island interest (%) 25 Offshore Australia Onslow 72.5[A] 6.4 (mtpa) 15.3 3.6 8.9 [A] We divested a further 5% interest in Prelude during the first quarter of 2013, reducing our interest to 67.5%. GTL PLANTS IN OPERATION Bintulu Pearl Equity LNG sales volumes Shell 100% capacity Country Malaysia Qatar interest (%) 72 100 (b/d) 14,700 140,000 SHELL SHARE OF EQUITY LNG SALES VOLUMES MILLION TONNES Australia Brunei Malaysia Nigeria Oman Qatar Sakhalin Total 2012 2011 3.6 1.7 2.5 5.1 1.9 2.4 3.0 3.1 1.7 2.4 5.0 2.0 1.7 2.9 20.2 18.8 2010 3.4 1.7 2.4 4.5 2.0 – 2.8 16.8 reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Downstream 35 B U S I N E S S R E V I E W DOWNSTREAM KEY STATISTICS Segment earnings [A] Including: $ MILLION 2012 5,350 2011 4,289 2010 2,950 Revenue (including inter-segment sales) 424,410 428,646 336,216 Share of earnings of equity-accounted investments [A] Production and manufacturing expenses Selling, distribution and administrative 1,354 9,484 1,577 948 10,547 10,592 expenses 12,996 12,920 13,716 Depreciation, depletion and amortisation Net capital investment [A] Refinery availability (%) Chemical plant availability (%) Refinery processing intake (thousand b/d) Oil products sales volumes (thousand b/d) 3,083 4,275 93 91 2,819 6,235 4,251 4,342 4,254 2,358 92 89 92 94 2,845 6,196 3,197 6,460 Chemicals sales volumes (thousand tonnes) 18,669 18,831 20,653 [A] Segment earnings are presented on a current cost of supplies basis. See Notes 2 and 4 to the “Consolidated Financial Statements” for further information. Overview Shell’s Downstream organisation is made up of a number of different business activities, part of an integrated value chain, that collectively turn crude oil into a range of refined products, which are moved and marketed around the world for domestic, industrial and transport use. The products include gasoline, diesel, heating oil, aviation fuel, marine fuel, lubricants, bitumen, sulphur and liquefied petroleum gas (LPG). In addition, we produce and sell petrochemicals for industrial use worldwide. Our Refining activities comprise Manufacturing, Supply and Distribution. Marketing includes Retail, Lubricants, Business to Business (B2B) and Alternative Energies. Chemicals has dedicated manufacturing and marketing units of its own. We also trade crude oil, oil products and petrochemicals, primarily to optimise feedstock for Manufacturing and Chemicals and to supply our Marketing businesses. Downstream earnings are presented on a current cost of supplies basis (CCS earnings). On this basis, the purchase price of the volumes sold during a period is based on the current cost of supplies during the same period, after making allowance for the tax effect. CCS earnings therefore exclude the effect of changes in the oil price on inventory valuation. Accordingly, when oil prices increase during the period, CCS earnings are likely to be lower than earnings calculated on a first-in first-out basis (FIFO). Similarly, in a period with declining oil prices, CCS earnings are likely to be higher than earnings calculated on a FIFO basis. This explains why 2012 CCS earnings were $463 million higher than earnings calculated on a FIFO basis (2011: $2,355 million lower; 2010: $1,498 million lower). Business conditions The industrial landscape in 2012 reflected weaker economic growth in several regions, which reduced demand. Even so, refining margins were higher in 2012 compared with 2011 in key refining hubs, except Asia. Chemical margins in Europe and Asia were lower than in 2011 as a result of weak macroeconomic conditions, although US ethane cracker margins rose significantly due to the wide price differential between crude oil and natural gas, and improved marketing margins. Earnings 2012-2011 Segment earnings in 2012 were $5,350 million, 25% higher than in 2011. This increase reflected a return to profitability in Refining, although marginal, as a result of higher realised refining margins and better refinery availability that were partly offset by lower Chemicals earnings. Trading contributions were lower in 2012 than in 2011, while Marketing contributions were broadly unchanged. Both activities continued to contribute significantly to Downstream earnings. Realised refining margins recovered strongly from their low level at the end of 2011, and improved across all regions apart from Asia. Refinery intake volumes were 1% lower compared with 2011. However, when portfolio impacts are excluded, refinery intake volumes were 4% higher than in 2011. Refinery availability increased to 93% compared with 92% in 2011. Chemicals earnings were lower, mainly as a result of the global economic slowdown, supply constraints of favourable feedstocks in the USA, and the impact of hurricane Isaac on operations. Chemicals sales volumes were 1% lower compared with 2011, as reductions in European manufacturing capacity and rationalisation of the contract portfolio were largely offset by improved operating performance. Chemical plant availability increased to 91% compared with 89% in 2011. Oil products sales volumes were 1% higher compared with 2011. Lower marketing volumes, mainly as a result of portfolio divestments, were more than offset by higher trading volumes. Excluding the impact of divestments and the effect of the formation of the Raízen biofuel joint venture, oil products sales volumes were 3% higher compared with 2011. Overall, operating expenses decreased in 2012 compared with 2011. Production and manufacturing expenses declined, driven by manufacturing divestments, cost reduction initiatives and favourable currency exchange rate effects. Selling, distribution and administrative expenses were broadly unchanged; cost reductions, portfolio divestments and favourable currency exchange rate effects were offset by spending related to higher volumes, and growth-stimulating programmes. Earnings in 2012 included a net gain of $39 million. There were net gains on divestments and a tax credit, partly offset by legal and environmental provisions. The divestments relate to a number of retail sites in Canada, LPG businesses in Malaysia and the Philippines, as well as the continuation of the divestment of our Downstream activities in Africa. Earnings in 2011 included a net gain of $15 million. There was a gain from the fair-value accounting of commodity derivatives, a gain arising from the formation of the Raízen joint venture, a net gain on divestments and a tax credit. These gains were significantly offset by charges related to impairments, redundancy, decommissioning and legal provisions. The 2011 divestments included the sale of our Stanlow refinery in the UK, the majority of our Downstream activities in seven African countries, our Downstream activities in Chile and additional non-core business exits. Earnings 2011-2010 Segment earnings in 2011, which included a net gain of $15 million as described above, were $4,289 million, 45% higher than in 2010. Earnings in 2010 included a net charge of $923 million. Impairment charges were partly offset by a gain related to the fair-value accounting of commodity derivatives, gains from divestments and a 36 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Downstream gain from the sale of land holdings associated with the former Shell Haven refinery in the UK. Business and property RE FIN I N G All gains and charges identified above relate to items that individually exceed $50 million. The following comments relate to earnings after excluding the net gain of $15 million from the 2011 results and the net charge of $923 million from the 2010 results. Downstream earnings increased in 2011 compared with 2010, supported by improved realised unit marketing margins in most businesses, although oil products sales volumes declined, mainly as a result of portfolio divestments and the effects of the formation of the Raízen joint venture. Chemicals reported record earnings in 2011 as the market environment was favourable during most of the year, resulting in higher realised margins, partly offset by the impact of unplanned operational events on Chemicals sales volumes. Realised refining margins were in line with 2010 until the fourth quarter, when margins declined significantly as global market conditions deteriorated. As a result, Refining reported a larger loss in 2011 than in 2010. This loss was largely offset by increased contributions from trading activities due to higher market volatility and greater arbitrage opportunities relative to 2010. Manufacturing We have interests in more than 30 refineries worldwide with the capacity to process approximately 3.4 million barrels of crude oil per day. Approximately 40% of our refining capacity is in Europe and Africa, 35% in the Americas and 25% in Asia-Pacific. The Port Arthur refinery expansion project in Texas, USA, owned by Motiva Enterprises (Shell interest 50%), restarted operations in early 2013, following operational issues in 2012. The expansion brings an additional 320 thousand b/d of capacity online in the US Gulf Coast region (increasing the refinery’s total capacity to 620 thousand b/d). Supply and Distribution With more than 1,500 storage tanks and approximately 150 distribution facilities in approximately 25 countries, our Supply and Distribution infrastructure is well positioned for making deliveries throughout the world. Deliveries include feedstock for our refineries as well as finished products for our Marketing businesses and customers worldwide. Net capital investment Net capital investment was $4.3 billion in both 2012 and 2011. M A R K E T I N G Capital investment was $5.5 billion in 2012, of which $3.2 billion was in Refining and Chemicals, and $2.3 billion was in Marketing. Approximately 56% of our 2012 capital investment was used to maintain the integrity and performance of our asset base. In 2011, capital investment was $7.5 billion, of which $3.3 billion was in Refining and Chemicals, and $4.2 billion was in Marketing. Of the $4.2 billion in Marketing, we invested $1.7 billion in Raízen and $0.4 billion in the acquisition of 253 retail stations in the UK. Divestment proceeds were $1.2 billion in 2012 compared with $3.2 billion in 2011. The planned asset divestment programme to refocus our Downstream portfolio is now mostly complete. Portfolio actions In Refining, Shell acquired the remaining outstanding shares in Gasnor AS, a market leader in Norway, that supplies LNG as a transport fuel to industrial and marine customers. In Australia refining operations at the 79 thousand b/d Clyde refinery ceased. The Clyde refinery and the Gore Bay terminal are in the process of being converted into a fuel import facility. In Marketing, Shell agreed to acquire Neste Oil Corporation’s network of 105 retail sites in Poland. Shell completed the sale of the majority of its shareholding in downstream activities in Botswana, Burkina Faso, Côte d’Ivoire, Guinea, Kenya and Namibia, whilst downstream activities in Tanzania were discontinued. The agreements form part of the divestment of Shell’s shareholding in most of its downstream activities in Africa as announced in 2011. Shell continues to divest non-strategic Downstream positions. Divestments included retail stations in North America and most of our LPG activities in Asia-Pacific. Retail We have about 44,000 service stations in more than 70 countries and more than 100 years’ experience in fuel development. In recent years, we have concentrated on developing differentiated fuels with special formulations designed to clean engines and improve performance. We sell such fuels under the Shell V-Power brand in more than 60 countries. Lubricants Across approximately 100 countries we make, market and sell technically advanced lubricants not only for passenger cars, trucks and coaches but also for industrial machinery in manufacturing, mining, power generation, agriculture and construction. Our strong competitive positioning was highlighted by a number of leading market research firms. The tenth annual Kline & Company report on the global lubricants sector (Global Lubricants Industry 2011: Market Analysis and Assessment) confirmed that Shell maintained its volume and branded leadership position during 2011 with a 13% market share. Business to Business Our Business to Business (B2B) activities sell fuels, speciality products and services to a broad range of commercial customers. Shell Aviation provides fuel for approximately 7,000 aircraft every day at more than 800 airports in more than 35 countries. On average we refuel a plane every 12 seconds. Shell Gas (LPG) provides liquefied petroleum gas and related services to retail, commercial and industrial customers for cooking, heating, lighting and transport. Shell Commercial Fuels provides transport, industrial and heating fuels in 20 countries. Our wide range of products, from reliable main-grade fuels with standard quality to premium products, can offer tangible benefits. These include fuel economy, enhanced equipment performance, such as longer life and lower maintenance costs, and environmental benefits, such as reduced emissions. reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Downstream 37 Shell Bitumen supplies on average 11,000 tonnes of products every day to 1,600 customers worldwide and invests in technology research and development to create innovative, award-winning new products. Downstream business activities with Iran, Sudan and Syria Shell Sulphur Solutions has developed a dedicated sulphur business to manage the complete value chain of sulphur, from refining to marketing. The business provides sulphur for industries such as mining and textiles and also develops new products which incorporate sulphur, for example in road surfaces, fertilisers and concrete. Our marine activities provide lubricants, fuels and related technical services to the shipping and boating industries. We supply more than 100 grades of lubricants and 20 different types of fuel for marine vessels powered by diesel, steam-turbine and gas-turbine engines. We serve more than 15,000 vessels worldwide, ranging from large ocean- going tankers to small fishing boats. Alternative Energies We investigate alternative energy technologies with a long-term aspiration to develop them into business opportunities. We were one of the first companies to invest in advanced biofuels. Our Raízen joint venture in Brazil produces sustainable ethanol from sugar, and manages a retail network. With an annual production capacity of more than 2 billion litres, it is one of the largest biofuel producers in the world. We also continue to research and explore the potential of hydrogen as an alternative energy source for the longer term. IRAN Shell transactions in Iran are disclosed in accordance with Section 13(r) of the US Securities Exchange Act of 1934. See page 51. SUDAN Shell-controlled companies ceased all operational activities in Sudan in 2008. We have, however, continued soil remediation related to earlier operations in the country. SYRIA Shell-controlled companies are in compliance with all EU and US sanctions. Shell-controlled companies continue to supply limited quantities of polyols via a Netherlands-based distributor to private sector customers in Syria. Polyols are commonly used for the production of foam in mattresses and soft furnishings. Downstream data tables The tables below reflect Shell subsidiaries, the 50% Shell interest in Motiva in the USA and instances where Shell owns the crude or feedstock processed by a refinery. Other equity-accounted investments are only included where explicitly stated. B U S I N E S S R E V I E W Shell CO2 is responsible for coordinating and driving CO2 management activities across all our businesses. OIL PRODUCTS – COST OF CRUDE OIL PROCESSED OR CONSUMED [A] C H E M I C A L S Total $ PER BARREL 2012 2011 106.82 104.71 2010 77.22 Manufacturing Our plants produce a range of base chemicals, including ethylene, propylene and aromatics, as well as intermediate chemicals, such as styrene monomer, propylene oxide, solvents, detergent alcohols, ethylene oxide and ethylene glycol. We have the capacity to produce nearly 6 mtpa of ethylene. Marketing We sell petrochemicals to about 1,000 major industrial customers worldwide, with the top 20 customers accounting for more than 40% of our revenue. Our Chemicals business is in the top 10 of chemicals enterprises in the world by revenue. Its products are used to make numerous everyday items, from clothing and cars, to bubble bath and bicycle helmets. TRA D IN G Our trading activities include the optimisation of our oil value chain, including where necessary the sale or purchase of the excess or shortfall of oil products, as well as trading around the physical flow of hydrocarbons. We trade in physical and financial contracts, lease storage and transportation capacities around the globe and manage shipping activities. [A] Includes Upstream margin on crude oil supplied by Shell subsidiaries and equity-accounted investment exploration and production companies. CRUDE DISTILLATION CAPACITY [A] THOUSAND B/CALENDAR DAY [B] Europe Asia-Pacific Americas Other Total 2012 1,243 822 1,212 83 3,360 2011 1,243 861 1,064 83 3,251 2010 1,501 855 1,155 83 3,594 [A] Average operating capacity for the year, excluding mothballed capacity. [B] Calendar day capacity is the maximum sustainable capacity adjusted for normal unit downtime. ETHYLENE CAPACITY [A] THOUSAND TONNES/YEAR Europe Asia-Pacific Americas Other Total 2012 1,659 1,556 2,212 366 5,793 2011 1,659 1,556 2,212 366 5,793 2010 1,878 1,565 2,212 366 6,021 [A] Includes the Shell share of equity-accounted investments’ capacity entitlement (offtake rights), which may be different from nominal equity interest. Nominal capacity is quoted as at December 31. 38 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Downstream OIL PRODUCTS – CRUDE OIL PROCESSED [A] THOUSAND B/D OIL PRODUCT SALES VOLUMES [A] THOUSAND B/D Europe Asia-Pacific Americas Other Total 2012 1,069 704 1,024 220 2011 1,058 731 985 200 2010 1,306 729 1,007 222 Europe Gasolines Kerosines Gas/Diesel oils 3,017 2,974 3,264 Fuel oil [A] Includes natural gas liquids, share of equity-accounted investments and processing for others. REFINERY PROCESSING INTAKE [A] THOUSAND B/D Other products Total Asia-Pacific Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total Americas Gasolines Kerosines 2012 2,620 199 2,819 970 670 2011 2,652 193 2,845 1,041 666 2010 2,932 265 3,197 1,314 650 1,117 1,075 1,158 Crude oil Feedstocks Total Europe Asia-Pacific Americas Other Total 62 63 75 Gas/Diesel oils 2,819 2,845 3,197 Fuel oil [A] Includes crude oil, natural gas liquids and feedstocks processed in crude distillation units and in secondary conversion units. REFINERY PROCESSING OUTTURN [A] THOUSAND B/D Gasolines Kerosines Gas/Diesel oils Fuel oil Other Total 2012 2011 995 321 996 256 452 993 339 977 252 385 2010 1,224 354 1,074 315 442 3,020 2,946 3,409 [A] Excludes “own use” and products acquired for blending purposes. Other products Total Other Gasolines Kerosines Gas/Diesel oils Fuel oil Other products Total Total product sales [B][C] Gasolines Kerosines Gas/Diesel oils Fuel oil Other products CHEMICALS SALES VOLUMES [A] THOUSAND TONNES Total 2012 2011 2010 450 234 909 180 184 467 261 876 227 192 505 299 953 205 227 1,957 2,023 2,189 319 176 445 304 227 315 164 423 273 220 308 172 370 301 224 1,471 1,395 1,375 1,123 1,136 1,128 264 528 89 233 265 461 91 236 270 523 90 249 2,237 2,189 2,260 184 60 230 64 32 570 2,076 734 2,112 637 676 6,235 156 93 236 60 44 589 2,074 783 1,996 651 692 6,196 174 86 253 75 48 636 2,115 827 2,099 671 748 6,460 [A] Excludes deliveries to other companies under reciprocal sale and purchase arrangements, which are in the nature of exchanges. Sales of condensate and natural gas liquids are included. [B] Certain contracts are held for trading purposes and reported net rather than gross. The effect in 2012 was a reduction in oil product sales of approximately 856,000 b/d (2011: 925,000 b/d; 2010: 934,000 b/d). [C] Export sales as a percentage of total oil product sales volumes amounted to 27.9% in 2012 (2011: 26.0%; 2010: 24.1%). Europe Base chemicals First-line derivatives and others Total Asia-Pacific Base chemicals First-line derivatives and others Total Americas Base chemicals First-line derivatives and others Total Other Base chemicals First-line derivatives and others Total Total product sales Base chemicals First-line derivatives and others Total 2012 2011 2010 3,771 2,626 6,397 2,209 3,053 5,262 3,336 3,145 6,481 379 150 529 4,006 2,689 6,695 2,027 3,111 5,138 3,405 3,193 6,598 229 171 400 4,507 2,795 7,302 2,209 3,415 5,624 3,949 3,134 7,083 461 183 644 9,695 8,974 9,667 11,126 9,164 9,527 18,669 18,831 20,653 [A] Excludes chemical feedstock trading and by-products. REFINERIES IN OPERATION (AT DECEMBER 31, 2012) Europe Czech Republic Denmark Germany The Netherlands Norway Asia-Pacific Australia Japan Malaysia Pakistan Philippines Singapore Turkey Americas Argentina Canada Alberta Ontario USA California Louisiana Texas Washington Other Saudi Arabia South Africa Location Kralupy[C] Litvinov[C] Fredericia Harburg Miro[C] Rheinland Schwedt[C] Pernis Mongstad[C] Geelong Mizue (Toa)[C] Yamaguchi[C] Yokkaichi[C] Port Dickson Karachi[C] Tabangao Pulau Bukom Batman[C] Izmir[C] Izmit[C] Kirikale[C] Buenos Aires Scotford Sarnia Martinez Convent[C] Norco[C] Deer Park Port Arthur[C][D] Puget Sound Al Jubail[C] Durban[C] reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Downstream 39 Thousand barrels/calendar day, 100% capacity[B] Thermal Crude cracking/ Asset class Shell distillation visbreaking/ interest (%)[A] capacity coking Catalytic cracking Hydro- cracking Š Š (cid:3) Š (cid:3) Š Š / Š/ / Š/ / (cid:3) Š Š/ / / Š / (cid:3) (cid:3) Š Š Š/ Š/ / 16 16 100 100 32 100 38 90 21 100 18 13 26 51 30 67 100 1 1 1 1 100 100 100 100 50 50 50 50 100 50 38 59 101 63 108 310 327 220 404 205 118 60 110 193 107 43 96 462 23 217 217 106 100 92 71 145 227 229 312 569 137 292 165 – 14 40 14 65 57 47 45 23 – 23 – – – – 31 63 – 17 – – 18 – 5 42 – 25 79 138 23 62 23 24 – – 15 89 – 50 48 55 38 38 25 55 39 – – 34 – 14 13 – 20 – 19 65 82 107 63 81 52 – 34 B U S I N E S S R E V I E W – 30 – – – 79 – 81 – – – – – – – – 55 – 18 25 16 – 62 9 37 45 34 53 67 – 45 – [A] Shell interest rounded to nearest whole percentage point; Shell share of production capacity may differ. [B] Calendar day capacity is the maximum sustainable capacity adjusted for normal unit downtime. [C] Not operated by Shell. [D] Includes the refinery expansion, whose crude distillation unit was restarted in January 2013 and is in ramp up phase. (cid:3) Integrated refinery and chemical complex. Š Refinery complex with cogeneration capacity. / Refinery complex with chemical unit(s). 40 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Downstream MAJOR CHEMICAL PLANTS IN OPERATION [A] (AT DECEMBER 31, 2012) Location Ethylene Thousand tonnes/year, Shell share capacity Styrene monomer Ethylene glycol Higher olefins[B] Europe Germany The Netherlands UK Asia-Pacific China Japan Singapore Americas Canada USA Other Saudi Arabia Total Rheinland Moerdijk Mossmorran [C] Stanlow [C] Nanhai [C] Yamaguchi [C] Jurong Island [D] Pulau Bukom Scotford Deer Park Geismar Norco Al Jubail [C] 272 972 415 – 475 – 281 800 – 836 – 1,376 366 5,793 – 789 – – 320 – 720 – 450 – – – 400 2,679 – 155 – – 175 – 940 – 450 – 375 – – – – – 330 – 11 – – – – 920 – – 2,095 1,261 [A] Includes joint-venture plants, with the exception of the Infineum additives joint ventures. [B] Higher olefins are linear alpha and internal olefins (products range from C6-C2024). [C] Not operated by Shell. [D] Combination of 100% Shell-owned plants and joint ventures (Shell and non-Shell operated). A Aromatics, lower olefins. I P Intermediates. Polyethylene, polypropylene. O Other. OTHER CHEMICAL LOCATIONS Europe Germany The Netherlands Asia-Pacific Australia Japan Malaysia Americas Argentina Canada USA Other South Africa A Aromatics, lower olefins. I Intermediates. O Other. Location Harburg Karlsruhe Schwedt Pernis Geelong Kawasaki Yokkaichi Bintulu Port Dickson Buenos Aires Sarnia Martinez Mobile Puget Sound Durban Additional products A A, I – I A, I, P A, I A, I, P, O A, I A, I A, I I A A, O Products I A A A, I, O A, I A, I A I A I A, I O A O I CORPORATE EARNINGS Net interest and investment expense Foreign exchange gains/(losses) Other – including taxation Segment earnings 2012 (1,001) 169 623 (209) $ MILLION 2010 (309) 42 358 91 2011 (624) (77) 787 86 Overview The Corporate segment covers the non-operating activities supporting Shell. It includes Shell’s holdings and treasury organisation, its headquarters and central functions as well as its self-insurance activities. All finance expense and income as well as related taxes are included in the Corporate segment earnings rather than in the earnings of the business segments. The holdings and treasury organisation manages many of the Corporate entities and is the point of contact between Shell and the external capital markets. It conducts a broad range of transactions – from raising debt instruments to transacting foreign exchange. Treasury centres in London, Singapore and Rio de Janeiro support these activities. Headquarters and central functions provide business support in the areas of communications, finance, health, human resources, information technology, legal services, real estate and security. They also provide support for the shareholder-related activities of the Company. The central functions are supported by business service centres located around the world which process transactions, manage data and produce statutory returns, among other services. The majority of the headquarters and central-function costs are recovered from the business segments. Those costs that are not recovered are retained in Corporate. reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Corporate 41 Shell mainly self-insures its risk exposures. Shell insurance subsidiaries provide insurance coverage to Shell entities, generally up to $1.15 billion per event and usually limited to Shell’s percentage interest in the relevant entity. The type and extent of the coverage provided is equal to that which is otherwise commercially available in the third-party insurance market. Earnings 2012-2010 Segment earnings for 2012 were a loss of $209 million, compared with a gain of $86 million in 2011 and a gain of $91 million in 2010. Net interest and investment expense increased by $377 million between 2011 and 2012. Interest expense was significantly higher, mostly driven by the liquidity premium associated with our currency swaps, and an increase in Shell’s share of interest expense from equity-accounted investments. Further, the amount of interest capitalised on projects declined overall as major projects came on- stream, partly offset by the development of new projects. These effects were partly offset by higher interest income. In 2011, net interest and investment expense increased by $315 million compared with 2010. There was a substantial reduction in the amount of interest capitalised with projects coming on-stream, and Shell’s share of interest expense from equity-accounted investments was higher due to the debt portfolios of new investments. These effects were partly offset by an increase in interest income as a result of higher average levels of cash balances. Foreign exchange gains of $169 million in 2012 were principally due to the favourable impact of exchange rates on non-functional currency loans and cash balances in operating units. In 2011, foreign exchange losses of $77 million were principally due to the adverse impact of exchange rates on these items. Other earnings decreased by $164 million in 2012 compared with 2011, mainly because of increased costs partly offset by higher tax credits. The increase from 2010 to 2011 of $429 million was mainly due to increased tax credits and reduced costs. B U S I N E S S R E V I E W is to increase proved reserves and more than offset their decline due to production. However, proved reserves and production increases are subject to a variety of risks and other factors, including: crude oil and natural gas prices; the uncertainties of exploration; operational interruptions; geology; frontier conditions; availability of new technology and engineering capacity; availability and cost of skilled or specialist resources; project delays; cost overruns; and fiscal, regulatory and political changes. We have a diverse portfolio of field-development projects and exploration opportunities. This diversity can help to reduce the impact of the political and technical risks in Upstream, including the impact on the cash flow generated by our operating activities. It is our intention to continue to make selective acquisitions and divestments as part of active portfolio management that is in line with our strategy and influenced by market opportunities. Statement of cash flows Net cash from operating activities in 2012 was $46.1 billion, an increase from $36.8 billion in 2011. This increase mainly reflected a working capital decrease in 2012, compared with a working capital increase in 2011. In 2010, net cash from operating activities was $27.4 billion. The increase in 2011 compared with 2010 mainly reflected the increase in earnings. Net cash used in investing activities was $28.4 billion in 2012, an increase from $20.4 billion in 2011. The increase was mainly the result of higher capital expenditure and investments in equity- accounted investments. In 2010, net cash used in investing activities was $22.0 billion. The decrease in 2011 compared with 2010 was mainly the result of higher proceeds from the sale of assets and lower capital expenditure, partly offset by lower proceeds from the sale of equity-accounted investments. Net cash used in financing activities in 2012 was $10.6 billion (2011: $18.1 billion; 2010: $1.5 billion). This included payment of dividends of $7.4 billion (2011: $6.9 billion; 2010: $9.6 billion), interest paid of $1.4 billion (2011: $1.7 billion; 2010: $1.3 billion) and repurchases of shares of $1.5 billion (2011: $1.1 billion; 2010: $nil). Debt issued in 2012 was largely offset by debt repaid (2011: net repayments of debt of $7.1 billion; 2010: net new borrowings of $9.3 billion). Cash and cash equivalents were $18.6 billion at December 31, 2012 (2011: $11.3 billion; 2010: $13.4 billion). 42 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Liquidity and capital resources LIQUIDITY AND CAPITAL RESOURCES We manage our assets and liabilities with the aim that, across the business cycle, “cash in” (including cash from operations and divestments) at least equals “cash out” (including capital investment, interest and dividends), while maintaining a strong balance sheet. A key measure of our capital structure management is the proportion of debt to equity. Across the business cycle we aim to manage gearing (net debt to net debt plus total equity) within the range of 0-30%. During 2012, gearing ranged from 8.1% to 13.1% (2011: 10.8% to 17.1%). See Note 15 to the “Consolidated Financial Statements”. With respect to the objective of maintaining a strong balance sheet, our priorities for applying our cash are investing for organic and inorganic growth, servicing debt commitments, paying dividends and returning surplus cash to our shareholders. Overview The most significant factors affecting our operating cash flow are earnings and movements in working capital. The main drivers impacting our earnings include: realised prices for crude oil and natural gas; production levels of crude oil and natural gas; and refining and marketing margins. Since the contribution of Upstream to earnings is larger than that of Downstream, changes affecting Upstream – particularly changes in realised crude oil and natural gas prices and production levels – have the largest impact on Shell’s operating cash flow. While Upstream benefits from higher realised crude oil and natural gas prices, the extent of such benefit (and the extent of an impact from a decline in these prices) depends on: the extent to which contractual arrangements are tied to market prices; the dynamics of production-sharing contracts; the existence of agreements with governments or national oil companies that have limited sensitivity to crude oil prices; tax impacts; and the extent to which changes in commodity prices flow through into operating costs. Changes in benchmark prices of crude oil and natural gas in any particular period therefore provide only a broad indicator of changes in Upstream earnings experienced in that period. In Downstream, changes in any one of a range of factors derived from either within the industry or the broader economic environment can influence margins. The precise impact of any such changes depends on how the oil markets respond to them. The market response is affected by factors such as: whether the change affects all crude oil types or only a specific grade; regional and global crude-oil and refined-products inventories; and the collective speed of response of the industry refiners and product marketers in adjusting their operations. As a result, refinery and marketing margins fluctuate from region to region and from period to period. Downstream earnings are reported on a current cost of supplies basis, which excludes the effect of changes in the oil price on inventory carrying amounts. However, cash flow from operations is not affected by the reporting basis. In the longer term, replacement of proved oil and gas reserves will affect our ability to maintain or increase production levels in Upstream, which in turn will affect our cash flow and earnings. We will need to take measures to maintain or increase production levels in future periods. These may include: developing new fields and mines; developing and applying new technologies and recovery processes to existing fields and mines; and making selective acquisitions. Our goal reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Liquidity and capital resources 43 B U S I N E S S R E V I E W CASH FLOW INFORMATION [A] $ BILLION 2012 2011 2010 Net cash from operating activities excluding working capital movements Upstream Downstream Corporate Total Increase in inventories (Increase)/decrease in accounts receivable Increase/(decrease) in accounts payable and accrued liabilities (Increase)/decrease in working capital Net cash from operating activities Net cash used in investing activities Net cash used in financing activities Currency translation differences relating to cash and cash equivalents Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 32.9 8.0 1.8 42.7 (1.7) 14.1 (9.0) 3.4 46.1 (28.4) (10.6) 0.2 7.3 11.3 18.6 33.3 24.6 8.7 1.2 43.2 (1.9) 8.1 0.6 33.3 (2.9) (10.1) (11.9) 5.6 (6.4) 36.8 (20.4) (18.1) 8.9 (5.9) 27.4 (22.0) (1.5) (0.4) (0.2) (2.1) 3.7 13.4 11.3 9.7 13.4 [A] For the “Consolidated Statement of Cash Flows” see page 102. Financial condition and liquidity Our financial position is strong. In 2012, we generated a return on average capital employed (ROACE) of 12.7% (see page 45) and year- end gearing was 9.2% (2011: 13.1%). We returned $11.0 billion to our shareholders through dividends in 2012. Some of those dividends were paid out as 103.8 million shares issued to shareholders who had elected to receive new shares instead of cash. To partly offset the dilution created by the issuance of those shares, 43.7 million shares were repurchased and cancelled as part of our share buyback programme. The size and scope of our businesses require a robust financial control framework and effective management of our various risk exposures. Financial turbulence in the eurozone and other international events continue to put significant stress on the business environment in which we operate. We are following closely the developments and the challenges that the eurozone and other markets face, and are taking all reasonable steps to ensure that we are well positioned to deal with unexpected events should they occur. Our treasury and trading operations are highly centralised, and are effective in controlling credit exposures associated with managing our substantial cash, foreign exchange and commodity positions. We diversify our cash investments across a range of financial instruments and counterparties to avoid concentrating risk in any one type of investment or country. We carefully monitor our investments and adjust them in light of new market information. Exposure to failed financial and trading counterparties was minimal in 2012 (see Note 21 to the “Consolidated Financial Statements”). Total employer contributions to our defined benefit pension plans in 2012 were $2.3 billion (2011: $2.3 billion) and are estimated to be $2.5 billion in 2013, reflecting current funding levels. See Notes 3 and 18 to the “Consolidated Financial Statements” for further information. Cash and cash equivalents amounted to $18.6 billion at the end of 2012 (2011: $11.3 billion). Cash and cash equivalents are held in various currencies but primarily in dollars, euros and sterling. Total debt increased by $0.6 billion in 2012 to $37.8 billion at December 31, 2012. The total debt outstanding (excluding leases) at December 31, 2012, will mature as follows: 23% in 2013; 8% in 2014; 12% in 2015; 6% in 2016; and 51% in 2017 and beyond. The debt maturing in 2013 is expected to be repaid from a combination of cash balances and cash generated from operations. We also maintain a $5.1 billion credit facility that was undrawn as at December 31, 2012. We believe our current working capital is sufficient for present requirements. We satisfy our funding and working capital requirements from the cash generated by our businesses and through the issuance of external debt. Our external debt is principally financed from the international debt capital markets through central debt programmes consisting of: ▪ a $10 billion global commercial paper (CP) programme, exempt from registration under section 3 (a)(3) of the US Securities Act of 1933, with maturities not exceeding 270 days; ▪ a $10 billion CP programme, exempt from registration under section 4(2) of the US Securities Act of 1933, with maturities not exceeding 397 days; ▪ a $25 billion euro medium-term note (EMTN) programme; and ▪ an unlimited US universal shelf (US shelf) registration. All CP, EMTN and US shelf issuances have been undertaken by Shell International Finance B.V., the issuance company for Shell, and are guaranteed by Royal Dutch Shell plc. Further disclosure on debt is included in Note 15 to the “Consolidated Financial Statements”. Certain joint-venture operations are financed separately. In 2012, despite our strong cash position, we took advantage of favourable market conditions, including historically low interest rates, to pre-finance bond maturities in 2013 and issued $4.25 billion of long-term bonds under the US shelf registration. Periodically, for working capital purposes, we issued commercial paper (2011: we issued commercial paper, but no long-term bonds). Our $5.1 billion committed credit facility, which is due to expire in 2015, and internally available liquidity provide back-up coverage for commercial paper. Aside from certain borrowings in local subsidiaries, we do not have any other committed credit facilities. We consider additional facilities to be neither necessary nor cost-effective for financing purposes, given our size, credit rating and cash- generative nature. The maturity profile of our outstanding commercial paper is actively managed to ensure that the amount of commercial paper maturing within 30 days remains consistent with the level of supporting liquidity. While our subsidiaries are subject to restrictions, such as foreign withholding taxes on the transfer of funds in the form of cash dividends, loans or advances, such restrictions are not expected to have a material impact on our ability to meet our cash obligations. The consolidated unaudited ratio of earnings to fixed charges of Shell for each of five years ending December 31, 2008-2012, is as follows: RATIO OF EARNINGS TO FIXED CHARGES Ratio of earnings to fixed charges 30.99 35.78 21.75 12.90 26.80 2012 2011 2010 2009 2008 44 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Liquidity and capital resources For the purposes of the above table, earnings consist of pre-tax income from continuing operations (before adjustment for non-controlling interest) plus fixed charges (excluding capitalised interest) less undistributed income of equity-accounted investments. Fixed charges consist of expensed and capitalised interest (excluding accretion expense) plus interest within rental expenses (for operating leases). Refer to “Exhibit 7.1” regarding the calculation of the ratio of earnings to fixed charges. CAPITALISATION TABLE $ MILLION Dec 31, 2012 Dec 31, 2011 Equity attributable to Royal Dutch Shell plc shareholders Current debt Non-current debt Total debt [A] Total capitalisation 188,494 169,517 7,833 29,921 37,754 6,712 30,463 37,175 226,248 206,692 [A] Of total debt, $33.4 billion (2011: $32.7 billion) was unsecured and $4.4 billion (2011: $4.5 billion) was secured. Further disclosure on debt, including the amount guaranteed by Royal Dutch Shell plc, is included in Note 15 to the “Consolidated Financial Statements”. Dividends Our policy is to grow the US dollar dividend through time in line with our view of Shell’s underlying earnings and cash flow. When setting the dividend, the Board of Directors looks at a range of factors, including the macro environment, the current balance sheet and future investment plans. We have announced an interim dividend in respect of the fourth quarter 2012 of $0.43 per share, a 2.4% increase compared with the US dollar dividend for the same quarter of 2011. Shareholders have a choice to receive dividends in cash or in shares via our Scrip Dividend Programme. The Board expects that the first quarter 2013 interim dividend will be $0.45 per share, an increase of 4.7% compared with the US dollar dividend for the same quarter of 2012. Net capital investment Our net capital investment was $29.8 billion in 2012 (2011: $23.5 billion; 2010: $23.7 billion). Of the total net capital investment, $25.3 billion (2011: $19.1 billion; 2010: $21.2 billion) related to Upstream; $4.3 billion (2011: $4.3 billion; 2010: $2.4 billion) to Downstream; and $0.2 billion (2011: $0.1 billion; 2010: $0.1 billion) to Corporate. Our 2012 net capital investment comprised $36.8 billion of capital investment (2011: $31.1 billion; 2010: $30.6 billion) less $7.0 billion of divestment proceeds (2011: $7.5 billion; 2010: $6.9 billion) See Note 4 to the “Consolidated Financial Statements” for further information. Financial framework We manage our businesses to deliver strong cash flows to fund investment and growth. Our management decisions are based on assumptions about future oil and gas prices. Repurchases of shares On May 22, 2012, the shareholders approved an authority, which will expire at the end of the 2013 AGM, for the Company to repurchase up to 632 million of its shares. In accordance with a similar authority granted at the 2011 AGM, a share buyback programme was commenced in that year to offset the dilution created by the issuance of shares under our Scrip Dividend Programme. All of the shares purchased under the buyback programme were cancelled. A resolution will be proposed at the 2013 AGM to renew authority for the Company to purchase its own share capital up to specified limits for another year. Shares are also purchased by the employee share ownership trusts (see page 58), in part through re-investment of dividends received, to meet delivery commitments under employee share plans. All share purchases are made in open-market transactions. The following table provides information on repurchases of shares in 2012 and up to February 19, 2013. Purchases in euros and sterling are converted to dollars using the exchange rate at each transaction date. ISSUER PURCHASES OF EQUITY SECURITIES Number repurchased for employee A shares Weighted average Number repurchased for employee Number repurchased B shares Weighted average Purchase period share plans price ($)[A] share plans for cancellation[B] price ($)[A] 2012 January March April May June July August September October November December Total 2012 2013 January Total 2013 [C] – 844,295 – – – 36.32 – – – – – – – 1,325,366 6,854,706 8,146,667 720,984 32.79 2,265,336 11,956,000 – – – – 681,524 35.43 – – 732,278 2,979,081 – – – – 32.91 34.42 – – – – – – – 2,290,370 4,555,706 2,446,231 – – 2,493,369 8,132,813 2,332,831 43,687,983 – – – – – 35.29 34.83 32.44 33.91 35.27 – – 35.28 34.52 35.07 34.19 – – [A] Average price paid per share includes stamp duty and brokers’ commission. [B] Under the share buyback programme. [C] As at February 19, 2013. Number repurchased for employee share plans 768,737 187,410 – – 438,085 519,100 1,211,128 168,090 – – 181,367 3,473,917 928,694 928,694 A ADSs Weighted average price ($)[A] 73.15 73.91 – – 64.86 68.18 69.84 70.85 – – 65.81 69.75 69.05 69.05 reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Liquidity and capital resources 45 Contractual obligations The table below summarises Shell’s principal contractual obligations at December 31, 2012, by expected settlement period. The amounts presented have not been offset by any committed third-party revenue in relation to these obligations. CONTRACTUAL OBLIGATIONS $ BILLION Debt [A] Finance leases [B] Operating leases [C] Less Between Between 5 years than 1 and 3 3 and 5 1 year years years 7.5 0.7 4.9 6.4 1.2 7.9 5.7 1.2 5.9 and later 12.8 4.4 12.2 Total 32.4 7.5 30.9 Return on average capital employed ROACE measures the efficiency of Shell’s utilisation of the capital that it employs. In this calculation, ROACE is defined as income for the period adjusted for after-tax interest expense as a percentage of the average capital employed for the period. Capital employed consists of total equity, current debt and non-current debt. The tax rate is derived from calculations at the published segment level. CALCULATION OF RETURN ON AVERAGE CAPITAL EMPLOYED $ MILLION Income for the period Interest expense after tax 2012 2011 2010 26,840 31,185 20,474 938 770 577 Purchase obligations [D] 176.0 92.2 39.4 160.1 467.7 Income before interest expense 27,778 31,955 21,051 Other long-term Capital employed – opening 208,178 194,112 173,168 contractual liabilities [E] – 0.9 0.5 0.2 1.6 Capital employed – closing 227,681 208,178 194,112 Total 189.1 108.6 52.7 189.7 540.1 Capital employed – average 217,930 201,145 183,640 [A] Contractual repayments excluding $4.2 billion of finance lease obligations. See Note 15 to the “Consolidated Financial Statements”. [B] Includes interest. See Note 15 to the “Consolidated Financial Statements”. [C] See Note 15 to the “Consolidated Financial Statements”. [D] Includes all significant items, including fixed or minimum quantities to be purchased; fixed, minimum or any agreement to purchase goods and services that is enforceable, legally binding and specifies variable price provisions; and the approximate timing of the purchase. [E] Includes all obligations included in “Trade and other payables” in “Non- current liabilities” on the Consolidated Balance Sheet that are contractually fixed as to timing and amount. In addition to these amounts, Shell has certain obligations that are not contractually fixed as to timing and amount, including contributions to defined benefit pension plans (see Note 18 to the “Consolidated Financial Statements”) and obligations associated with decommissioning and restoration (see Note 19 to the “Consolidated Financial Statements”). The table above excludes interest expense related to debt, which is estimated to be $1.1 billion payable in less than one year, $1.7 billion payable between one and three years, $1.5 billion payable between three and five years and $5.9 billion payable five years and later. For this purpose, we assume that interest rates with respect to variable interest rate debt remain constant and that there is no change in the aggregate principal amount of debt other than repayment at scheduled maturity as reflected in the table. Guarantees and other off-balance sheet arrangements Guarantees at December 31, 2012, were $3.3 billion (2011: $3.3 billion). This includes $2.2 billion (2011: $2.2 billion) of guarantees of debt of equity-accounted investments, for which the largest amount outstanding during 2012 was $2.2 billion (2011: $2.4 billion). ROACE 12.7% 15.9% 11.5% In 2012, about 27% of our average capital employed was not generating any revenue, which reduced our ROACE by approximately 5%. These assets included projects being developed and exploration acreage. Financial information relating to the Royal Dutch Shell Dividend Access Trust The results of operations and financial position of the Royal Dutch Shell Dividend Access Trust (the Trust) are included in the consolidated results of operations and financial position of Shell. Certain condensed financial information in respect of the Trust is given below. Separate financial statements for the Trust are also included in this Report. For the years 2012, 2011 and 2010 the Trust recorded income before tax of £2,383 million, £2,175 million and £2,863 million respectively. In each period this reflected the amount of dividends received on the dividend access share. At December 31, 2012, the Trust had total equity of £nil (2011: £nil; 2010: £nil), reflecting cash of £1,202,271 (2011: £997,987; 2010: £774,546) and unclaimed dividends of £1,202,271 (2011: £997,987; 2010: £774,546). The Trust only records a liability for an unclaimed dividend, and a corresponding amount of cash, to the extent that cheques expire, which is one year after their issuance, or to the extent that they are returned unpresented. B U S I N E S S R E V I E W 46 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Our people OUR PEOPLE Competitiveness and innovation Our people are central to our aim of being the world’s most competitive and innovative energy company. We recruit, train and recompense them according to a people strategy based on three priorities: assuring sources of talent now and in the future; strengthening leadership and professionalism; and enhancing individual and organisational performance. Over the course of 2012, Shell employed an average of 87,000 people in more than 70 countries. We had a strong external recruitment drive to execute our strategy and growth plans for the future, hiring approximately 1,200 graduates and 3,500 experienced professionals. The majority of our graduates and experienced professional hires came from technical disciplines. EMPLOYEES BY GEOGRAPHICAL AREA (AVERAGE NUMBERS) The Netherlands UK Other Europe Asia, Oceania, Africa USA Other Americas Total THOUSAND 2012 2011 2010 8 6 10 24 31 20 12 87 8 7 10 25 33 20 12 90 8 7 13 28 34 20 15 97 Employee communication and involvement Two-way dialogue between management and staff – directly and, where appropriate, via employee representative bodies – is important and embedded in our work practices. On a quarterly basis, we brief our staff about Shell’s operational and financial results through various channels, including electronic communications from the Chief Executive Officer, webcasts, publications and face-to-face gatherings. in the number of senior leadership positions, while the number of women stayed the same. In 42% of the countries where Shell subsidiaries and equity-accounted investments are based, local nationals filled more than half of the senior leadership positions, compared with 34% of countries in 2011. Employee share plans Shell has a number of share plans designed to align employees’ interests with Shell’s performance through share ownership. For information on the share-based compensation plans for Executive Directors, see the “Directors’ Remuneration Report”. PERFORMANCE SHARE PLAN The Performance Share Plan (PSP) was introduced in 2005. Conditional awards of the Company’s shares are made under the terms of the PSP to some 15,000 employees each year. The extent to which the awards vest is determined over a three-year performance period. Half of the award is linked to the key performance indicators described on page 8, averaged over the period. For the PSP awards made prior to 2010, the other half of the award was linked to the relative total shareholder return over the period compared with four of our main competitors. For awards made in 2010 and onwards, the other half of the award is linked to a comparison with four of our main competitors over the period on the basis of four relative performance measures. All shares that vest are increased by an amount equal to the notional dividends accrued on those shares during the period from the award date to the vesting date. None of the awards results in beneficial ownership until the shares are delivered. Also refer to Note 22 to the “Consolidated Financial Statements”. RESTRICTED SHARE PLAN Under the Restricted Share Plan, awards are made on a highly selective basis to senior staff. Shares are awarded subject to a three- year retention period. All shares that vest are increased by an amount equal to the notional dividends accrued on those shares during the period from the award date to the vesting date. The Shell People Survey is one of the principal tools used to measure employee engagement: the degree of affiliation and commitment to Shell. It provides insights into employees’ views, and has had a consistently high response rate. The average employee engagement score in 2012 was 77% favourable, a three-point increase from 2011. GLOBAL EMPLOYEE SHARE PURCHASE PLAN Employees in 50 countries may participate in the Global Employee Share Purchase Plan. This plan enables eligible employees to make contributions towards the purchase of the Company’s shares at a 15% discount to the market price either at the start or at the end of an annual cycle – whichever date offers the lower market price. We promote safe reporting of views about our processes and practices. Our global telephone helpline and website enable employees to report, confidentially and anonymously, breaches of the Shell General Business Principles and Code of Conduct. Diversity and inclusion We have a culture that embraces diversity and fosters inclusion. By embedding these principles in our operations, we have a better understanding of the needs of our varied customers, partners and stakeholders throughout the world and can benefit from a wider talent pool. We provide equal opportunity in recruitment, career development, promotion, training and reward for all employees, including those with disabilities. We make adjustments in job design and provide appropriate training where possible for any existing employee who becomes disabled. We actively monitor representation of women and local nationals in senior leadership positions, and have talent-development processes to support us in delivering more diverse representation. At the end of 2012, the proportion of women in senior leadership positions was 16.2%, compared with 16.6% in 2011, because of a small increase UK SHARESAVE SCHEME Eligible employees of participating companies in the UK may participate in the UK Sharesave Scheme. Options are granted over the Company’s shares at market value on a date normally not more than 30 days before the grant date of the option. These options are normally exercisable after completion of a three-year or five-year contractual savings period. UK SHELL ALL EMPLOYEE SHARE OWNERSHIP PLAN Eligible employees of participating companies in the UK may participate in the Shell All Employee Share Ownership Plan, under which monthly contributions from gross pay are made towards the purchase of the Company’s shares. ENVIRONMENT AND SOCIETY Our success in business depends on our ability to meet a range of environmental and social challenges. We must show we can operate safely and manage the effect our activities can have on neighbouring communities and society as a whole. If we fail to do this, we may incur liabilities or sanctions, lose opportunities to do business, our reputation as a company may be harmed, and our licence to operate may be impacted. The Shell General Business Principles include a commitment to sustainable development that involves balancing short- and long-term interests, and integrating economic, environmental and social aspects into our business decisions. We have rigorous standards and a firm governance structure in place to help manage potential impacts. We also work with communities, business partners, non-governmental organisations and other bodies to address potential impacts and share the benefits of our operations and projects. Detailed data and information on our 2012 environmental and social performance will be published in April 2013 in the Shell Sustainability Report. Safety Sustaining our licence to operate depends on maintaining the safety and reliability of our operations. We manage safety risk across our businesses through controls and compliance systems combined with a safety-focused culture. Our global standards and operating procedures define the controls and physical barriers we require to prevent incidents. For example, our offshore wells are designed with at least two independent barriers to mitigate the risk of an uncontrolled release of hydrocarbons. We regularly inspect, test and maintain these barriers to ensure they meet our standards. We continue to strengthen the safety culture among our employees and contractors. We expect everyone working for us to intervene and stop work that may appear to be unsafe. In addition to our ongoing safety awareness programmes, we hold an annual global safety day to give workers time to reflect on how to prevent incidents. We expect everyone working for us to comply with our 12 mandatory Life-Saving Rules. If employees break these rules, they will face disciplinary action up to and including termination of employment. If contractors break the Life-Saving Rules, they can be removed from the worksite. Climate change Growth in energy demand means that all forms of energy will be needed over the longer term. With hydrocarbons forecast to provide the bulk of the energy needed over coming decades, policymakers are focusing on regulations that balance energy demand with environmental concerns. The management of emissions of carbon dioxide (CO2) will become increasingly important as concerns over climate change lead to tighter environmental regulation. We already assess potential costs associated with CO2 emissions when evaluating projects. But in the years to come, governments may impose a price on CO2 emissions that all companies will have to incorporate in their investment plans, and may also require companies to apply technical measures to reduce their CO2 emissions. This could result in higher energy, product and project costs. Currently enacted, proposed and future legislation are also expected to increase the cost of doing business. Furthermore, in our own operations, we are working to understand the potential physical impact of climate change in the future on our facilities and new projects. Shell, together with reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Environment and society 47 other energy companies, has been subject to litigation regarding climate change. We believe these lawsuits are without merit and are not material to Shell. As energy demand increases and easily accessible oil and gas resources decline, we are developing resources that require more energy and require advanced technology to produce. This growth includes expanding our conventional oil and gas businesses, our oil sands operations in Canada, our gas-to-liquids (GTL) business in Qatar, and our global liquefied natural gas (LNG) business. As our businesses grow and production becomes more energy intensive, we expect there will be an associated increase in the direct CO2 emissions from the Upstream facilities we operate. We are seeking cost-effective ways to manage CO2 emissions and see potential business opportunities in developing such solutions. Our main contributions to reducing CO2 emissions are in four areas: supplying more natural gas; supplying more biofuels; progressing carbon capture and storage (CCS) technologies; and implementing energy efficiency measures in our operations. B U S I N E S S R E V I E W Nearly one-third of the world’s CO2 emissions come from power generation. For most countries, using more gas in power generation instead of coal can make the largest contribution, at the lowest cost, to meeting their emission reduction objectives this decade. In combination with renewables and utilisation of CCS, natural gas is essential for significantly lower CO2 emissions beyond 2020. With Shell’s leading position in LNG and new technologies for recovering natural gas from tight rock formations, we can supply natural gas to replace coal in power generation. We see biofuels as one of the most practical and commercially viable ways to reduce CO2 emissions from transport fuels in coming years. Our Raízen joint venture in Brazil produces low-carbon biofuel from sugar cane. We are also investing in research to help develop and commercialise advanced biofuels. The International Energy Agency has stated that CCS could contribute approximately 19% of the CO2 mitigation effort required by 2050. To advance CCS technologies, Shell is involved in CCS projects including the Quest project in Canada, the Mongstad test centre in Norway, and the Gorgon CO2 injection project in Australia. In 2012, we also submitted a proposal for a project in the UK to store CO2 in a depleted gas reservoir in the North Sea. During this important demonstration phase, government support is essential, and initiatives such as the United Nations’ acceptance of CCS as an offsetting activity under the Clean Development Mechanism is a positive step in progressing such technologies. We continue to focus on implementing energy efficiency measures in our operations. Shell has multibillion dollar programmes in place in an effort to improve the energy efficiency of our operations. These include our oil and gas production projects, oil refineries and chemical plants. In addition, we work to help our customers conserve energy and reduce their CO2 emissions, including through the development and sale of advanced fuels and lubricants. The flaring, or burning off, of gas in our Upstream business contributed to our overall greenhouse gas emissions in 2012. The majority of this flaring takes place at facilities where there is no infrastructure to capture the gas produced with oil, known as associated gas. Most of the continuous flaring takes place in Nigeria, where the security situation and lack of partner funding had previously slowed progress 48 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Environment and society on projects to capture associated gas. However, the Shell Petroleum Development Company of Nigeria Ltd (SPDC) made progress in reducing flaring in 2012. Improved security in some areas of the Niger Delta and stable co-funding from our partners meant SPDC was able to continue its multi-year programme to install new gas-gathering facilities and repair existing facilities damaged during the militant crisis of 2006 to 2009. SPDC is working on projects to further reduce flaring. Progress will depend on continued partner support, the local security conditions and the development of an effective market for gas in Nigeria. We expect gas flaring from our Majnoon operations in Iraq to rise in coming years as oil production increases while we evaluate with our partners the most effective way to capture the associated gas. In the south of Iraq we set up a joint venture to capture the associated gas currently being flared from non-operated fields in Basrah province. Spills Large spills of crude oil, oil products and chemicals associated with our operations can result in major clean-up costs as well as fines and other damages. They can also affect our licence to operate and harm our reputation. We have clear requirements and procedures designed to prevent spills, and multibillion dollar programmes are underway to maintain or improve our facilities and pipelines. Shell business units are responsible for organising and executing oil spill responses in line with Shell guidelines as well as with national legislation. All our offshore installations have plans in place to respond to a spill. These plans detail response strategies and techniques, available equipment, and trained personnel and contacts. We are able to call upon significant resources such as containment booms, collection vessels and aircraft. We are also able to draw upon the contracted services of oil spill response organisations, if required. We conduct regular exercises to ensure these plans remain effective. Shell is a founding member of the Marine Well Containment Company, a non-profit industry consortium to provide a containment response system for the Gulf of Mexico. In addition, Shell is operating the Subsea Well Response Project, an industry cooperative effort to enhance global well-containment capabilities. Shell also maintains site-specific emergency response plans in the event of an onshore spill. Like the offshore response plans, these are designed to meet Shell guidelines as well as relevant legal and regulatory requirements. They also provide for initial assessment of incidents and the mobilisation of resources needed to manage them. In 2012, the number of operational spills of more than 100 kilograms decreased to 204, down from 211 in 2011. As of the end of February 2013, there were three spills under investigation in Nigeria that may result in adjustments to the 2012 data. The number of operational spills of more than 100 kilograms for 2011 was updated to 211 from 207 to reflect completion of investigations into spills. As previously noted, detailed data and information on our 2012 environmental and social performance will be published in April 2013 in the Shell Sustainability Report. Although oil spills in Nigeria resulting from sabotage and theft of crude oil remain a significant challenge, there are instances where spills occur in our operations due to operational failures, accidents or corrosion. SPDC has been working to reduce operational spills that are under its control. It maintains a public website to track the response, investigation and clean-up of every spill from its facilities due to operational failure, sabotage or theft. In 2011, the United Nations Environment Programme (UNEP) released a study of oil spills in Ogoniland, where SPDC operated until 1993. SPDC accepted the recommendations of the UNEP report, and has established an independent scientific advisory panel to review SPDC practices in the rehabilitation and remediation of oil spill sites in the Niger Delta. In July 2012, the Federal Government of Nigeria established the Hydrocarbon Pollution Restoration Project – an essential first step to implement the recommendations of the UNEP report. Since the release of the UNEP report, SPDC has undertaken a range of interim activities in Ogoniland where it was free to do so, including helping fund the provision of emergency water supplies and installing permanent water facilities in one affected area, launching a community health outreach programme across Ogoniland, and cleaning up a number of sites where SPDC was granted access. The response to the UNEP report will require a joint effort by all stakeholders, and SPDC intends to play its full part. Hydraulic fracturing Over the last decade, we have expanded our onshore oil and gas portfolio using advances in technology to access previously uneconomic tight oil and gas resources, including those locked in shale formations. One of the key technologies applied in tight-oil and tight-gas fields is known as hydraulic fracturing, a technique that has been used since the 1950s. It involves pumping a mixture of water, sand and chemical additives at very high pressure into a rock formation, creating tiny fissures through which oil and gas can flow. To protect and isolate potable groundwater from hydraulic-fracturing fluids in the wellbore, we line our tight-oil and tight-gas wells with steel casing and cement. All of our oil and gas wells are expected to have two or more subsurface barriers to protect groundwater. We monitor a wellbore’s integrity during and, in many cases, after hydraulic fracturing. When we acquire assets, we evaluate the assets’ wells for conformity with our safety and operating principles, and put in place a plan with a timeline for rectifying any inconsistencies. We recycle or reuse as much water as we believe is reasonably practical. We store, treat or dispose of water in accordance with regulatory requirements. To the extent allowed by our suppliers, Shell makes the material safety data sheet information available for locations where wells are being hydraulically fractured. Shell supports regulation to require suppliers to release such information. The chemicals used in hydraulic fracturing will vary from well to well and from contractor to contractor, but some can be toxic. For that reason, we have stringent procedures for handling hydraulic-fracturing chemicals in accordance with the design and assurance processes described above. The formations into which these additives may be injected are typically more than a thousand metres below freshwater aquifers. Our procedures require that potable groundwater must be isolated from well completion and production activities. Moreover, we only use air, water or a water-based liquid while drilling through the potable groundwater aquifer to a depth considerably below the aquifer. The casing and cement are then put in place before drilling is resumed and hydraulic fracturing is initiated. In June 2012, methane was detected in a well and a stream in Tioga County, Pennsylvania, USA. Shell plugged the well, halting the release of methane to the surface. Our investigation determined that a well abandoned in the 1930s was the likely conduit for the methane gas reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Environment and society 49 B U S I N E S S R E V I E W and water that reached the surface. We are taking additional precautionary measures to reduce the risk of abandoned wells potentially being a conduit for methane to reach water sources. There have been reports linking hydraulic fracturing to earth tremors. Most seismic events occur naturally due to motion along faults under stress in the earth’s crust. Some areas are more seismically active than others. While more than 1.1 million wells in the USA have been hydraulically fractured, there have been relatively few reported cases of seismicity detected at the surface near the time and vicinity of such operations. Shell analyses publicly available seismic, geologic and geophysical data to determine historical seismicity in areas where we plan to operate, and if seismic activity beyond historic levels is detected, we will investigate and review our operations. Some jurisdictions are considering more stringent permitting, well construction or other regulations relating to fracturing, as well as local bans and other land use restrictions. Such regulations could subject our operations to delays, increased costs or prohibitions. Oil sands We are developing mineable oil sands resources in Alberta, Canada. We use hot water to remove bitumen, which is a heavy oil. Tailings are the residual by-products that remain after the bitumen is separated from the mined oil sands ore. They are composed of some residual bitumen, water, sand, silt, heavy metals, and clay particles. Tailings are stored in an above-ground tailings pond or in mined-out pits. Tailings contain naturally occurring chemicals that are toxic; we monitor them continuously, assess their potential environmental impact, and take measures to protect wildlife and to prevent contamination of surface water and groundwater. The tailings management areas at the Athabasca Oil Sands Project’s Muskeg River and Jackpine mines cover an area of 24 square kilometres. The land that is mined must be reclaimed – for example, through revegetation or reforestation – to a capability equivalent to that which existed prior to development, as required by the Alberta government. When dried, tailings are blended and treated to produce material suitable for use in land reclamation. We continue to work with the Energy Resources Conservation Board of Alberta to ensure we meet the requirements of Directive 074, a regulation which was introduced in 2009 to reduce the amount of liquid tailings, thereby speeding up land reclamation. We also continue to work on tailings technology and collaborate with research institutions and other operators to advance solutions and ultimately accelerate the pace of land reclamation. In late 2010, we found water at the bottom of a section of a pit at the Muskeg River Mine. The water was confirmed to be saline and to originate from an aquifer below the mine pit. We continue to work closely with the local authorities and industry experts to develop a permanent solution. Meanwhile, the water is contained within a segregated area in the pit. Exploration in Alaska In 2012, Shell started a multi-year drilling programme in the Beaufort and Chukchi seas off the coast of Alaska. We previously operated for almost 50 years in Alaska, including in both these seas, until 1998. We are therefore familiar with these shallow waters and the hydrocarbon reservoirs beneath them, which are of relatively low pressure. Our preparations to explore for oil in 2012 followed a number of years of work to lay the foundations for the responsible development of the area’s potential resources. We have worked closely with regulators, local communities and other organisations to develop what we believe are appropriate safeguards. To prepare for drilling off the coast of Alaska, we have developed a thorough oil spill response capability that includes capping and containment equipment, and oil spill response vessels. In 2012, we completed our top-hole drilling operations off the North Slope. This was conducted safely, in accordance with permits and regulatory standards. This work has prepared the ground for continued drilling. However, there were challenges. For example, during the first full-scale deployment test of our containment dome, the dome was damaged. We have since put in place a comprehensive plan to repair and modify the dome. We also experienced challenges in moving our rigs to and from the area of operations. In October 2012, the Arctic Challenger, a purpose-built oil spill containment vessel, received U.S. Coast Guard certification and classification from the American Bureau of Shipping, which was too late for the 2012 drilling season. At the end of February 2013, the final inspection by the U.S. Department of the Interior (Bureau of Safety and Environmental Enforcement) was pending. After successfully completing its role in supporting our 2012 Alaska exploration programme, Shell’s Alaska drilling unit Kulluk encountered a series of challenges posed by severe weather and mechanical issues with its tow ship while on its way to Washington State for maintenance. These incidents caused the Kulluk to run aground off the southern coast of Alaska, before being successfully moored off the coast of Kodiak Island. This occurred after completion of our exploration programme and did not involve drilling operations. We are cooperating with the U.S. Coast Guard investigation and are carrying out a detailed assessment of the vessel. We have decided to pause our exploration drilling activity for 2013 in Alaska’s Beaufort and Chukchi seas to prepare equipment and plans for a resumption of activity at a later stage. Our exploration in Alaska is a long-term programme that we intend to pursue in a safe and measured way. Water Global demand for fresh water is growing while access to fresh water is becoming more constrained in some parts of the world. It is estimated that, by 2025, two-thirds of the world’s population will live in areas where the demand for fresh water exceeds the available amount or where the water’s poor quality restricts its use. As world energy demand rises, the energy industry is becoming one of the larger industrial consumers of fresh water globally. Shell’s water footprint may expand in the future with the development of unconventional resources, such as shale oil and gas, oil sands, and our biofuel business. A combination of increasing demand for water resources, growing stakeholder expectations and concerns, and water-related legislation may drive actions that affect our ability to secure access to fresh water and to discharge water from our operations. At our oil sands operations in Canada we use far less than our water allocation from the Athabasca River, and we minimise the amount withdrawn during the winter months, when the flow rate is low. We also reduce the amount of fresh water needed in operations by recycling water from the tailings ponds. About 80% of the water we use is recycled, and we are investigating new ways to further reduce fresh water intake. 50 Shell Annual Report and Form 20-F 2012 reports.shell.com Business Review > Environment and society Our Pearl GTL plant in Qatar does not take fresh water from its arid surroundings and water produced in the GTL manufacturing process is recycled in the operation. Biofuels The international market for biofuels is growing, driven largely by the introduction of new energy policies in Europe and the USA that call for more renewable, lower-carbon fuels for transport. Shell predicts that biofuels will increase from 3% of the global transport fuel mix today to more than 10% by 2050. Sustainable biofuels are expected to play an increasingly important role in helping to meet our customers’ fuel needs and reduce CO2 emissions. Sustainability challenges exist with today’s biofuels. These include: CO2 emissions that vary according to the raw materials, production and distribution processes used; competition with food crops for available land; and labour rights. We are one of the world’s largest biofuels distributors. We include our own long-established sustainability clauses in our supply contracts and where possible, we source biofuels that have been certified against internationally recognised sustainability standards. These clauses are designed to prevent the sourcing of biofuels from suppliers that may not abide by human rights guidelines, or that may have cleared land rich in biodiversity. We are also developing our own capabilities to produce sustainable biofuel components. The Raízen joint venture produces approximately 2 billion litres annually of ethanol from sugar cane in Brazil – the most sustainable and cost-competitive of today’s biofuels. This ethanol can reduce CO2 emissions by around 70% compared with gasoline, from cultivation of the sugar cane to using the ethanol as fuel. The joint-venture agreement includes developing joint sustainability principles, standards and operating procedures that also apply to third-party suppliers. We also continue to work with industry, governments and voluntary organisations towards the development of global sustainability standards for biofuels. We continue to invest in developing more advanced biofuels for the future. These new technologies will take time to reach commercial scale. Government support will be required to accelerate their speed of development. Environmental costs We are subject to a variety of environmental laws, regulations and reporting requirements in the countries where we operate. Infringing any of these laws, regulations and requirements could result in significant costs, including clean-up costs, fines, sanctions, and third- party claims, as well as harm our ability to do business and our reputation. Our ongoing operating expenses include the costs of avoiding unauthorised discharges into the air and water, and the safe disposal and handling of waste. We place a premium on developing effective technologies that are also safe for the environment. However, when operating at the forefront of technology, there is always the possibility that a new technology brings with it environmental impacts that have not been assessed, foreseen or determined to be harmful, when originally implemented. While we believe we take all reasonable precautions to limit these risks, we are subject to additional remedial environmental and litigation costs as a result of our operations’ unknown and unforeseeable impacts on the environment. Although these costs have so far not been material to Shell, no assurance can be made that this will always be the case. In this regard, as oil and gas fields age, it is possible in certain circumstances for seismic activity to increase based on the unique geology of individual fields. For example, after more than 60 years of developing the Groningen gas field in the Netherlands, seismic activity has recently increased leading to measurable earth tremors. Our Dutch joint venture is currently reviewing its operations, in consultation with Dutch authorities. Neighbouring communities Gaining the trust of local communities is essential to the success of our projects and operations. We have global requirements for social performance – how we perform in our relationship with communities. The requirements set clear rules and expectations for how we engage with and respect communities that may be impacted by our operations. For all major installations and new projects we appoint a person who is responsible for assessing social impacts and finding ways to mitigate them. In addition, we have specific requirements for minimising our impact on indigenous peoples’ traditional lifestyles, and on handling involuntary resettlement and grievance issues. reports.shell.com Shell Annual Report and Form 20-F 2012 Business Review > Section 13(r) of the US Securities Exchange Act of 1934 disclosure 51 SECTION 13(r) OF THE US SECURITIES EXCHANGE ACT OF 1934 DISCLOSURE In accordance with our General Business Principles and Code of Conduct, Shell seeks to comply with all applicable international trade laws including applicable sanctions and embargoes. The activities listed below have been conducted outside the US by non- US Shell subsidiaries. For the disclosure below, amounts have been converted into US dollars at the average or spot exchange rate, as appropriate. We do not believe that any of the transactions or activities listed below violated US sanctions. In 2010, we ceased all of our Upstream commercial activities and suspended new business development in Iran, as a direct consequence of the international sanctions imposed on the country. We recently began the process to close our small representative office in Iran and terminate all its activities. During 2012, local payments made in connection with this office were transacted through Bank Tejarat, and subsequently through Bank Karafarin. All payments were made in local currency. In 2012, in connection with staff employed at this office, as well as Iranian expatriates, we paid $635,486 in social security and other payroll taxes to the Iranian government. We also paid $167,071 in rental taxes, as well as $573,338 in corporate and withholding taxes, the majority of which relates to prior years’ commercial activities. In addition, we paid $14,378 for electricity, gas, telecommunications and water to the following suppliers: Mobile Telecommunication Company of Iran, Tehran Electrical Distribution Company, Tehran Province Gas Company, Tehran Province Water and Wastewater, and Telecommunication Company of Tehran. None of the above activities generated gross revenue or net profit during 2012. Some of the suppliers to our local representative office, which themselves are not blocked pursuant to US Executive Order Nos. 13224 or 13382, have used banks that are blocked pursuant to those US Executive Orders. In 2012, some payments to the accounts of these suppliers, and to the accounts of our local employees, were made through Bank Eghtesad Novin, Bank Karafarin, Bank Mellat, Bank Melli, Bank Pasargad, Bank Refah, Bank Saderat, Bank Saman, B U S I N E S S R E V I E W Bank Sarmayeh, Bank Sepah and Bank Tejarat. We no longer make payments to accounts held at these banks, with the exception of Bank Karafarin where we maintain an account for local transactions. None of these activities generated gross revenue or net profit in 2012. However, in 2012, our balance of $6.5 million in the banks discussed above, used to fund local activities, generated non-taxable interest income of $1.4 million. In Downstream, through Shell’s trading activities, we purchased crude oil, condensate and fuel oil from Iran for trading purposes, and for petrochemical and refining operations. In 2012, our crude oil purchases from Iran generated a gross revenue of $481 million and a net loss of $6 million; our condensate and fuel oil purchases from Iran generated a gross revenue of $631 million and a net profit of $4 million. None of these purchases has been paid for, and all contracts were terminated and activities ceased before June 28, 2012. In Downstream, through Shell’s retail credit cards activities, we provided retail services to the following Iranian diplomatic missions: Botschaft der Islamischen Republik Iran and Permanent Mission of the Islamic Republic of Iran, in Austria; Délégation permanente de la République islamique d’Iran auprès de l’UNESCO, in France; Consulate General of the Islamic Republic of Iran, in Hong Kong, China; Iráni Nagykövetség, in Hungary; Embassy of the Islamic Republic of Iran, in the Netherlands; and Mission Permanente d’Iran, in Switzerland. In 2012, these activities generated a gross revenue of $97,829 and a net profit of $2,354. We are in the process of either terminating these contractual agreements or transferring them to third parties as part of larger agreements. Through Shell’s retail credit cards activities, we also provided retail services in Switzerland to Naftiran Intertrade Co. (NICO) Sàrl. In 2012, this activity generated a gross revenue of $10,353 and a net profit of $286. This contract was terminated in February 2013. In Downstream, through Shell’s marine activities, we provided in 2012 oil analysis relating to lubricants used in machinery and equipment on ships to a non-sanctioned third party for the Iranian vessel “Souvenir”. This service did not generate any gross revenue. We have informed the third party that we will no longer provide any services for vessels that are subject to US sanctions. Currently, we have approximately $2,336 million payable to, and $11 million receivable from, National Iranian Oil Company. We are unable to settle the payable position as a result of applicable sanctions. 52 Shell Annual Report and Form 20-F 2012 reports.shell.com The Board of Royal Dutch Shell plc THE BOARD OF ROYAL DUTCH SHELL PLC Jorma Ollila CHAIRMAN Born August 15, 1950. A Finnish national, appointed Chairman of the Company with effect from June 2006. He started his career at Citibank in London and Helsinki, before moving in 1985 to Nokia, where he became Vice President of International Operations. In 1986, he was appointed Senior Vice President Finance and between 1990 and 1992 he served as President of Nokia Mobile Phones. Between 1992 and 1999 he was President and Chief Executive Officer of Nokia, and from 1999 to 2006 he was Chairman and Chief Executive Officer. He remained Chairman from 2006 until May 2012. member of the Supervisory Board of Aegon N.V. from 2004 to 2006, a member of the Supervisory Board of UBS AG from 2005 to April 2010 and a member of the Swiss Federal Auditor Oversight Authority from 2006 to December 2010. In 2011, he was awarded the title of Dato Seri Laila Jasa by the Sultan of Brunei. He is a Director of Catalyst, a non-profit organisation which works to build inclusive environments and expand opportunities for women and business, and he was appointed to the Board of Directors of Roche Holdings Limited in March 2011. He is also active in a number of international and bilateral organisations, including the European Round Table of Industrialists and The Business Council. Chairman of the Nomination and Succession Committee Simon Henry CHIEF FINANCIAL OFFICER Hans Wijers DEPUTY CHAIRMAN AND SENIOR INDEPENDENT DIRECTOR Born January 11, 1951. A Dutch national, appointed a Non-executive Director of the Company with effect from January 2009. Until April 2012 he was Chief Executive Officer and Chairman of the Board of Management of Akzo Nobel N.V., a position he had held since 2003. He obtained a PhD in economics from Erasmus University Rotterdam while teaching there. Later, he became Managing Partner of The Boston Consulting Group. He served as Dutch Minister for Economic Affairs from 1994 to 1998, after which he returned to The Boston Consulting Group as Senior Partner until his appointment as a Board member of Akzo Nobel N.V. in 2002. He is Chairman of the Supervisory Board of AFC Ajax N.V., a member of the Supervisory Board of Heineken N.V., and a trustee of various charities. In January 2013, he was appointed a Non-executive Director of GlaxoSmithKline plc with effect from April 1, 2013. Chairman of the Remuneration Committee and Member of the Nomination and Succession Committee Peter Voser CHIEF EXECUTIVE OFFICER Born August 29, 1958. A Swiss national, appointed Chief Executive Officer of the Company with effect from July 2009. He first joined Shell in 1982 and held a variety of finance and business roles in Switzerland, the UK, Argentina and Chile, including Chief Financial Officer of Oil Products. In 2002, he joined the Asea Brown Boveri (ABB) Group of Companies as Chief Financial Officer and a member of the ABB Group Executive Committee. Born July 13, 1961. A British national, appointed Chief Financial Officer of the Company with effect from May 2009. He joined Shell in 1982 as an engineer at the Stanlow refinery in the UK. After qualifying as a member of the Chartered Institute of Management Accountants in 1989, he held various finance posts, including Finance Manager of Marketing in Egypt, Controller for the Upstream business in Egypt, Oil Products Finance Adviser for Asia-Pacific, Finance Director for the Mekong Cluster and General Manager Finance for the South East Asian Retail business. He was appointed Head of Group Investor Relations in 2001 and Chief Financial Officer for Exploration & Production in 2004. Josef Ackermann NON-EXECUTIVE DIRECTOR Born February 7, 1948. A Swiss national, appointed a Non-executive Director of the Company in May 2008. He is Chairman of the Board of Directors of Zurich Insurance Group Limited and of Zurich Insurance Company Limited, positions he has held since March 2012. He started his professional career in 1977 at Schweizerische Kreditanstalt (SKA), where he held a variety of positions in corporate banking, foreign exchange/money markets, treasury and investment banking. In 1990, he was appointed to SKA’s Executive Board, on which he served as President between 1993 and 1996. He joined Deutsche Bank’s Management Board in 1996 with responsibility for the investment banking division and, from 2006 and 2002 respectively until May 2012, he was Chairman of the Management Board and of the Group Executive Committee of Deutsche Bank AG. He is a member of the Supervisory Board of Siemens AG, the Board of Directors of Investor AB and a number of advisory boards. He also has various roles in several foundations and academic institutions. He returned to Shell in October 2004, when he became a Managing Director of The “Shell” Transport and Trading Company, p.l.c. and Chief Financial Officer of the Royal Dutch/Shell Group. He was a Member of the Nomination and Succession Committee and the Remuneration Committee reports.shell.com Shell Annual Report and Form 20-F 2012 The Board of Royal Dutch Shell plc 53 Guy Elliott NON-EXECUTIVE DIRECTOR Christine Morin-Postel NON-EXECUTIVE DIRECTOR Born December 26, 1955. A British national, appointed a Non-executive Director of the Company with effect from September 2010. He is Chief Financial Officer of Rio Tinto plc and Rio Tinto Limited, positions he has held since 2002. Following a period in investment banking, he joined the Rio Tinto Group in 1980 after gaining an MBA at INSEAD. He has held a variety of marketing, strategy and general management positions, including Head of Business Evaluation and President of Rio Tinto Brasil. He was a Non-executive Director and the Senior Independent Director of Cadbury plc from 2007 and 2008 respectively until March 2010. While on the Cadbury Board, he served as Chairman of the Audit Committee until April 2009. He has been a member of the UK Takeover Panel since 2012. Chairman of the Audit Committee Charles O. Holliday NON-EXECUTIVE DIRECTOR Born March 9, 1948. A US national, appointed a Non-executive Director of the Company with effect from September 2010. He served as Chief Executive Officer of DuPont from 1998 to January 2009, and as Chairman from 1999 to December 2009. He joined DuPont in 1970 after receiving a B.S. in industrial engineering from the University of Tennessee and held various manufacturing and business assignments, including a six-year, Tokyo-based posting as President of DuPont Asia/Pacific, before becoming Chairman and Chief Executive Officer. He previously served as Chairman of the World Business Council for Sustainable Development, Chairman of The Business Council, Chairman of Catalyst, Chairman of the Society of Chemical Industry – American Section, and is a founding member of the International Business Council. He is Chairman of the Board of Directors of Bank of America Corporation and a Director of Deere & Company. Chairman of the Corporate and Social Responsibility Committee and Member of the Remuneration Committee Gerard Kleisterlee NON-EXECUTIVE DIRECTOR Born September 28, 1946. A Dutch national, appointed a Non- executive Director of the Company with effect from November 2010. He was President/Chief Executive Officer and Chairman of the Board of Management of Koninklijke Philips Electronics N.V. from 2001 to March 2011. Having joined Philips in 1974, he held several positions before being appointed as Chief Executive Officer of Philips’ Components division in 1999 and Executive Vice-President of Philips in 2000. He is Chairman of Vodafone Group plc, a member of the Supervisory Board of Daimler AG, and a Director of Dell Inc. Born October 6, 1946. A French national, appointed a Non-executive Director of the Company in October 2004. She was a member of the Supervisory Board of Royal Dutch Petroleum Company (Royal Dutch) from July 2004 and was a Board member of Royal Dutch until December 2005. Previously, she was Chief Executive of Société Générale de Belgique, Executive Vice-President and a member of the Executive Committee of Suez S.A., Chairman and Chief Executive Officer of Crédisuez S.A. and a Non-executive Director of Pilkington plc, Alcan Inc. and EXOR S.p.A. She is a Non-executive Director of British American Tobacco plc. Member of the Audit Committee Sir Nigel Sheinwald GCMG NON-EXECUTIVE DIRECTOR Born June 26, 1953. A British national, appointed a Non-executive Director of the Company with effect from July 2012. He was a senior British diplomat who served as British Ambassador to the USA from 2007 to 2012. He joined the Diplomatic Service in 1976 and served in Brussels (twice), Washington and Moscow and in a wide range of policy roles in London. He served as British Ambassador and Permanent Representative to the European Union in Brussels from 2000 to 2003. Prior to his appointment as British Ambassador to the USA, he served as Foreign Policy and Defence Adviser to the Prime Minister and Head of the Cabinet Office Defence and Overseas Secretariat. He retired from the Diplomatic Service in March 2012. He is a Senior Adviser to the Universal Music Group and Visiting Professor at King’s College, London. Member of the Corporate and Social Responsibility Committee Linda G. Stuntz NON-EXECUTIVE DIRECTOR Born September 11, 1954. A US national, appointed a Non-executive Director of the Company with effect from June 2011. She is a founding partner of the law firm of Stuntz, Davis & Staffier, P.C., based in Washington, D.C. Her law practice includes energy and environmental regulation as well as matters relating to government support of technology development and transfer. From 1989 to 1993, she held senior policy positions at the U.S. Department of Energy, including Deputy Secretary. She played a principal role in the development and enactment of the Energy Policy Act of 1992. From 1981 to 1987, she was an Associate Minority Counsel and Minority Counsel to the Energy and Commerce Committee of the U.S. House of Representatives. She chaired the Electricity Advisory Committee to the U.S. Department of Energy from 2008 to 2009, and was a member of the Board of Directors of Schlumberger Limited from 1993 to 2010. She is a member of the Board of Directors of Raytheon Company. Member of the Audit Committee Member of the Audit Committee B O A R D A N D S E N O R I M A N A G E M E N T 54 Shell Annual Report and Form 20-F 2012 reports.shell.com The Board of Royal Dutch Shell plc Jeroen van der Veer NON-EXECUTIVE DIRECTOR Born October 27, 1947. A Dutch national, appointed a Non-executive Director of the Company with effect from July 2009. Previously, he was Chief Executive from October 2004. He was appointed President of Royal Dutch Petroleum Company in 2000, having been a Managing Director since 1997. He was a Director of Shell Canada Limited from 2003 until 2005. He was Vice-Chairman and Senior Independent Director of Unilever (which includes Unilever N.V. and Unilever plc) until May 2011 and is Chairman of the Supervisory Boards of Koninklijke Philips Electronics N.V. and of ING Group. He also has various roles in several foundations and charities. Member of the Corporate and Social Responsibility Committee Gerrit Zalm NON-EXECUTIVE DIRECTOR Born May 6, 1952. A Dutch national, appointed a Non-executive Director of the Company with effect from January 1, 2013. He is Chairman of the Board of Management of ABN AMRO Bank N.V., a position he has held since February 2009. Before joining ABN AMRO, he was the Minister of Finance of the Netherlands from 1994 until 2002, Chairman of the VVD Liberal Party in the Lower House (2002) and Minister of Finance from 2003 until 2007. During 2007 until 2009 he was an adviser to PricewaterhouseCoopers (2007), Chairman of the trustees of the International Accounting Standards Board (2007-2010), an adviser to Permira (private equity fund) (2007-2008) and Chief Financial Officer of DSB Bank (2008). Prior to 1994, he was head of the Netherlands Bureau for Economic Policy Analysis, a professor at Vrije Universiteit Amsterdam and held various positions at the Ministry of Finance and at the Ministry of Economic Affairs. He studied General Economics at Vrije Universiteit Amsterdam and received an Honorary Doctorate in Economics from this university. Member of the Corporate and Social Responsibility Committee Michiel Brandjes COMPANY SECRETARY Born December 14, 1954. A Dutch national, appointed as Company Secretary and General Counsel Corporate of the Company in February 2005. He joined Shell in 1980 as a Legal Adviser and was later appointed Head of Legal in Singapore. Following a period as Head of Legal in China, he was appointed Company Secretary of Royal Dutch Petroleum Company. reports.shell.com Shell Annual Report and Form 20-F 2012 Senior Management 55 SENIOR MANAGEMENT The Senior Management of the Company comprises the Executive Directors and those listed below. All are members of the Executive Committee (see page 80). Hugh Mitchell CHIEF HUMAN RESOURCES & CORPORATE OFFICER Ben van Beurden DOWNSTREAM DIRECTOR Born April 23, 1958. A Dutch national, appointed Downstream Director with effect from January 1, 2013. Previously he was Executive Vice President Chemicals, and has held various engineering, plant management and operations and commercial roles in the Netherlands, Africa, Malaysia, the UK and the USA. Matthias Bichsel PROJECTS & TECHNOLOGY DIRECTOR Born July 24, 1954. A Swiss national, appointed Projects & Technology Director with effect from July 1, 2009. Previously, he was Executive Vice President Development and Technology, being responsible for delivering reserves and production from new upstream projects, as well as providing technology applications and research via Shell’s Upstream technology organisation. Andrew Brown UPSTREAM INTERNATIONAL DIRECTOR Born January 29, 1962. A British national, appointed Upstream International Director with effect from April 1, 2012. Previously he was Executive Vice President for Shell’s activities in Qatar and a member of the Upstream International Leadership Team. He was awarded the Order of the British Empire in 2012 for his services to British-Qatari business relations. Born February 13, 1957. A British national, appointed Chief Human Resources & Corporate Officer with effect from July 1, 2009. In 1997, he became HR Vice President for the Global Oil Products business and in 2003 was appointed Director International, one of the Royal Dutch/ Shell Group’s Corporate Centre Directors. In 2005, he was appointed Human Resources Director of Shell. Marvin Odum UPSTREAM AMERICAS DIRECTOR Born December 13, 1958. A US national, appointed Upstream Americas Director with effect from July 1, 2009. Previously, he was Executive Vice President for the Americas for Shell Exploration & Production. He was appointed President of Shell Oil Company in 2008, having served as Executive Vice President since 2005 with responsibility for Shell’s Exploration & Production businesses in the western hemisphere. Peter Rees QC LEGAL DIRECTOR Born April 21, 1957. A British national, appointed Legal Director with effect from January 1, 2011. He started his legal career in 1979 at the international law firm Norton Rose. He became a partner in 1987 and Head of Dispute Resolution and a member of the Executive Committee in 1997. In 2006, he joined Debevoise & Plimpton as a partner in its London office. In 2009, he was appointed Queen’s Counsel. B O A R D A N D S E N O R I M A N A G E M E N T 56 Shell Annual Report and Form 20-F 2012 reports.shell.com Report of the Directors REPORT OF THE DIRECTORS Principal activities Royal Dutch Shell plc (the Company) is a holding company which owns, directly or indirectly, investments in the numerous companies constituting Shell. Shell is engaged worldwide in the principal aspects of the oil and gas industry and also has interests in chemicals and other energy-related businesses. Details of the Company’s subsidiaries can be found in Exhibit 8. Business Review The information that fulfils the requirements of the Business Review can be found in the “Chairman’s message” on page 5, the “Chief Executive Officer’s review” on pages 6-7 and also in the “Business Review” on pages 8-51, all of which are incorporated in this Report of the Directors by way of reference. This Report of the Directors also serves as the Management Report for the purpose of Disclosure and Transparency Rule 4.1.8R. Throughout this Report of the Directors, the Board aims to present a balanced and understandable assessment of the Company’s position and prospects in its reporting to shareholders and other interested parties. Research and development Shell carries out its research and development programmes in a worldwide network of technology centres complemented by external partnerships. The main technology centres are in the Netherlands and the USA, with other centres in Canada, China, Germany, India, Norway, Oman, Qatar and the UK. Further details of Shell’s research and development, including expenditure, can be found on pages 18-19 of the “Business Review” as well as in the “Consolidated Statement of Income”. Recent developments and post-balance sheet events Recent developments and post-balance sheet events are given in Note 28 to the “Consolidated Financial Statements”. Financial statements and dividends The “Consolidated Statement of Income” and “Consolidated Balance Sheet” are available on pages 99 and 100 respectively. The table below sets out the dividends on each class of share and each class of American Depositary Share (ADS [A]). The Company announces its dividends in US dollars and, at a later date, announces the euro and sterling equivalent amounts using a market exchange rate. [A] ADSs are listed on the New York Stock Exchange under the symbols RDS.A and RDS.B. Each ADS represents two shares – two A shares in the case of RDS.A or two B shares in the case of RDS.B. Dividends on A shares are paid by default in euros, although holders are able to elect to receive dividends in sterling. Dividends on B shares are paid by default in sterling, although holders are able to elect to receive dividends in euros. Dividends on ADSs are paid in US dollars. In September 2010, the Company introduced a Scrip Dividend Programme which enables shareholders to increase their shareholding by choosing to receive new shares instead of cash dividends, if approved by the Board. Only new A shares are issued under the programme, including to shareholders who hold B shares. Full details of the programme can be found at www.shell.com/dividend. The Directors have announced a fourth quarter interim dividend as set out in the table below, payable on March 28, 2013, to shareholders on the Register of Members at close of business on February 15, 2013. The closing date for scrip election and dividend currency election was March 1, 2013 [B]. The euro and sterling equivalents announcement date was March 8, 2013. [B] Different scrip and dividend currency election dates may apply to shareholders holding shares in a securities account with a bank or other financial institution ultimately holding through Euroclear Nederland. Such shareholders can obtain the applicable deadlines from their broker, financial intermediary, bank or other financial institution where they hold their securities account. A different scrip election date may also apply to registered and non-registered ADS holders. Registered ADS holders can contact The Bank of New York Mellon for the applicable deadline. Non- registered ADS holders can contact their broker, financial intermediary, bank or other financial institution for the applicable election deadline. Creditor payment policy and practice Statutory regulations issued under the UK Companies Act 2006 (the Act) require a public company to make a statement of its policy and practice on the payment of trade creditors. As a holding company whose principal business is to hold shares in subsidiaries, the Company has no trade creditors. Given the international nature of DIVIDENDS Q1 Q2 Q3 Q4 Total announced in respect of the year Amount paid during the year $ 0.43 0.43 0.43 0.43 1.72 € 0.3468 0.3421 0.3333 0.3314 1.3536 1.3424 A shares pence 27.92 27.08 26.86 28.79 110.65 108.60 $ 0.43 0.43 0.43 0.43 1.72 pence 27.92 27.08 26.86 28.79 110.65 108.60 B shares[A] A ADSs € 0.3468 0.3421 0.3333 0.3314 1.3536 1.3424 $ 0.86 0.86 0.86 0.86 3.44 3.42 2012 B ADSs $ 0.86 0.86 0.86 0.86 3.44 3.42 [A] It is expected that holders of B shares will receive dividends through the dividend access mechanism applicable to such shares. The dividend access mechanism is described more fully on pages 85-86. Shell’s operations there is no specific company-wide creditor payment policy. Relationships with suppliers are governed by Shell’s commitment to long-term relations, based on trust and mutually beneficial arrangements. Shell U.K. Limited, Shell’s most significant UK operating company, had approximately 22 days’ purchases outstanding at December 31, 2012 (2011: 30 days), based on the average daily amount invoiced by suppliers during the year. Shell U.K. Limited has adopted the Prompt Payment Code, a copy of which is available from the Company Secretary. Directors’ responsibilities in respect of the preparation of the annual report and accounts The Directors are responsible for preparing the Annual Report including the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Consolidated and Parent Company Financial Statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). In preparing these financial statements, the Directors have also elected to comply with IFRS as issued by the International Accounting Standards Board (IASB). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of Shell and the Company and of the profit or loss of Shell and the Company for that period. In preparing these financial statements, the Directors are required to: ▪ select suitable accounting policies and then apply them consistently; ▪ make judgements and accounting estimates that are reasonable and prudent; and ▪ state whether IFRS as adopted by the EU and IFRS as issued by the IASB have been followed. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the transactions of Shell and the Company and disclose with reasonable accuracy, at any time, the financial position of Shell and the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006 and, as regards the Consolidated Financial Statements, with Article 4 of the IAS Regulation and therefore are in accordance with IFRS as adopted by the EU. The Directors are also responsible for safeguarding the assets of Shell and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Each of the Directors, whose names and functions are listed on pages 52-54, confirms that, to the best of their knowledge: ▪ the financial statements, which have been prepared in accordance with IFRS as adopted by the EU, and with IFRS as issued by the IASB, give a true and fair view of the assets, liabilities, financial position and profit of Shell and the Company; ▪ the Business Review includes a fair review of the development and performance of the business and the position of Shell, together with a description of the principal risks and uncertainties that it faces; and ▪ he or she has taken all the steps that ought to have been taken in order to become aware of any relevant audit information and to establish that the auditors are aware of that information. There is no relevant audit information of which the auditors are unaware. reports.shell.com Shell Annual Report and Form 20-F 2012 Report of the Directors 57 The Directors are responsible for the maintenance and integrity of the Shell website (www.shell.com). Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Board of Directors The Directors during the year were Josef Ackermann, Malcolm Brinded (who stood down with effect from April 1, 2012), Guy Elliott, Simon Henry, Charles O. Holliday, Lord Kerr of Kinlochard (who stood down with effect from May 22, 2012), Gerard Kleisterlee, Christine Morin-Postel, Jorma Ollila, Sir Nigel Sheinwald (appointed with effect from July 1, 2012), Linda G. Stuntz, Jeroen van der Veer, Peter Voser and Hans Wijers. Appointment and reappointment of Directors In line with the UK Corporate Governance Code, all Directors will retire at each Annual General Meeting (AGM) and, subject to the Articles of Association and their wish to continue as a Director of the Company, seek reappointment by shareholders. At the 2013 AGM, this will include Gerrit Zalm who was appointed as a Director of the Company by the Board with effect from January 1, 2013. Christine Morin-Postel and Jeroen van der Veer will not be seeking reappointment and will be standing down at the close of business of the 2013 AGM after having served as Non-executive Directors since July 2004 and July 2009 respectively. Prior to his role as a Non-executive Director, Jeroen van der Veer had served as Chief Executive from October 2004 until June 2009. The biographies of all Directors are given on pages 52-54 and, for those seeking reappointment, also in the Notice of the AGM. Details of the Executive Directors’ contracts can be found on page 67 and copies are available for inspection from the Company Secretary. Furthermore, a copy of the form of these contracts has been filed with the U.S. Securities and Exchange Commission as an exhibit. The terms and conditions of appointment of Non-executive Directors are set out in their letters of appointment with the Company which, in accordance with the UK Corporate Governance Code, are available for inspection from the Company Secretary. No Director is, or was, materially interested in any contract subsisting during or at the end of the year that was significant in relation to the Company’s business. See also “Related party transactions” on page 58. Financial risk management, objectives and policies Descriptions of the use of financial instruments and Shell’s financial risk management objectives and policies are set out in the “Business Review” and on pages 83-84, and also in Note 21 to the “Consolidated Financial Statements”. Qualifying third-party indemnities The Company has entered into a deed of indemnity with each Director who served during the year under identical terms. The deeds indemnify the Directors to the widest extent permitted by the applicable laws of England against all liability incurred as a Director or employee of the Company or of certain other entities. R E P O R T O F T H E I D R E C T O R S 58 Shell Annual Report and Form 20-F 2012 reports.shell.com Report of the Directors Directors’ interests The interests (in shares of the Company or calculated equivalents) of the Directors in office at the end of the year, including any interests of a “connected person” (as defined in the Disclosure and Transparency Rules), are set out below: DIRECTORS’ INTERESTS [A] January 1, 2012 December 31, 2012 A shares B shares A shares B shares Josef Ackermann 10,000 – 10,253 – Guy Elliott Simon Henry Charles O. Holliday Gerard Kleisterlee Christine Morin-Postel Jorma Ollila Sir Nigel Sheinwald Linda G. Stuntz Jeroen van der Veer Peter Voser Hans Wijers – 5,677 – 5,677 9,175 50,843 9,175 51,652 – 20,000[B] – 20,000[B] 5,000 8,485 25,000 – – – 5,000 8,485 25,000 – – – – – 470[C] 3,000[D] – – 470 8,400[E] 195,195 148,496 5,251 – – – 383,400 289,013 5,251 – – – [A] Excludes interests in shares or options awarded under the Long-term Incentive Plan, the Deferred Bonus Plan, and the share option plans. Interests under these plans as at January 1, 2012, and December 31, 2012, are given on pages 72-76. [B] Held as 10,000 ADSs (RDS.B ADS). Each RDS.B ADS represents two B shares. [C] At the date of appointment. [D] Held as 1,500 ADSs (RDS.B ADS). Each RDS.B ADS represents two B shares. [E] Held as 4,200 ADSs (RDS.B ADS). Each RDS.B ADS represents two B shares. There were no changes in Directors’ share interests during the period from December 31, 2012, to March 13, 2013, except in the case of Simon Henry whose interests increased by 277 B shares, and for those changes in the interests in shares or options awarded under the Long- term Incentive Plan, the Deferred Bonus Plan, and the share option plans set out in the “Directors’ Remuneration Report” on pages 72-76. As at March 13, 2013, the Directors and Senior Management [A] of the Company beneficially owned individually and in aggregate (including shares under option) less than 1% of the total shares of each class of the Company shares outstanding. [A] The Senior Management of the Company is given on page 55. The Board continues to regard the ability to repurchase issued shares in suitable circumstances as an important part of the financial management of the Company. A resolution will be proposed at the 2013 AGM to renew the authority for the Company to purchase its own share capital up to specified limits for another year. More detail of this proposal is given in the Notice of the AGM. Political and charitable contributions No donations were made by the Company or any of its subsidiaries to political parties or organisations during the year. Shell Oil Company administers the non-partisan Shell Oil Company Employees’ Political Awareness Committee (SEPAC), a political action committee registered with the US Federal Election Commission. Eligible employees may make voluntary personal contributions to the SEPAC. Shell, through individual subsidiaries, sponsors social investment programmes in many countries throughout the world. In the UK, Shell donated $16 million in 2012 to charitable causes and sponsorships. This included donations to: “The Big Bang”, the UK’s largest single science and engineering fair for young people; a climate science gallery at the Science Museum, London; the “Shell Classic International”, a series of international concerts held at the Royal Festival Hall, London; and the Shell Foundation, an independent charity established in 2000 that applies business thinking to global development challenges. Diversity and inclusion Detailed information can be found in the “Business Review” on page 46. Employee communication and involvement Detailed information can be found in the “Business Review” on page 46. Corporate social responsibility A summary of Shell’s approach to corporate social responsibility can be found on pages 47-50 of the “Business Review”. Further details will be available in the Shell Sustainability Report 2012. Essential contracts and Takeovers Directive information Shell does not have contracts or other arrangements that individually are essential to its business, nor does it have any significant agreements that would take effect, alter or terminate upon a change of control of the Company following a takeover bid. Related party transactions Other than disclosures given in Notes 5 and 10 to the “Consolidated Financial Statements”, there were no transactions or proposed transactions that were material to either the Company or any related party. Nor were there any transactions with any related party that were unusual in their nature or conditions. S HA RE C A P I TA L The Company’s issued share capital as at December 31, 2012, is set out in Note 11 to the “Parent Company Financial Statements”. The percentage of the total issued share capital represented by each class of share is given below. Other disclosure requirements pursuant to the Takeovers Directive can be found below and on pages 85-88. Repurchases of shares On May 22, 2012, shareholders approved an authority, which will expire at the end of the 2013 AGM, for the Company to repurchase up to a maximum of 632 million of its shares (excluding share purchases for employee share-based compensation plans). During 2012, 43.7 million B shares with a nominal value of €3.1 million ($3.7 million) (representing 0.7% of the Company’s entire issued share capital at December 31, 2012) were purchased for cancellation for a total cost of $1,492 million, including expenses, at an average price of $34.13 per B share. During the period January 1, 2013, to February 19, 2013, no share purchases were made. SHARE CAPITAL PERCENTAGE Share class A ordinary B ordinary Sterling deferred % 59.03 40.97 de minimis T R A N S F E R OF SE C U R I T I E S There are no significant restrictions on the transfer of securities. SHARE OWNERSHIP TRUSTS Shell currently operates three primary employee share ownership trusts: a Dutch Stichting and two US Rabbi Trusts. The shares held by reports.shell.com Shell Annual Report and Form 20-F 2012 Report of the Directors 59 R E P O R T O F T H E I D R E C T O R S the Stichting are voted by the Stichting Board and the shares in the Rabbi Trusts are voted by the Voting Trustee, Evercore Trust Company, N.A. Both the Stichting Board and the Voting Trustee are independent of the Company. The UK Shell All Employee Share Ownership Plan (SAESOP) has a separate related share ownership trust. Shares held for the SAESOP are voted by its trustee, EES Corporate Trustees Limited, as directed by the participants. S I GN I FI C A N T S HA RE HOLD I N GS Information concerning significant shareholdings is given on page 90. A RTIC LE S OF A S S OC I A TI ON Information concerning the Articles of Association is given on pages 85-88. Auditors PricewaterhouseCoopers LLP has signified its willingness to continue in office and a resolution for its reappointment will be proposed at the 2013 AGM. Corporate governance The Company’s statement on corporate governance is included in the “Corporate governance” report on pages 77-88 and is incorporated in this “Report of the Directors” by way of reference. Annual General Meeting The Annual General Meeting (AGM) will take place on May 21, 2013, at the Circustheater, Circusstraat 4, The Hague, The Netherlands. Details of the business to be put to shareholders at the AGM can be found in the Notice of the Annual General Meeting. Signed on behalf of the Board /s/ Michiel Brandjes Michiel Brandjes Company Secretary March 13, 2013 60 Shell Annual Report and Form 20-F 2012 reports.shell.com Directors’ Remuneration Report DIRECTORS’ REMUNERATION REPORT INDEX TO THE DIRECTORS’ REMUNERATION REPORT Remuneration elements Remuneration principles Strategy alignment Pay for performance Competitiveness Shareholding Consistency Compliance Risk assessment 60 Letter from the Chairman of the Remuneration Committee 61 Overview 63 The Remuneration Committee 63 Remuneration policy for Executive Directors 63 64 64 64 64 64 65 65 65 65 65 65 67 67 67 68 Remuneration determinations for Executive Directors Base salary 68 Annual bonus 68 Other cash and non-cash earnings 69 Long-term Incentive Plan 69 Deferred Bonus Plan 69 69 Pension interests 70 Non-executive Directors 70 Remuneration policy 70 Additional statutory disclosure 71 Data tables 71 75 Base salary Annual bonus Long-term incentives Pensions Contracts of employment External appointments Executive Directors Non-executive Directors Dear Shareholders, As the Chairman of the Remuneration Committee (REMCO), I am pleased to present the 2012 Directors’ Remuneration Report of Royal Dutch Shell plc. This report covers the remuneration of Directors for 2012. The reported remuneration of Executive Directors is driven by performance against agreed annual and multi-year targets. Key components were the 2012 Scorecard results leading to an above target annual bonus and the 2009 long-term incentive awards vesting at 60% of target. Base salaries for the Executive Directors were reviewed and adjusted with effect from January 1, 2013. No policy changes were made during 2012. As stated in last year’s annual report, Malcolm Brinded stood down as an Executive Director with effect from April 1, 2012. His reported remuneration relates to his period as an Executive Director during the year and his end-of-service arrangements. REMCO has had a number of interactions with shareholders during the year. There was a consensus that the long-term performance of Shell should guide our remuneration policies, along with our commitments to transparency and ongoing shareholder engagement. As a remuneration committee, we continue to operate with this in mind. Overall we received positive feedback on our Directors’ Remuneration Report and its consistent format. Despite this, there is always room for improvement. This year we have made an effort to explain better how REMCO accounts for individual performance in determining annual bonuses. We have also adjusted the way we describe the Deferred Bonus Plan and Directors’ shareholdings. We subscribe to the ambition of the UK government to increase the transparency of remuneration reporting. We therefore look forward to the revised regulations in this area for the 2013 Directors’ Remuneration Report. I hope you find our 2012 Directors’ Remuneration Report clear, transparent and informative. As always, I welcome your feedback and look forward to meeting you at our AGM on May 21, 2013. Hans Wijers Chairman of the Remuneration Committee March 12, 2013 reports.shell.com Shell Annual Report and Form 20-F 2012 Directors’ Remuneration Report > Overview 61 In respect of the reward instruments in use, they are designed to make executive reward strongly correlated to business success. Where the results do not match business performance, REMCO has a duty to make adjustments. The table below provides an overview of the Executive Directors’ remuneration policy in 2012 and REMCO decisions made in respect of each element. Malcolm Brinded stood down as an Executive Director with effect from April 1, 2012. In this report we include remuneration related to his period as an Executive Director. The forward-looking statements are related to the two remaining Executive Directors. OVERVIEW REMCO continued operating existing policies in 2012. Particularly in the area of performance conditions relating to variable pay, no reviews were required. In 2012, we continued our constructive engagements with major shareholders and shareholder institutions. The 2012 AGM vote resulted in 90.88% in favour of the 2011 Remuneration Report resolution. Further developments in the governance landscape could require changes to our policies. During 2013, REMCO will consider share plan design, as the existing plan rules governing long-term incentives will expire in 2015. REMCO will seek shareholder views where appropriate. Base salary and pensionable salary Annual bonus Policy ▪ Base salaries are quoted in euros and are reviewed in Determinations ▪ Effective from January 1, 2013, base salaries were January. ▪ Pensionable salaries in the base country are reviewed at the same time on the basis of base country market movements and conversion of the euro base salary using long-term exchange rates. ▪ Target levels (as a percentage of base salary): Chief Executive Officer – 150% Other Executive Directors – 110% Maximum bonus – 250% and 220%, respectively. ▪ Calculation of an Executive Director’s annual bonus: – Shell results at the end of the year are translated into a score of between zero and two, on the basis of a predefined scorecard and REMCO’s judgement. – Bonus awards are based on this score multiplied by the target bonus levels, and adjusted for individual performance as determined by REMCO. increased as follows: Chief Executive Officer Peter Voser to €1,640,000 (+2.5%) and Chief Financial Officer Simon Henry to €985,000 (+4.8%). ▪ Pensionable salaries were also reviewed and, effective January 1, 2013, increased to CHF 2,540,000 (+2.2%) for Peter Voser and to £720,000 (+4.9%) for Simon Henry. ▪ The Executive Directors’ Scorecard for 2012 produced a calculated score of 1.35 which REMCO confirmed to be the final outcome. ▪ Considered individual performance and set the individual bonuses for 2012 at €3,300,000 and €1,500,000 for Peter Voser and Simon Henry, respectively. The prorated 2012 bonus for Malcolm Brinded was set at €550,000. R E M U N E R A T I O N R E P O R T Long-term Incentive Plan (LTIP) ▪ Target award levels (as a percentage of base salary): ▪ New LTIP awards were made on February 28, 2013 (see Chief Executive Officer – 300% Other Executive Directors – 240% Maximum vesting – 600% and 480%, respectively. ▪ The actual value delivered after three years depends on the relative performance of LTIP measures against other oil majors. ▪ LTIP shares to be held for two years following vesting. ▪ Shareholding requirements – three times base salary for the Chief Executive Officer and two times base salary for other Executive Directors built up over five years. ▪ Executive Directors are required to invest no less than 25%, and can choose to invest up to 50% of their annual bonus in deferred bonus shares. ▪ Half of these deferred bonus shares are matchable with additional performance-related shares, which can be earned on the same basis as the LTIP vesting. page 69 for further details). ▪ On March 12, 2013, 175% of the LTIP shares awarded in 2010 vested, in line with the plan rules and based on relative performance on TSR, growth in EPS, hydrocarbon production and net cash from operating activities. This is how Shell performed relative to its competitors: TSR (second), EPS (first), hydrocarbon production (second) and net cash from operating activities (first). ▪ Both Executive Directors elected to defer the maximum 50% of the 2012 annual bonus into the DBP. Shares worth €1,650,000 and €750,000 were purchased by Peter Voser and Simon Henry, respectively. ▪ On March 12, 2013, 175% of the performance-related matching DBP shares awarded in 2010 to Peter Voser, Simon Henry and Malcolm Brinded vested. Deferred Bonus Plan (DBP) 62 Shell Annual Report and Form 20-F 2012 reports.shell.com Directors’ Remuneration Report > Overview This report follows the UK requirements of the Companies Act 2006, the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, the Listing Rules and the UK Corporate Governance Code. It outlines the remuneration policies and individual remuneration details for Executive Directors and Non-executive Directors of the Company for the year ended December 31, 2012. The Board has approved this report, and it will be presented to shareholders for approval at the AGM of the Company on May 21, 2013. The base currency in this Directors’ Remuneration Report is the euro. Where amounts are shown in other currencies, an average exchange rate for 2012 is used, unless a specific date is stated, in which case the average exchange rate for the specific date is used. FORM E R E X E C U TI V E D I RE C TOR M A LC OLM B RI N D E D The end of employment arrangements for Malcolm Brinded and the way they feature in this report are summarised below. ▪ The Earnings of Executive Directors table on page 71 contains the base salary paid for his period of service as an Executive Director and the annual bonus for 2012. The cash benefits section of this table includes the severance payment of €2,520,000, as disclosed in the 2011 Directors’ Remuneration Report. ▪ Certain shares under the Long-term Incentive Plan lapsed as awards granted in 2011 and 2012 were prorated for service. This lapsing is reflected in the table on page 72. ▪ The status of the awards under the Deferred Bonus Plan is reported in the table on page 73. ▪ Share options granted in 2004 were exercised in 2012 after he The table below summarises the 2012 compensation for the current Executive Directors. The total amount includes: stood down as an Executive Director. This exercise is reflected in the Share Options table on page 74. ▪ Accrued pension entitlements are reported on page 74. ▪ Shell purchased the house Malcolm Brinded owned in the Netherlands. This transaction resulted in a one-off additional payment to him to cover the loss in value of the property. A description of this transaction and the additional payment is provided in the footnotes to the Earnings of Executive Directors table. ▪ base salary earned in 2012; ▪ annual bonus for 2012 performance paid in 2013; ▪ other cash and non-cash remuneration; ▪ value of LTIP and Performance Share Plan (PSP) awards granted in 2009 that vested in March 2012; ▪ value of DBP awards granted in 2009 that vested in March 2012, representing the matching shares delivered less the original amount deferred; and ▪ value of exercised share options. 2012 SUMMARY COMPENSATION Earnings [A] Value of released 2009 LTIP awards Value of released 2009 DBP awards Value of released 2009 PSP awards Value of exercised share options Total compensation in euros in dollars in sterling € THOUSAND Simon Henry 2,502 – – 1,412[B] 298 4,212 5,416 3,417 Peter Voser 5,086 2,468 1,026 – – 8,580 11,033 6,962 [A] More details can be found on page 71. [B] Value of shares under the PSP, received prior to appointment as an Executive Director, released in March 2012. The UK’s Department for Business, Innovation & Skills has published a consultation on directors’ remuneration reporting (set out in its “Consultation on revised remuneration reporting regulations” document dated June 2012). One of the draft proposals is the publication of a single remuneration figure for each director. It is proposed that this single figure includes a value for the increase in each director’s accrued pension over the year. For defined benefit pension arrangements it is proposed that this is calculated by multiplying the annual increase in accrued pension by twenty (the so-called HMRC Lifetime Allowance method). The annual increase in accrued pension for 2012 can be found on page 74 in the currency of the pension plan. Multiplying this increase by 20, without reduction for inflation, and expressed in euros gives an illustrative value for the increase in accrued pension during 2012 of €954,000 for Peter Voser and €802,000 for Simon Henry. reports.shell.com Shell Annual Report and Form 20-F 2012 Directors’ Remuneration Report > The Remuneration Committee 63 THE REMUNERATION COMMITTEE REMUNERATION POLICY FOR EXECUTIVE DIRECTORS REMCO needs to ensure the remuneration structure and its decisions generate fair and appealing long-term rewards for the Executive Directors while reflecting Shell business performance and sustained shareholder-value growth. Shell’s Executive Directors are asked to make decisions in executing a strategy set by the Board, which represents the Company’s shareholders. The Executive Directors’ remuneration package comprises a base salary, an annual bonus and long-term incentives, as well as a pension plan and other benefits. Remuneration principles REMCO makes policy decisions guided by the following principles: ▪ alignment with Shell’s strategy; ▪ pay for performance; ▪ competitiveness; ▪ long-term creation of shareholder value; ▪ consistency; ▪ compliance; and ▪ risk assessment. R E M U N E R A T I O N R E P O R T REMCO’s key responsibilities in respect of Executive Directors include: ▪ setting remuneration policy; ▪ agreeing performance frameworks, setting targets and reviewing performance; ▪ determining actual remuneration and benefits; and ▪ determining contractual terms. REMCO’s Terms of Reference are reviewed regularly and updated as appropriate. They are available at www.shell.com/investor. Copies can be obtained from the Company Secretary. See inside back cover for details. The members of the Remuneration Committee are: ▪ Hans Wijers (Chairman of the Committee); ▪ Josef Ackermann; and ▪ Charles O. Holliday. Their biographies are given on pages 52-54; REMCO meeting attendance is given on page 79. No other Non-executive Directors participated in the REMCO meetings. Advice and consultation from within Shell on various subjects including the Executive Directors’ Scorecard and the remuneration of Senior Management was sought from: ▪ Peter Voser, Chief Executive Officer; ▪ Hugh Mitchell, Chief Human Resources & Corporate Officer and Secretary to the Committee; and ▪ Michael Reiff, Executive Vice President Remuneration, Benefits & Services. The Chairman of the Board and the Chief Executive Officer were consulted on remuneration decisions affecting other Executive Directors. In addition, REMCO engaged Deloitte LLP to provide an external perspective on shareholder voting, corporate governance developments and market practice. Deloitte LLP also provided other consulting services to Shell during the year, including advice on taxation and operational excellence, but did not provide advice on Board executive remuneration matters other than for REMCO. 64 Shell Annual Report and Form 20-F 2012 reports.shell.com Directors’ Remuneration Report > Remuneration policy for Executive Directors R E M U N E R A T I O N S U P P O R T I N G T H E S T R A T E G I C F O C U S Strategic focus (cid:2) Investment priorities driven on a global thematic basis: – Operational performance and selective growth of upstream and downstream engines – Growth priority: integrated gas, deep water and resources plays (shale oil and gas) – Development of future opportunities (cid:2) More efficient deployment of capital, people and technology SHORT TERM: ONE YEAR Base salary Annual bonus MEDIUM TERM: FIVE YEARS LTIP Deferred bonus LONG TERM: FIVE TO TEN YEARS Personal shareholdings (cid:2) Base salary competitively positioned recognising the scope and complexity of the role. (cid:2) Annual bonus based on performance against a scorecard of short-term strategic targets and individual achievement. (cid:2) Three-year growth in TSR, EPS (CCS), hydrocarbon production and net cash from operating activities, compared with that of BP, Chevron, ExxonMobil and Total, determines LTIP pay-out and DBP match. (cid:2) LTIP shares need to be held for two years after vesting. (cid:2) Shareholding requirement for tenure in role. (cid:2) Variable pay gains subject to clawback provisions, extending three years beyond payment. S TRA TE GY A LI GN M E N T The Executive Directors’ compensation package is strongly linked to the achievement of stretch targets that are seen as indicators of the execution of Shell’s strategy. REMCO considers this link to be critical. The chart above summarises the connection. P A Y FO R P E R F O R M A N C E The chart below shows that, with on-target values, more than three- quarters of the Executive Directors’ compensation (excluding pension) is linked directly to Shell’s performance through the variable pay instruments described below. Our short-term incentives are linked to absolute targets, and long-term incentives are linked to relative targets which reflect the interests of shareholders. TARGET PAY DISTRIBUTION Base salary 21% Annual bonus 27% Long-term incentives 52% REMCO believes the pay distribution ratios and the gearing between target and maximum remain fit for purpose. A consequence of this design is that the total compensation can differ substantially from year to year, depending on Shell and individual performance. C OM P E TI TI V E N E S S REMCO determines remuneration levels by reference to companies of comparable size, complexity and global scope. The current key comparator group consists of BP, Chevron, ExxonMobil and Total as well as a selection of major Europe-based companies. The spread provides a balanced mix across industries. There was no change in the comparator group in 2012. EUROPEAN COMPARATOR GROUP Allianz Anglo American AstraZeneca AXA Barclays BHP Billiton Deutsche Bank Diageo E.ON GlaxoSmithKline HSBC Nokia Novartis Philips Rio Tinto Roche Siemens Unilever Vivendi Vodafone S HA RE HOLD I N G REMCO believes that Executive Directors should align their interests with those of shareholders by holding shares in Royal Dutch Shell plc. The Chief Executive Officer is expected to build up a shareholding over five years of three times his base salary. Other Executive Directors are expected to build up a shareholding to the value of two times their base salary over the same period. REMCO periodically translates these guidelines into absolute shareholding targets for simplicity and consistency. These targets were reviewed in 2012, and were re-confirmed at 240,000 shares for the Chief Executive Officer and 100,000 shares for other Executive Directors. Executive Directors are required to maintain the required shareholding level for the full period of their appointment. Bonuses invested in shares in the DBP, including accrued dividends, count towards the guideline. Unexercised share options, unvested LTIP awards and matching shares under the DBP that are subject to performance conditions do not count. As at December 31, 2012, the relevant shareholding of Royal Dutch Shell plc shares by Peter Voser was 426,638 A shares, equivalent to approximately seven times his base salary, and by Simon Henry was 9,175 A shares and 99,843 B shares, equivalent to approximately three times his base salary. C ON S I S TE N C Y The remuneration structure for Executive Directors is generally consistent with that for the Senior Management of Shell. This consistency builds a culture of alignment with Shell’s purpose and a reports.shell.com Shell Annual Report and Form 20-F 2012 Directors’ Remuneration Report > Remuneration policy for Executive Directors 65 common approach to sharing in Shell’s success. REMCO sets the principles of the remuneration policy and has oversight of the individual remuneration decisions for Senior Management. 2013 ANNUAL BONUS SCORECARD MEASURES FOR EXECUTIVE DIRECTORS 30% WEIGHT 50% WEIGHT Executive Directors’ benefits are also in line with those for other employees on the basis of local market practices. Personal loans or guarantees are not provided to Executive Directors. They are employed under local Dutch terms and conditions – except for their pensions. Their base salary levels are therefore set in euros. Only base salaries, translated into their pension plan’s currency, are pensionable, and referred to as the pensionable salary. REMCO takes pay and employment conditions of other employees within Shell into account when determining Executive Directors’ pay and benefits, to ensure alignment and consistency among the different levels of the organisation. Executive Directors’ annual performance is measured on the basis of a Shell-wide scorecard. C OM P LIA N C E REMCO takes its decisions in the context of the Shell General Business Principles. It also ensures compliance with applicable laws and corporate governance requirements when designing and implementing policies and plans. R I S K A S S E S S M E N T REMCO ensures the remuneration structures and rewards meet risk- assessment tests to ensure that shareholder interests are safeguarded and that inappropriate actions are avoided. For example: ▪ all performance-based incentives awarded to Executive Directors are subject to a clawback provision which applies in situations of financial restatements due to material non-compliance and/or misconduct by an Executive Director or misconduct through his direction or non-direction. To facilitate clawback actions, specific provisions are incorporated in all incentive award documents issued from 2011. The clawback period covers at least the three-year period preceding the decision to claw back; ▪ the use of multiple performance measures, including non-financial and relative measures, mitigates unintended financial and behavioural consequences; ▪ the Executive Directors’ shareholdings ensure that they bear the consequences of their management decisions; and ▪ Executive Directors’ expenses are audited internally and reviewed by REMCO on a regular basis. Remuneration elements CASH FLOW Cash generated from operations that factors in the impact of commodity price fluctuations as well as business performance so that Executive Directors, like shareholders, share the effects of both. 20% WEIGHT SUSTAINABLE DEVELOPMENT Equally weighted indicators of safety and environmental performance. OPERATIONAL EXCELLENCE ▪ Project delivery: indicator of Shell’s ability to deliver projects on-stream on time and on budget. ▪ Hydrocarbon production, sales of liquefied natural gas, refinery and chemical plant availability: indicators of the full and effective use of resources – both facilities and people – according to the relevant business. As was the case in 2011, for the 2012 Executive Directors’ Scorecard, the sustainable development component was a combination of the safety measure (10% weight) and additional targeted internal measures (10% weight in total) covering operational spills, energy efficiency and use of fresh water. These measures reflect some of the most important sustainability issues faced by Shell and will also be used for 2013. REMCO strengthens the Executive Directors’ individual accountability by increasing or decreasing their annual bonuses to take account of how well they have delivered against their own individual performance targets. These targets typically relate to qualitative differentiators not already covered on the scorecard, for example stakeholder management, portfolio development, organisational leadership and brand value. A positive individual adjustment corresponds with personal impact beyond expectations and a negative adjustment would mean expectations were not completely met. R E M U N E R A T I O N R E P O R T The calculation of an Executive Director’s annual bonus is: Annual bonus = base salary x target bonus % x scorecard result; adjusted for individual performance (and capped at 250% of salary for the Chief Executive Officer and 220% of salary for other Executive Directors). ANNUAL BONUS LEVELS (% OF SALARY) BAS E SALARY The base salary rewards day-to-day leadership and direction as well as holistic management of various internal and external stakeholders. Chief Executive Officer Other Executive Directors Target award Maximum 150% 110% 250% 220% A N N U A L B ON U S REMCO uses the annual bonus to focus on short-term targets that the Board agrees each year as part of the Business Plan, and on individual performance against personal targets. A scorecard with financial, operational, project delivery and sustainable development targets represents the link to business results. The scorecard targets are stretching but realistic. The scorecard for the year is set and approved by REMCO. The outcome of the performance year is usually known in January of the following year, and REMCO translates this into a score of between zero and two. In doing so, REMCO exercises its judgement to ensure that the final annual bonuses for Executive Directors are in line with Shell’s performance for the reported year. LON G- TE RM IN C E N TIV E S There are two main long-term incentive programmes currently in use: the Long-term Incentive Plan (LTIP) and the Deferred Bonus Plan (DBP). Another long-term incentive programme – the Restricted Share Plan (RSP) – is available for retention purposes. Long-term incentives focus on performance relative to other oil majors: BP, Chevron, ExxonMobil and Total. They reward Executive Directors if Shell outperforms its peers over a three-year period on a combination of TSR, EPS growth on the basis of current cost of supplies (CCS), hydrocarbon production growth and net cash growth from operating activities. 66 Shell Annual Report and Form 20-F 2012 reports.shell.com Directors’ Remuneration Report > Remuneration policy for Executive Directors Vested shares are increased by dividend shares accrued over the performance period. Following payment of taxes, vested shares from LTIP awards must be held for a further two years to align with the strategic focus. REMCO always approves award dates in advance. 2013 LONG-TERM INCENTIVE MEASURES FOR EXECUTIVE DIRECTORS 30% WEIGHT 20% WEIGHT TSR Assessment of actual wealth created for shareholders. HYDROCARBON PRODUCTION GROWTH Overall indicator of success in locating and developing proved reserves and delivering production. 30% WEIGHT 20% WEIGHT EPS GROWTH (ON A CCS BASIS) [A] Indicator of the quality of revenue growth and cost management that underpins TSR. NET CASH GROWTH FROM OPERATING ACTIVITIES Source of dividends and capital expenditure commitments which support sustainable growth based on portfolio and cost management. [A] Earnings per share on a CCS basis takes into account the changes in the cost of supplies and thereby enables a consistent comparison with other oil majors. See Note 2 to the “Consolidated Financial Statements” for further information. For simplicity, we measure and rank growth based on the data points at the beginning of the three-year performance period relative to the data points at the end of the period, using unadjusted publicly reported data. These measures were introduced with the 2009 LTIP and DBP awards. Before 2009, TSR was the only performance measure. LTIP AWARD LEVELS (% OF SALARY) Chief Executive Officer Other Executive Directors Maximum Target award[A] vesting 300% 240% 600% 480% [A] LTIP target awards cannot exceed four times base salary, as approved by shareholders in 2005. T I ME L IN E FO R 2 0 1 3 LTI P SH A RE AWA RD S Performance period Retention period February Award Vesting esaeleR 2013 2014 2015 2016 2017 2018 Deferred Bonus Plan Under the DBP, Executive Directors must invest at least 25% of their annual bonus, up to a maximum of 50%, in Royal Dutch Shell plc shares. These deferred bonus shares are released after three years, and may be matched with additional shares. The number of additional shares awarded as a match will depend on the performance of Shell compared with its peer group during the three-year deferral period. To calculate the number of additional shares, the same vesting percentage as the LTIP award is applied to half of the Executive Directors’ deferred bonus shares. As with the LTIP award, the maximum vesting percentage that can be applied is 200%, and the minimum is 0%. At the end of the three years, Executive Directors also receive shares equal to the value of any dividends that would have accrued during the period on the deferred bonus shares as well as any additional matching shares released. The consistent performance alignment of LTIP and DBP reinforces the carried interest of Executive Directors with Shell and shareholders, using Company grants under the LTIP and earned cash under the DBP. TIMELINE FOR 2 012 DE FERRED BON US PL AN Performance period for annual bonus Deferral period The LTIP and DBP vest on the basis of relative performance rankings as follows: February Award esaeleR 2012 2013 2014 2015 2016 RELATIVE PERFORMANCE RANKINGS Shell’s rank against peers shares ultimately awarded, taking into Number of conditional performance on each of the four performance measures 1st 2nd 3rd account the weightings of the four performance measures. 2 x initial LTIP award 2 x half of the deferred bonus shares 1.5 x initial LTIP award 1.5 x half of the deferred bonus shares 0.8 x initial LTIP award 0.8 x half of the deferred bonus shares 4th or 5th Nil TSR underpin If the TSR ranking is fourth or fifth, the level of the award that can be vested on the basis of the three other measures will be capped at 50% of the maximum payout for the LTIP and half of the deferred bonus shares for the DBP. Use of discretion REMCO confirms that it would exercise upward discretion only after consulting shareholders. Restricted Share Plan In certain circumstances, three-year restricted share awards may be made under the Restricted Share Plan (RSP) for retention purposes. At the start of the year, there were no RSP awards outstanding for the current Executive Directors and no new awards were made to them during the year. Employee share plans Executive Directors are not eligible to participate in other employee share plans (see page 46). Proration The annual bonus is prorated in the final year of employment. As of 2011, the LTIP awards are prorated on an Executive Director’s departure on the basis of his service within the performance period. The prorated awards will vest at the end of the performance period, subject to satisfaction of performance conditions. REMCO retains the discretion to modify the prorating if it considers that this would be appropriate. Dilution To deliver shares under these plans, we use market-purchased shares rather than issue new shares. The dilution limit under the discretionary plans is 5% in 10 years and, to date, no shareholder dilution has resulted from these plans, although it is permitted under the rules of the plans. reports.shell.com Shell Annual Report and Form 20-F 2012 Directors’ Remuneration Report > Remuneration policy for Executive Directors 67 Pensions Executive Directors’ pensions are maintained in their base country pension arrangements, as are those of other employees working internationally. Contribution rates for Executive Directors are the same as for other employees under these plans. The pension accrual rates are 1.8% (1/56) of base salary for each year of service for Peter Voser and 1.85% (1/54) for Simon Henry. Executive Directors’ euro base salaries are translated into their home currencies for pension plan purposes. Once their salaries are denominated in base country currency, they are maintained in line with the euro base salary increases taking into account exchange rate fluctuations and other factors as determined by REMCO. Contracts of employment Executive Directors’ employment contracts are governed by Dutch employment law. This choice was made because mandatory provisions of Dutch employment law apply even if a foreign law has been specified to govern the contract. This is consistent with the employment terms of other Shell senior managers and staff based in the Netherlands. The contracts end by notice of either party (one month for an employee and up to a maximum of four months for the employer) or automatically at retirement. Under Dutch law, termination payments are not linked to the contract’s notice period. For current Executive Directors, REMCO will offer compensation for losses resulting from termination of employment up to one times annual pay (base salary plus target bonus). For future Executive Directors, all new contracts will include a cap of one times annual pay (base salary plus target bonus) on any payments resulting from loss of employment, with a reference to the Executive Directors’ duty to seek alternative employment and thereby mitigate their loss. This level of termination payments was part of a number of policy changes supported by shareholders in 2011 following consultations. REMCO will determine terms and conditions for any situation where a severance payment is appropriate, taking into consideration applicable law, corporate governance provisions and the best interests of shareholders at the time. REMCO will ensure that poor performance is not rewarded in such circumstances. External appointments The Board considers external appointments to be valuable in broadening Executive Directors’ knowledge and experience. The number of outside directorships is generally limited to one. The Board must explicitly approve such appointments. Executive Directors are allowed to retain any cash or share-based compensation they receive from such external board directorships. EXECUTIVE DIRECTORS’ EMPLOYMENT CONTRACTS EXTERNAL APPOINTMENTS Peter Voser Simon Henry Employing company Shell Petroleum N.V. Shell Petroleum N.V. Contract date July 20, 2005 Appointee organisation May 20, 2009 Peter Voser [A] Roche Malcolm Brinded [A] Shell Petroleum N.V. July 20, 2005 Malcolm Brinded [B] Network Rail THOUSAND 2012 fee £ 13 CHF 330 [A] Malcolm Brinded stood down as an Executive Director with effect from [A] Appointed as a Non-executive Director as of March 1, 2011. April 1, 2012. During April 2012 he transferred to employment in his base [B] Appointed as a Non-executive Director as of October 12, 2010. The country of the UK where he was employed by Shell International Limited amount shown has been prorated to show fees receivable during Malcolm until April 30, 2012, his last day of employment. Brinded’s period as an Executive Director of Royal Dutch Shell plc. R E M U N E R A T I O N R E P O R T 68 Shell Annual Report and Form 20-F 2012 reports.shell.com Directors’ Remuneration Report > Remuneration determinations for Executive Directors REMUNERATION DETERMINATIONS FOR EXECUTIVE DIRECTORS REMCO considered overall performance and decided to follow the mathematical outcome of the scorecard. More details on certain of these measures are provided in “Performance indicators” on pages 8-9. Base salary REMCO reviewed Executive Directors’ annual base salary levels and made the following decisions regarding salary adjustments. I N D I V I D U A L P E RFORM A N C E An Executive Director’s individual performance is also taken into account in determining his annual bonus. Individual performance is assessed against personal targets. REMCO considered the individual performance of each Executive Director in 2012 and for Peter Voser and Simon Henry determined an upward adjustment of the bonus generated by the scorecard. Particular individual achievements during 2012 which supported REMCO’s judgement are set out below. Chief E xecutive Officer Peter Voser strongly led the strategy review and its implementation, including delivery of key projects following final investment decisions, which progressed well in all business units. The Company’s speed of implementation has accelerated, additional options were delivered in respect of portfolio, and future option development expanded. He actively drove portfolio management leading to initiatives to further commercialise the North American gas position, and to deepen the China strategy. The Company’s senior leadership was further strengthened, including key Executive Committee appointments, and good progress was made in many areas of the sustainability agenda. Chief Financial Officer Simon Henry was responsible for strong development of the overall financial operating agenda, executed a very effective delivery and discussion of the strategic plan, and initiated the creation of a new global IT vision. He further strengthened external relationships with investors and key stakeholders in Asia, and played a major role in business performance appraisal and improvements on process standardisation. Strong operational cash performance resulted in lower gearing levels, and a stronger balance sheet overall. 2012 BONUSE S Based on the scorecard outcome, the calculated 2012 bonus would be €3,240,000 for Peter Voser and €1,395,900 for Simon Henry. As described above, REMCO also took into account individual performance and determined the final annual bonuses for 2012 as €3,300,000 for Peter Voser and €1,500,000 for Simon Henry. For the prorated period, REMCO determined €550,000 for Malcolm Brinded. Below Threshold On target Above Outstanding BASE SALARY OF EXECUTIVE DIRECTORS (UNAUDITED) Peter Voser Simon Henry € thousand 1,640 985 Increase Effective date 2.5% 4.8% January 1, 2013 January 1, 2013 In making salary adjustment determinations, REMCO considered: ▪ the market positioning of the Executive Directors’ compensation packages; ▪ the different tenure and experience each Executive Director has in his role; ▪ the planned average salary increase in 2013 for other employees across three major countries – the Netherlands, the UK and the USA; ▪ the impact of pensionable salary increase on pension benefits; and ▪ Shell’s performance and Executive Directors’ individual performance in 2012. Annual bonus S C ORE C A RD RE S U LT SE T A T 1. 35 In assessing Shell’s 2012 performance, REMCO noted that: ▪ Net cash from operating activities was on target at $46 billion; ▪ Operational excellence was above target: – project delivery was outstanding at 90%; – hydrocarbon production was substantially below target at 3,262 thousand boe/d; – LNG sales were outstanding at 20.2 million tonnes; and – combined refinery and chemical plant availability was above target at 92.9%. ▪ Shell’s sustainability performance was in aggregate above target: – occupational safety, as measured by the total recordable case frequency (TRCF), was on target at 1.3 cases per million working hours; and – targeted internal measures covering volume of operational spills, use of fresh water, and energy intensity were better than target, whereas the number of operational spills was on target. 2 0 1 2 S C O R E C A R D F O R E X E C U T I V E D I R E C T O R S Measures Operational cash flow Operational excellence Project delivery Production Sales of liquefied natural gas Refinery and chemical plant availability Sustainable development Safety Additional sustainability measures [A] Overall performance Weight 30% 50% 20% 12% 6% 12% 20% 10% 10% 100% Score 1.19 1.44 2.00 0.00 2.00 1.65 1.35 1.13 1.57 1.35 [A] Operational spills (volume and number), use of fresh water and energy intensity. 0 0.40 0.80 1.20 1.60 2.00 reports.shell.com Shell Annual Report and Form 20-F 2012 Directors’ Remuneration Report > Remuneration determinations for Executive Directors 69 Other cash and non-cash earnings Executive Directors received car allowances and transport to and from home and office, as well as employer contributions to insurance plans. As appropriate for those employees outside their home country, additional amounts for children’s school fees were reimbursed, in line with Shell’s International Mobility Policy. The Earnings of Executive Directors table is on page 71. Long-term Incentive Plan Vesting In 2010, Executive Directors were granted a conditional award of performance shares under the LTIP. At the end of the performance period, which was from January 1, 2010, to December 31, 2012, Shell was ranked second among its peer group in terms of TSR, first in terms of EPS growth, second in terms of hydrocarbon production growth and first in terms of growth in net cash from operating activities. REMCO also considered the underlying financial performance of Shell and decided to release 175% of shares under the LTIP, using no discretion. Award On February 28, 2013, a conditional award of performance shares under the LTIP was made to the Executive Directors. The award had a face value of three times base salary for the Chief Executive Officer and 2.4 times base salary for the Chief Financial Officer, resulting in the following shares being awarded conditionally: AWARDED LTIP SHARES Peter Voser Simon Henry [A] Royal Dutch Shell plc A shares. [B] Royal Dutch Shell plc B shares. Number of shares conditionally awarded 195,393[A] 91,920[B] For details of LTIP awards and releases see the Long-term Incentive Plan table on page 72. Deferred Bonus Plan Vesting In 2010, Executive Directors were granted conditional awards of matching shares under the DBP. The performance period was January 1, 2010, to December 31, 2012. Given that the performance condition of the DBP is the same as for the 2010 LTIP, REMCO decided to release 175% of the performance-related matching shares under the DBP. Award Peter Voser and Simon Henry elected to defer 50% of their 2012 annual bonus into the DBP which was awarded on February 28, 2013, resulting in share awards as follows: AWARDED DBP SHARES Peter Voser Simon Henry [A] Royal Dutch Shell plc A shares. [B] Royal Dutch Shell plc B shares. Number of deferred shares awarded 65,528[A] 29,162[B] Half of the shares awarded are matchable with additional performance-related shares which can be earned on the same basis as the LTIP vesting. For details of DBP awards and releases see the Deferred Bonus Plan table on page 73. Pension interests During 2012, Peter Voser, Simon Henry and Malcolm Brinded accrued retirement benefits under defined benefit plans. In addition to the standard Swiss pension arrangements, Peter Voser has an unfunded pension arrangement that was agreed upon his return to Shell in 2004 and implemented in 2006. For details of accrued pension benefits see page 74. The transfer values have been calculated in accordance with regulations 7 to 7E of the Occupational Pension Schemes (Transfer Values) Regulations 1996. R E M U N E R A T I O N R E P O R T 70 Shell Annual Report and Form 20-F 2012 reports.shell.com Directors’ Remuneration Report > Non-executive Directors & Additional statutory disclosure NON-EXECUTIVE DIRECTORS Remuneration policy The Board determines the fees payable to Non-executive Directors (NEDs) of the Company, within the limit of €4,000,000 specified by the Articles of Association and in accordance with the NEDs’ responsibilities and time commitments. The Board reviews NED fees periodically to ensure that they are aligned with those of other major listed companies. The Chairman’s fee is determined by REMCO. A review was undertaken during 2012 and the Chairman’s fee was increased from €800,000 to €825,000. The Board reviewed the NED fees, which resulted in an increase in the base annual fee from €120,000 to €125,000. These changes were implemented in January 2013. NON-EXECUTIVE DIRECTORS’ FEES STRUCTURE (UNAUDITED) Chairman of the Board Non-executive Director annual fee Senior Independent Director Audit Committee Chairman [A] Member Corporate and Social Responsibility Committee Chairman [A] Member Nomination and Succession Committee Chairman [A] Member Remuneration Committee Chairman [A] Member Intercontinental travel fee € 825,000 125,000 55,000 45,000 25,000 35,000 17,250 25,000 12,000 35,000 17,250 5,000 [A] The chairman of a committee does not receive an additional fee for membership of that committee. The Chairman and the other NEDs cannot receive awards under any incentive or performance-based remuneration plans, and personal loans or guarantees are not granted to them. NEDs receive an additional fee of €5,000 for any Board meeting involving intercontinental travel – except for one meeting per year held in a location other than The Hague. The earnings of the NEDs in office during 2012 can be found on page 75. NEDs do not accrue any retirement benefits as a result of their Non- executive Directorships with the Company. During his service as an employee, Jeroen van der Veer accrued retirement benefits and was awarded share options as well as conditional shares under the LTIP and DBP. Relevant awards are summarised on pages 75-76. The policy in respect of prorating LTIP and DBP awards on termination of employment came into effect for awards made from 2011 onwards. ADDITIONAL STATUTORY DISCLOSURE C OM P E N S A TION OF D I RE C TORS A N D S E N I OR M A N A GE M E N T Shell paid and/or accrued a total amount of compensation of $83,028,000 [A] for services in all capacities that Directors and Senior Management at Shell provided during the year ended December 31, 2012 (2011: $85,692,000). In addition, Shell accrued a total amount of $12,644,000 (excluding inflation), to provide pension, retirement and similar benefits for Directors and Senior Management during the year ended December 31, 2012 (2011: $9,236,000). [A] Compensation includes gains realised from long-term incentive awards released and share options exercised during the year. Biographies of the Directors and Senior Management are found on pages 52-55. PE RFORMA N C E GRA PHS The graphs below compare, on the basis required by the UK Companies Act 2006, Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, the TSR performance of Royal Dutch Shell plc over the past five financial years with that of the companies comprising the Euronext 100 share index and the FTSE 100 share index. The Board regards the Euronext 100 and the FTSE 100 share indices as appropriate broad market equity indices for comparison, as they are the leading market indices in the home markets of Royal Dutch Shell plc. HIS TORI C A L TSR P E RFORM A N C E OF ROY A L D U TC H SHE LL P LC A ( RDSA ) SHA RE S Growth in the value of a hypothetical €100 holding over five years. Euronext 100 comparison based on 30 trading day average values. RDSA VERSUS EURONEXT 100 Value of hypothetical €100 Holding €150 RDSA Euronext 100 €125 €100 €75 €50 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 HIS TORI C A L TSR P E RFORM A N C E OF ROY A L D U TC H SHE LL P LC B ( RDSB) SHA RE S Growth in the value of a hypothetical £100 holding over five years. FTSE 100 comparison based on 30 trading day average values. RDSB VERSUS FTSE 100 Value of hypothetical £100 Holding RDSB FTSE 100 £150 £125 £100 £75 £50 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 reports.shell.com Shell Annual Report and Form 20-F 2012 Directors’ Remuneration Report > Data tables – Executive Directors 71 DATA TABLES – EXECUTIVE DIRECTORS EARNINGS OF EXECUTIVE DIRECTORS IN OFFICE DURING 2012 (AUDITED) Salary Bonus [A] Cash benefits [B] Non-cash benefits [C] Total in euros Total in dollars Total in sterling Peter Voser Simon Henry 2011 1,550 3,500 155 3 5,208 7,249 4,521 2012 940 1,500 20 42 2,502 3,217 2,030 2011 890 1,500 50 29 2,469 3,436 2,143 2012 1,600 3,300 183 3 5,086 6,539 4,126 € THOUSAND Malcolm Brinded 2012 300 550 2,520 28 3,398 4,370 2,758 2011 1,175 2,000 1 38 3,214 4,473 2,790 [A] The annual bonus figures are shown in the table in their related performance year and not in the following year in which they are paid. [B] Cash benefits include employer contributions to insurance plans, school fees, car allowances, tax compensation and the severance payment specific to Malcolm Brinded. Separately, as disclosed in the 2011 Directors’ Remuneration Report, following his relocation to the Netherlands in 2002, Malcolm Brinded received an indemnity on the house that Shell requested him to purchase in the Netherlands. The indemnity entailed that, should a Shell-initiated transfer result in the sale of this property at a loss (defined as a sale price below the original purchase price of €3,375,532), Shell would compensate him for such loss. Malcolm Brinded returned to the UK in April 2012 and marketed the property. In November 2012, Shell purchased the property for €2,383,333 (calculated as the average of three independent valuations). Since this was lower than the original purchase price, Shell made a payment to Malcolm Brinded of €992,199 to compensate him for the difference between the final sale price and the original purchase price which, when grossed up for tax, amounted to €2,067,248. [C] Non-cash benefits comprise life and medical insurance, company-provided transport for home to office commuting, relocation costs, and lease cars. The aggregate amount paid to or receivable by Executive Directors from Royal Dutch Shell plc and its subsidiaries for services in all capacities during the fiscal year ended December 31, 2012, was €13,043,000 (2011: €10,891,000). R E M U N E R A T I O N R E P O R T 72 Shell Annual Report and Form 20-F 2012 reports.shell.com Directors’ Remuneration Report > Data tables – Executive Directors LONG-TERM INCENTIVE PLAN Number of shares under award as at January 1, 2012[A] Audited Unaudited Dividend Dividend shares Number Total number of shares Market shares awarded/ of shares Value of shares under Additional accrued price at accrued (lapsed) released shares at award as at Potential value as at Original in prior date of during the during the during the release December 31, December 31, award years[B] 175,985 – 182,174 8,907 227,560 24,878 128,074 23,162 81,699 84,047 – 4,088 107,541 11,973 26,000 4,248 104,296 – 110,961 5,397 148,660 16,551 153,855 28,356 award € 27.28 25.53 19.78 19.40 £ 22.95 21.45 16.56 15.40 22.95 21.45 16.56 16.58 year[B] year[C] year (thousand)[D] 2012 2012 (thousand)[E] – – – – – – € – – – € $ 184,985 200,853 4,805 6,156 6,341 8,124 265,348 12,062 15,917 (60,494) 91,802 2,468 – – – – – – – £ – – – 21,176 52,019 1,178 (69,531) (38,786) – – – – – – – (72,883) 110,593 2,504 85,754 92,510 125,446 – 36,491 81,423 173,411 – – £ 1,865 2,374 4,775 – 794 2,090 6,600 – – $ 3,015 3,838 7,719 – 1,283 3,378 10,670 – 9,000 9,772 12,910 1,060 4,055 4,375 5,932 595 1,726 3,851 8,200 1,265 A shares Peter Voser 2012-2014 2011-2013 2010-2012 [F] 2009-2011 B shares Simon Henry 2012-2014 2011-2013 2010-2012 [F] 2009-2011 [G] Malcolm Brinded 2012-2014 [H] 2011-2013 [H] 2010-2012 [F][H] 2009-2011 [A] The 2012 award was made on February 3, 2012. (See pages 65-66 for more details about LTIP performance conditions.) [B] Dividend shares are performance-related and accumulate each year on an assumed notional LTIP award. Such dividend shares are disclosed and recorded on the basis of the number of shares conditionally awarded but, when an award vests, dividend shares will be awarded only in relation to vested shares as if the vested shares were held from the award date. [C] The vesting of the 2009 LTIP award at 60% meant that 40% of the shares originally awarded to Peter Voser and Malcolm Brinded have lapsed. The vesting of the 2009 Performance Share Plan (PSP) award at 170% for Simon Henry meant that additional shares were released at vesting. The outstanding 2011 and 2012 LTIP awards for Malcolm Brinded have been prorated for service on his termination of employment on April 30, 2012. This prorating resulted in the lapsing of previously awarded shares. [D] The vested awards were delivered on March 21, 2012. The respective share prices used to calculate the values at release were €26.89 for Peter Voser and £22.65 for Simon Henry and Malcolm Brinded, which were the closing prices of the previous trading day on Euronext Amsterdam for Royal Dutch Shell plc A shares and on the London Stock Exchange for Royal Dutch Shell plc B shares. [E] Representing the value of the conditional shares awarded in previous years under the LTIP at the end of the year. This is calculated by multiplying the market price of Royal Dutch Shell plc shares at December 31, 2012, by the number of shares under the LTIP that would vest based on the achievement of LTIP performance conditions up to December 31, 2012. (See pages 65-66 for more details about LTIP performance conditions.) [F] On March 12, 2013, REMCO determined to vest 175% of shares for the 2010 award (see page 69). The vesting percentage is applied to the total number of shares awarded on February 5, 2010. The resulting number of shares has been increased by notional dividends accrued between award date and vesting date (as if this resulting number of shares had been in place from award date). [G] Awarded under the PSP prior to appointment as an Executive Director. More information about the PSP can be found on pages 132-133. [H] The total number of shares under award as at cessation of appointment as an Executive Director on March 31, 2012, was 167,181 for the 2010 award, 117,745 for the 2011 award, and 105,539 for the 2012 award. reports.shell.com Shell Annual Report and Form 20-F 2012 Directors’ Remuneration Report > Data tables – Executive Directors 73 DEFERRED BONUS PLAN (AUDITED) Number of shares under award as at January 1, 2012[B] Non- performance- Dividend Dividend shares Number of related Dividend shares Performance- accrued on Number Total number of shares under award as at 67,443 80,989 54,946 – 28,508 33,282 20,539 38,011 49,849 43,713 – shares deferred from the matching shares Market accrued related performance- of shares Value of shares accrued price at during matching related released shares at Realised gains on the year[D] shares vested matching during the release deferral December 31, shares[E] year (thousand)[F] (thousand)[G] 2012 awarded in prior Awards [A] A shares Peter Voser bonus[C] at grant years[D] date of award € 2012-2014 2011-2013 64,161 73,457 2010-2012 [H] 47,121 – – – 2009-2011 36,687 9,171 B shares Simon Henry 2012-2014 2011-2013 27,160 30,238 2010-2012 [H] 17,607 Malcolm Brinded 2012-2014 [I] 2011-2013 [I] 36,214 45,289 2010-2012 [H][I] 37,474 – – – – – – – 27.28 3,282 3,591 5,151 8,294 25.53 3,941 19.78 2,674 19.40 632 £ – 22.95 1,348 1,470 1,960 21.45 1,574 16.56 972 – 22.95 1,797 2,203 4,172 21.45 2,357 16.56 2,067 – – – – – – – – – € – – – € – – – 8,254 1,609 64,647 1,738 1,026 – – – – – – – – – – – – – – – – – – £ – – – – – – £ – – – – – – 2009-2011 44,073 11,018 10,153 16.58 755 9,916 1,966 77,881 1,764 1,033 [A] Awards made in 2010, 2011 and 2012 refer to the portion of the 2009, 2010 and 2011 annual bonus respectively, which was deferred, and the related accrued dividends and matching shares. [B] The 2012 award was made on February 3, 2012. [C] Representing the proportion of the annual bonus that has been deferred and converted into notional share entitlements (deferred bonus shares), in which there is no beneficial ownership. Half of the shares awarded are matchable with additional performance-related shares, which can be earned on the same basis as the LTIP vesting. The value of the deferred bonus shares awarded for 2012 is also included in the annual bonus figures in the Earnings of Executive Directors table on page 71. [D] Representing dividends accumulated since the award on the number of shares equal to the deferred bonus shares awarded. [E] Dividend shares are performance-related and accumulate each year on an assumed notional DBP award. When an award vests, dividend shares will be awarded only in relation to vested shares as if the vested shares were held from the award date. [F] The vested awards were delivered on March 21, 2012. The respective share prices used to calculate the values at release were €26.89 for Peter Voser and £22.65 for Malcolm Brinded, which were the closing prices of the previous trading day on Euronext Amsterdam for Royal Dutch Shell plc A shares and on the London Stock Exchange for Royal Dutch Shell plc B shares. [G] Representing the difference between the value of shares released and bonus deferred. Peter Voser and Malcolm Brinded each deferred 50% of their 2008 annual bonus. [H] On March 12, 2013, REMCO decided to vest 175% of the performance-related matching shares relating to the 2010 award. The total vested award (comprising the original deferred bonus award plus the matching award) has been increased by the notional dividends accrued between the award date and the vesting date (see page 69). [I] The total number of shares under award at cessation of appointment as an Executive Director on March 31, 2012, was 42,143 for the 2010 award, 48,054 for the 2011 award, and 36,646 for the 2012 award. R E M U N E R A T I O N R E P O R T 74 Shell Annual Report and Form 20-F 2012 reports.shell.com Directors’ Remuneration Report > Data tables – Executive Directors SHARE OPTIONS (AUDITED) A shares Malcolm Brinded [C] B shares Peter Voser Simon Henry [D] Number of Number of Number of options under options options under award as at exercised award as at January 1, during the December 31, Grant Exercisable 2012 year 2012 price [A] € from date Expiry date Realised Realisable gains on share gains as at December 31, options exercised 2012 during the year (thousand) [B] € $ (thousand) € $ 50,000 229,866 22,728 32,583 – – 22,728 229,866 – – 32,583 – 31.05 21/03/05 20/03/12 £ 15.04 12.74 13.89 13.89 – £ – $ – £ – – $ – 05/11/07 04/11/14 1,544 2,495 19/03/06 18/03/13 – – 235 371 07/05/07 06/05/14 256 414 – – 07/05/07 06/05/14 – – 1,825 2,925 Malcolm Brinded [E] 229,866 229,866 – [A] Average of the opening and closing share prices over a period of five successive trading days prior to and including the day on which the options are granted (not at a discount). [B] Representing the value of unexercised share options granted in previous years at the end of the year, calculated by taking the difference between the grant price of the option and the market price of Royal Dutch Shell plc shares at December 31, 2012, multiplied by the number of shares under option at December 31, 2012. The actual gain realised, if any, will depend on the market price of Royal Dutch Shell plc shares at the time of exercise. [C] These share options expired unexercised during the year. [D] Awarded to Simon Henry prior to his appointment as an Executive Director. Simon Henry exercised 22,728 share options on August 22, 2012. The market price at the date of exercise was £23.08. [E] Malcolm Brinded had 229,866 share options under award as at the date he stood down as an Executive Director on March 31, 2012. He exercised these share options on April 2, 2012. The market price at the date of exercise was £21.82. The 2012 high, low and year-end prices of Royal Dutch Shell plc A and B shares are set out on page 92. PENSIONS (AUDITED) Peter Voser [A][D] Simon Henry [B][D] Malcolm Brinded [B][C][D] PENSIONS (AUDITED) At December 31, 2012 Increase over the year THOUSAND Accrued pension Increase over the year (excluding inflation) CHF 1,312 £ 386 666 $ 1,434 $ 623 1,076 CHF 57 £ 33 24 $ 63 $ 53 39 CHF 57 £ 22 5 $ 63 $ 35 7 Transfer values of accrued benefits THOUSAND Increase in accrued pension over the year (excluding inflation) less Directors’ contributions CHF 702 £ 476 104 $ 767 $ 770 168 Increase over the year less Directors’ contributions CHF 2,017 £ 748 227 $ 2,204 $ 1,209 367 Peter Voser [A] Simon Henry [B] Malcolm Brinded [B][C] At December 31, 2012 At December 31, 2011 CHF 17,758 £ 9,058 17,487 $ 19,406 $ 14,643 28,269 CHF 15,665 £ 8,270 17,260 $ 16,647 $ 12,748 26,606 [A] The pension values for Peter Voser include all of his Shell pension benefits. This includes a capped defined benefit pension in the Swiss pension fund based on salary up to a cap of CHF 835,200 per annum and benefits for salary in excess of this level provided via an individual savings account and an unfunded pension promise. As at December 31, 2012, his capped defined benefit pension was CHF 435,141 per annum, and the transfer value in respect of this benefit was CHF 5,889,201. The individual savings account was worth CHF 2,581,175 at December 31, 2012. The balance of his benefits (valued at CHF 9,287,315 at December 31, 2012) will be provided through the unfunded pension arrangement. [B] Simon Henry and Malcolm Brinded elected to have their benefits in the Shell Contributory Pension Fund (the main UK pension arrangement) restricted to the UK applicable lifetime allowance with any excess provided from an unfunded defined benefit scheme (the Shell Supplementary Pension Plan). While Simon Henry is, and Malcolm Brinded was, working outside of the UK, in line with Shell’s general pension policy, their benefits are provided by the Shell Overseas Contributory Pension Fund rather than the Shell Contributory Pension Fund. The values of the accrued pension benefits in each plan are aggregated in the table, and not disclosed separately. [C] Malcolm Brinded elected to receive his retirement benefits on April 30, 2012, and commuted £120,228 per annum of his pension for a lump sum of £2,208,949. The pension amounts shown do not allow for this effect for consistency between the start-of-year and end-of-year pension figures. The transfer value at December 31, 2012, is based on Malcolm Brinded’s post-commutation pension but has then been increased to add in the value of the lump sum and the pension payments (which amounted to £363,520) he received during 2012. [D] Employer contributions to pension plans in respect of Executive Directors were €848,143 in 2012 (2011: €1,161,641). reports.shell.com Shell Annual Report and Form 20-F 2012 Directors’ Remuneration Report > Data tables – Non-executive Directors 75 DATA TABLES – NON-EXECUTIVE DIRECTORS FEES OF NON-EXECUTIVE DIRECTORS IN OFFICE DURING 2012 (AUDITED) Non-executive Directors Josef Ackermann Guy Elliot Charles O. Holliday Lord Kerr of Kinlochard [A] Gerard Kleisterlee Christine Morin-Postel Jorma Ollila [B] Sir Nigel Sheinwald [C] Linda G. Stuntz Jeroen van der Veer Hans Wijers 2012[D] THOUSAND 2011 € 145 165 207 80 145 145 800 69 175 137 200 $ 186 212 266 103 186 186 1,029 88 225 176 258 € 137 157 196 214 145 153 800 – 95 137 162 $ 191 219 272 297 202 212 1,112 – 131 191 226 [A] Lord Kerr of Kinlochard stood down with effect from May 22, 2012. [B] Jorma Ollila receives no additional payments for chairing the Nomination and Succession Committee. He has the use of an apartment and company-provided transport between home and office. The total value of his non-cash benefits amounted to approximately €121,000. Accordingly, his total fees and non-cash benefits for 2012 were €921,000 (2011: €864,000). [C] Sir Nigel Sheinwald was appointed with effect from July 1, 2012. [D] In 2012, the total amount of fees and non-cash benefits received by NEDs was €2,389,000 (2011: €2,259,000). Jeroen van der Veer’s long-term incentive and pension interests The following tables show the LTIP, DBP, share option and pension interests of Jeroen van der Veer. All awards listed below were granted when Jeroen van der Veer was an Executive Director. LONG-TERM INCENTIVE PLAN (AUDITED) Number of A shares under award as at January 1, 2012 Original award Dividend shares accrued in prior years Market price at date of award Dividend shares accrued during the year [A] Additional shares awarded/(lapsed) during the year [B] Number of shares released during the year Value of shares at release (thousands) [C] Total number of shares under award as at December 31, 2012 R E M U N E R A T I O N R E P O R T 2009 to 2011 365,305 309,358 55,947 €19.40 2,560 (146,121) 221,744 €5,962 – [A] Dividend shares are performance-related and accumulate each year at an assumed notional LTIP award. Such dividend shares are disclosed and recorded on the basis of the number of shares conditionally awarded but, when an award vests, dividend shares will be awarded only in relation to vested shares as if the vested shares were held from the award date. [B] The vesting of the 2009 LTIP award at 60% meant that 40% of the shares originally awarded have lapsed. [C] The vested awards were delivered on March 21, 2012. The share price used to calculate the value at release was €26.89, which was the closing price of the previous trading day on Euronext Amsterdam for Royal Dutch Shell plc A shares. 76 Shell Annual Report and Form 20-F 2012 reports.shell.com Directors’ Remuneration Report > Data tables – Non-executive Directors DEFERRED BONUS PLAN [A] (AUDITED) Number of A shares under award as at January 1, 2012 Number of shares deferred from the bonus [B] Non-performance-related matching shares awarded at grant Dividend shares accrued in prior years [C] Market price at date of award Dividend shares accrued during the year [C] Performance-related matching shares vested during the year Dividend shares accrued on the performance-related matching shares [D] Number of shares released during the year Value of shares at release (thousand) [E] Realised gains on deferral (thousand) [F] Total number of shares under award as at December 31, 2012 2009 to 2011 142,696 96,674 24,168 21,854 €19.40 1,667 21,751 4,236 170,350 €4,580 €2,705 – [A] Awards made in 2009 refer to the portion of the 2008 annual bonus which was deferred, and the related accrued dividends and matching shares. [B] Representing the proportion of the annual bonus that has been deferred and converted into notional share entitlements (deferred bonus shares), in which there is no beneficial ownership. [C] Representing dividends accumulated since the award on the number of shares equal to the deferred bonus shares awarded. [D] Dividend shares are performance-related and accumulate each year on an assumed notional DBP award. When an award vests, dividend shares will be awarded only in relation to vested shares as if the vested shares were held from the award date. [E] The vested awards were delivered on March 21, 2012. The share price used to calculate the value at release was €26.89, which was the closing price of the previous trading day on Euronext Amsterdam for Royal Dutch Shell plc A shares. [F] Representing the difference between the value of shares released and the bonus deferred. SHARE OPTIONS (AUDITED) Awarded Number of options under award as at January 1, 2012 Number of options exercised during the year Realised gains on share options exercised during the year (thousand) Number of options expired during the year Number of options under award as at December 31, 2012 Grant price [A] Exercisable from date Expiry date A SHARES 2002 2003 2004 105,000 300,000 300,000 – – 105,000 – €31.05 21/03/05 300,000[B] €2,792 – – – – – €18.41 19/03/06 300,000 €20.65 07/05/07 20/03/12 18/03/13 06/05/14 [A] The grant price is the average of the opening and closing share prices over a period of five successive trading days prior to and including the day on which the options are granted (not at a discount). [B] Jeroen van der Veer exercised 150,000 share options on February 13, 2012, and 150,000 share options on July 31, 2012. The market prices at the dates of exercise were €27.55 for 50,000 and €27.45 for 100,000 on February 13, 2012, and €27.94 on July 31, 2012. PENSIONS [A] (AUDITED) Accrued pension At December 31, 2012 Increase over the year € 1,569 $ 2,070 € 0 $ 0 At December 31, 2012 At December 31, 2011 Increase over the year Transfer value of accrued benefits 27,232 35,936 26,919 34,788 € $ € $ € 313 $ 413 Increase/(decrease) over the year THOUSAND (excluding inflation) € $ (30) (40) Increase/(decrease) in accrued pension over the year (excluding inflation) € $ (581) (767) [A] Jeroen van der Veer is a pensioner. The pension payments made to him during 2012 amounted to approximately €1,569,000. The accrued pension, excluding the impact of inflation, shows a decrease as Dutch price inflation was higher than the pension increase granted in the Dutch pension fund during the year. The transfer value shows an increase largely due to a decrease in the discount rate and addition of interest, partially offset by payments made in the year. Signed on behalf of the Board /s/ Michiel Brandjes Michiel Brandjes Company Secretary March 13, 2013 reports.shell.com Shell Annual Report and Form 20-F 2012 Corporate governance 77 CORPORATE GOVERNANCE Dear Shareholders, I am pleased to introduce this report which describes our governance arrangements and explains how they were operated during the year. We are committed to the highest standards of corporate governance and believe that such standards are essential to business integrity, performance and maintaining investors’ trust. We fully embrace the view that good corporate governance facilitates effective, entrepreneurial and prudent management that can deliver the long-term success of the Company. As a company with a premium listing on the London Stock Exchange, we are required to report against the 2010 UK Corporate Governance Code, and I am pleased to say that we were fully compliant in 2012. As Chairman, I regard the issue of Board succession as very important and during the year we have been busy dealing with a number of new appointments and succession issues. Following the retirement of Lord Kerr of Kinlochard at the 2012 Annual General Meeting (AGM), Hans Wijers was appointed Deputy Chairman and Senior Independent Director, and we were delighted to appoint Sir Nigel Sheinwald and Gerrit Zalm as Non-executive Directors with effect from July 2012 and January 2013 respectively. During the year we also undertook a review of the membership of the four Board committees and made a number of changes. The Board and the Nomination and Succession Committee are very mindful of the importance of diversity within the Boardroom in general and believe that maintaining an appropriate balance of experience, skills, knowledge and background is key to effective Board performance. It believes gender diversity is an important element of this mix and we have stated our aim that by 2015 at least 25% of the Directors will be women. This is in line with the recommendations of the report by Lord Davies of Abersoch entitled “Women on Boards” (Davies Report). I am also mindful of my responsibility to ensure that the views of shareholders are communicated to the Board and my obligation to maintain a dialogue with major shareholders, particularly on such matters as governance and strategy. I regard this as critical to developing trust and confidence, and to this end I meet regularly with major shareholders, sometimes with senior members of the management team or other Non-executive Directors of the Board. I believe this to be mutually beneficial to the Company and investors alike. Looking forward, we will continue to strive for the highest standards of corporate governance since we believe this will help lead to the continued success of the Company. Jorma Ollila Chairman March 13, 2013 Statement of Compliance The Board confirms that throughout the year the Company has applied the main principles and complied with the relevant provisions set out in the 2010 UK Corporate Governance Code (the Code) [A]. In addition to complying with applicable corporate governance requirements in the UK, the Company must follow the rules of Euronext Amsterdam as well as Dutch securities laws because of its listing on this exchange. The Company must likewise follow US securities laws and the New York Stock Exchange (NYSE) rules and regulations because its securities are registered in the USA and listed on the NYSE. [A] In September 2012, the Financial Reporting Council issued an update to the 2010 UK Corporate Governance Code which applies to accounting periods beginning on or after October 1, 2012. NYSE governance standards In accordance with the NYSE rules for foreign private issuers, the Company follows home-country practice in relation to corporate governance. However, foreign private issuers are required to have an audit committee that satisfies the requirements of the U.S. Securities and Exchange Commission’s Rule 10A-3. The Company’s Audit Committee satisfies such requirements. The NYSE also requires a foreign private issuer to provide certain written affirmations and notices to the NYSE, as well as a summary of the ways in which its corporate governance practices differ significantly from those followed by domestic US companies under NYSE listing standards. The Company’s summary of its corporate governance differences is given below and can be found at www.shell.com/investor. N ON - E X E C U TI V E D I RE C TOR IN D E P E N D E N C E The Board follows the provisions of the Code in respect of Non- executive Director independence, which states that at least half of the Board, excluding the Chairman, should comprise Non-executive Directors determined by the Board to be independent. In the case of the Company, the Board has determined that all the Non-executive Directors are wholly independent with the exception of Jeroen van der Veer who served as Chief Executive until his retirement from that role on June 30, 2009 (see pages 78-79 for more information). N OM I N A TI N G/C ORP ORA TE GOV E RN A N C E C OM M I TTE E A N D C O M P E N S A T I O N C O M M I T T E E The NYSE listing standards require that a listed company maintain a nominating/corporate governance committee and a compensation committee, both composed entirely of independent directors and with certain specific responsibilities. The Company’s Nomination and Succession Committee and Remuneration Committee, respectively, comply with these requirements, except that the terms of reference of the Nomination and Succession Committee require only a majority of the committee members to be independent. A U D I T C O M M I T T E E As required by NYSE listing standards, the Company maintains an Audit Committee for the purpose of assisting the Board’s oversight of its financial statements, its internal audit function and its independent auditors. The Company’s Audit Committee is in full compliance with the U.S. Securities and Exchange Commission’s Rule 10A-3 and Section 303A.06 of the NYSE Listed Company Manual. However, in accordance with English law, the Company’s Audit Committee makes C O R P O R A T E G O V E R N A N C E 78 Shell Annual Report and Form 20-F 2012 reports.shell.com Corporate governance recommendations to the Board for it to put to shareholders for approval in general meeting regarding the appointment, reappointment and removal of independent auditors. Consequently, the Company’s Audit Committee is not directly responsible for the appointment of independent auditors. S HA RE HOLD E R A P P ROV A L OF S HA RE - B A S E D C OM P E N S A TI ON P LA N S The Company complies with the listing rules of the UK Listing Authority (UKLA) which require shareholder approval for the adoption of share- based compensation plans which are either long-term incentive schemes in which Directors can participate or schemes which may involve the issue of new shares. Under the UKLA rules, such plans cannot be changed to the advantage of participants without shareholder approval, except for certain minor amendments, for example to benefit the administration of the plan or to take account of tax benefits. The rules on the requirements to seek shareholder approval for share-based compensation plans, including those in respect of material revisions to such plans, may deviate from the NYSE listing standards. CODE OF ETHICS The NYSE listing standards require that listed companies adopt a code of business conduct and ethics for all directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers. The Company has adopted the Shell General Business Principles (see below), which satisfy the NYSE requirements. The Company also has internal procedures in place by which any employee can raise in confidence accounting, internal accounting controls and auditing concerns. Additionally, any employee can report irregularities to management through a worldwide dedicated telephone line and website without jeopardising his or her position (see below). Shell General Business Principles The Shell General Business Principles define how Shell subsidiaries are expected to conduct their affairs. These principles include, among other things, Shell’s commitment to support fundamental human rights in line with the legitimate role of business and to contribute to sustainable development. They can be found at www.shell.com/sgbp. Shell Code of Conduct Directors and employees are required to comply with the Shell Code of Conduct, which is intended to help them put Shell’s business principles into practice. This code clarifies the basic rules and standards they are expected to follow and the behaviour expected of them. It can be found at www.shell.com/codeofconduct. Code of Ethics Executive Directors and Senior Financial Officers of Shell must also comply with a Code of Ethics. This code is specifically intended to meet the requirements of Section 406 of the Sarbanes-Oxley Act and the listing requirements of the NYSE (see above). It can be found at www.shell.com/codeofethics. Shell Global Helpline Employees, contract staff and third parties with whom Shell has a business relationship (such as customers, suppliers and agents) may raise ethics and compliance concerns through the Shell Global Helpline. This is a worldwide confidential reporting mechanism, operated by an external third party, which is open 24 hours a day, seven days a week through local telephone numbers and at www.shell.com or www.compliance-helpline.com/shell. Board structure and composition During 2012, the Board comprised the Chairman, Jorma Ollila; two Executive Directors including the Chief Executive Officer, except for the period from January 1 to March 31 when there were three Executive Directors; and nine Non-executive Directors, including the Deputy Chairman and Senior Independent Director, except for the period from May 23 to June 30 when there were eight Non-executive Directors. At the 2012 Annual General Meeting (AGM) on May 22, 2012, Lord Kerr of Kinlochard stood down as a Non-executive Director and Sir Nigel Sheinwald was appointed as a Non-executive Director with effect from July 1, 2012. Hans Wijers succeeded Lord Kerr as Deputy Chairman and Senior Independent Director. A list of current Directors, including their biographies, is given on pages 52-54. The Board recognises its collective responsibility for the long-term success of the Company. It meets eight times a year and has a formal schedule of matters reserved to it. This includes: overall strategy and management; corporate structure and capital structure; financial reporting and controls, including approval of the Annual Report and Form 20-F and interim dividends; risk management and internal controls; significant contracts; and succession planning and new Board appointments. The full list of matters reserved to the Board for decision can be found at www.shell.com/investor. Role of Directors The roles of the Chairman, a non-executive role, and the Chief Executive Officer are separate, and the Board has agreed their respective responsibilities. The Chairman, Jorma Ollila, is responsible for the leadership and management of the Board and for ensuring that the Board and its committees function effectively. One way in which this is achieved is by ensuring Directors receive accurate, timely and clear information. He is also responsible for agreeing and regularly reviewing the training and development needs of each Director (see “Induction and training” on page 79) which he does with the assistance of the Company Secretary. The Chief Executive Officer, Peter Voser, bears overall responsibility for the implementation of the strategy agreed by the Board, the operational management of the Company and the business enterprises connected with it. He is supported in this by the Executive Committee, which he chairs (see page 80). Non-executive Directors Non-executive Directors are appointed by the Board or by shareholders in general meeting and, in accordance with the Code, must seek re-election by shareholders on an annual basis. Their letter of appointment refers to a specific term of office, such term being subject to the provisions of the Code and the Company’s Articles of Association (the Articles). Upon appointment, Non-executive Directors confirm they are able to allocate sufficient time to meet the expectations of the role. Appointments are subject to three months’ notice and there is no compensation provision for early termination. The Non-executive Directors bring a wide range and balance of skills and international business experience to Shell. Through their contribution to Board meetings and to the Board’s committee meetings, they are expected to challenge constructively and help develop reports.shell.com Shell Annual Report and Form 20-F 2012 Corporate governance 79 proposals on strategy and bring independent judgement on issues of performance and risk. The Chairman and the Non-executive Directors meet routinely without the Executive Directors to discuss, among other things, the performance of individual Directors. A number of Non- executive Directors also meet major shareholders from time to time. The role of the Senior Independent Director is to provide a sounding board for the Chairman and to serve as an intermediary for the other Directors when necessary. The Senior Independent Director is available to shareholders if they have concerns that contact through the normal channels of Chairman, Chief Executive Officer or other Executive Directors has failed to resolve or for which such contact is inappropriate. All the Non-executive Directors as at the end of 2012 are considered by the Board to be wholly independent, with the exception of Jeroen van der Veer, who served as Chief Executive until his retirement from that role on June 30, 2009. He will stand down as a Non-executive Director at the close of business of the 2013 AGM. The standard by which Directors’ independence is determined can be found at www.shell.com/investor within the terms of reference of the Nomination and Succession Committee. Conflicts of interest Certain statutory duties with respect to directors’ conflicts of interest are in force under the Companies Act 2006 (the Act). In accordance with the Act and the Articles, the Board may authorise any matter that otherwise may involve any of the Directors breaching his or her duty to avoid conflicts of interest. The Board has adopted a procedure to address these requirements. It includes the Directors completing detailed conflict of interest questionnaires. The matters disclosed in the questionnaires are reviewed by the Board and, if considered appropriate, authorised in accordance with the Act and the Articles. Conflicts of interest as well as any gifts and hospitality received by and provided by Directors are kept under review by the Board. Significant commitments of the Chairman The Chairman’s other significant commitments are given in his biography on page 52. Independent professional advice All Directors may seek independent professional advice in connection with their role as a Director. All Directors have access to the advice and services of the Company Secretary. The Company has provided to the Directors indemnities and directors’ and officers’ insurance in connection with the performance of their responsibilities. Copies of these indemnities and the directors’ and officers’ insurance policies are open to inspection. Copies of these indemnities have been previously filed with the U.S. Securities and Exchange Commission (SEC) and are incorporated by reference as an exhibit to this Report. Board activities during the year The Board met eight times during the year. Seven of the meetings were held in The Hague, the Netherlands, and one meeting was held in Perth, Australia. The agenda for each meeting included a number of regular items, including reports from each of the Board committees and from the Chief Executive Officer, the Chief Financial Officer and the other members of the Executive Committee. At most meetings the Board also considered a number of investment, divestment and financing proposals. During the year, the Board considered numerous strategic issues and approved each of the quarterly, half-year and full- year financial results and dividend announcements. Specific attention in 2012 was paid to our shipping activities, matters and projects in Alaska, Australia and Nigeria, asset integrity and process safety, CO2 management, project delivery and operational excellence, risk management and control, and safety and environmental performance. The Board received reports and presentations on all these subjects which it discussed and considered. The Board also received regular reports from the various functions, including Corporate (which includes Human Resources, Health and Security), Finance (which includes Investor Relations) and Legal. Induction and training Following appointment to the Board, Directors receive a comprehensive induction tailored to their individual needs. This includes site visits and meetings with senior management to enable them to build up a detailed understanding of Shell’s business and strategy, and the key risks and issues with which they are faced. In the case of Sir Nigel Sheinwald, who was appointed during the year, site visits were arranged to Shell operations in Australia; Rotterdam, the Netherlands; Nigeria; Aberdeen, UK; and Port Arthur, USA. In addition, visits were arranged to research and development facilities in Amsterdam and Rijswijk, the Netherlands, the Company’s headquarters in The Hague and the registered office at Shell Centre, London. Throughout the year, regular updates on developments in legal matters, governance and accounting are provided to Directors. The Board regards site visits as an integral part of ongoing Director training. Additional training is available so that Directors can update their skills and knowledge as appropriate. Attendance at Board and Board committee meetings Attendance during the year for all Board and Board committee meetings is given in the table below. ATTENDANCE AT BOARD AND BOARD COMMITTEE MEETINGS [A] Corporate and Nomination Social and Audit Responsibility Succession Remuneration Board Committee Committee Committee Committee Josef Ackermann 7/8 Malcolm Brinded 2/2 Guy Elliott Simon Henry Charles 8/8 8/8 5/5 O. Holliday 8/8 Lord Kerr of Kinlochard 2/2 Gerard Kleisterlee 8/8 5/5 Christine Morin- Postel Jorma Ollila Sir Nigel Sheinwald Linda G. Stuntz Jeroen van der Veer Peter Voser Hans Wijers 8/8 8/8 4/4 8/8 8/8 8/8 8/8 5/5 5/5 4/4 4/5 5/5 2/2 6/6 6/6 5/5 4/4 2/2 2/2 4/4 [A] The first figure represents attendance and the second figure the possible number of meetings. For example, 7/8 signifies attendance at seven out of eight possible meetings. Where a Director stood down from the Board or a Board committee during the year, or was appointed during the year, only meetings before standing down or after the date of appointment are shown. C O R P O R A T E G O V E R N A N C E 80 Shell Annual Report and Form 20-F 2012 reports.shell.com Corporate governance Executive Committee The Executive Committee operates under the direction of the Chief Executive Officer in support of his responsibility for the overall management of the Company’s business and affairs. The Chief Executive Officer has final authority in all matters of management that are not within the duties and authorities of the Board or of the shareholders’ general meeting. The membership of the Executive Committee is as follows: EXECUTIVE COMMITTEE Peter Voser Simon Henry Chief Executive Officer [A][B] Chief Financial Officer [A][B] Ben van Beurden Downstream Director [B][C] Matthias Bichsel Projects & Technology Director [B] Andrew Brown Upstream International Director [B][D] Hugh Mitchell Marvin Odum Peter Rees Chief Human Resources & Corporate Officer [B] Upstream Americas Director [B] Legal Director [B] [A] Director of the Company. [B] Designated an Executive Officer pursuant to US Exchange Act Rule 3b-7. Beneficially owns less than 1% of outstanding classes of securities. [C] As announced on October 10, 2012, Ben van Beurden took over the responsibilities for the Downstream business as a member of the Executive Committee in succession to Mark Williams with effect from January 1, 2013. [D] As announced on February 22, 2012, Andrew Brown took over the responsibilities for the Upstream International business as a member of the Executive Committee with effect from April 1, 2012. Malcolm Brinded stood down as Executive Director, Upstream International with effect from this date. Board committees There are four Board committees made up of Non-executive Directors. These are the: ▪ Audit Committee; ▪ Corporate and Social Responsibility Committee; ▪ Nomination and Succession Committee; and ▪ Remuneration Committee. Each of these Board committees has produced a report which is set out below and has been approved by the relevant chairman. A copy of each committee’s terms of reference is available from the Company Secretary and can be found at www.shell.com/investor. A U D I T C O M M I T T E E The members of the Audit Committee are Guy Elliott (Chairman of the Committee), Gerard Kleisterlee, Christine Morin-Postel and Linda G. Stuntz, all of whom are financially literate, independent, Non- executive Directors. For the purposes of the Code, Guy Elliott qualifies as a person with “recent and relevant financial experience” and for the purposes of US securities laws is an “audit committee financial expert”. The Committee met five times during the year; the Committee members’ attendances are shown on page 79. Role The key responsibilities of the Committee are to assist the Board in fulfilling its oversight responsibilities in relation to: internal control and financial reporting; the effectiveness of the risk management and internal control system; compliance with applicable external legal and regulatory requirements; monitoring the qualifications, expertise, resources and independence of both the internal and external auditors; and assessing each year the auditors’ performance and effectiveness. The Committee keeps the Board informed of the Committee’s activities and recommendations. Where the Committee is not satisfied with, or wherever it considers action or improvement is required concerning any aspect of risk management and internal control, financial reporting or audit-related activities, it promptly reports these concerns to the Board. Activities The Committee in its meetings covers a variety of topics, both standing items that the Committee considers as a matter of course (typically in relation to the quarterly results announcements, control and accounting matters) as well as a range of specific topics relevant to the overall control framework of the Company. The Committee invites the Chief Financial Officer, the Chief Internal Auditor, the Executive Vice President Controller, the Vice President Accounting and Reporting and the external auditors to attend each meeting. Other members of management attend as and when requested. The Committee also holds private sessions with the external auditors and the Chief Internal Auditor without members of management being present. During 2012, the Committee received comprehensive reports from management and the internal and external auditors. In particular, it reviewed regular reports on risks, controls and assurance, monitored the effectiveness of the procedures for internal control over financial reporting, reviewed the Company’s evaluation of the internal control systems as required under Section 404 of the Sarbanes-Oxley Act and discussed the Company’s annual accounts, half-year report and quarterly unaudited financial statements with management and the external auditors. It also discussed with the Chief Financial Officer, the Executive Vice President Controller, the Vice President Accounting and Reporting, and the external auditors issues that arose on accounting policies, practices and reporting, and received reports regarding the receipt, investigation and treatment of complaints regarding accounting, internal accounting controls, auditing and other matters. The Committee also reviewed the Internal Audit Department’s annual audit plan and the performance assessment of the Internal Audit function. The Committee also visited Shell’s Real Time Operation Center of the Wells Organization in Aberdeen, UK, and was updated on various matters such as strategy, controls and risk management including on process safety, resource planning and developments in drill technologies. The Committee has furthermore requested reports on such matters that it deemed appropriate. The Committee conducted an annual evaluation of its performance and concluded that it was effective and able to fulfil its role in accordance with its terms of reference. In December 2012, the Board approved an adjustment to the Committee’s terms of reference to reflect more clearly its responsibility for monitoring the effectiveness of Shell’s system of risk management and internal control. The amended terms of reference are available from the Company Secretary and can be found at www.shell.com/investor. External auditors During 2012, the Committee evaluated the effectiveness of the external auditors (PricewaterhouseCoopers LLP) and, following due consideration, made a recommendation to the Board that they be reappointed for the year ending December 31, 2012. There are no contractual obligations that restrict the Committee’s ability to make such a recommendation. The last competitive audit tender was in 2005 when PricewaterhouseCoopers LLP was first appointed as sole auditors of the Company. Their performance has been evaluated each year by the Committee. Such evaluations have taken account of the prior year’s external audit experience, feedback from management and compliance with relevant legislative, regulatory and professional requirements. reports.shell.com Shell Annual Report and Form 20-F 2012 Corporate governance 81 Non-audit services The Committee has adopted a policy on the engagement of the external auditor to supply non-audit services. This policy, designed to safeguard auditor objectivity and independence, includes guidelines on permitted and non-permitted services and on services requiring specific approval by the Committee. In addition to holding regular formal meetings, the Committee also visits Shell locations and meets with local staff and external stakeholders in order to observe how Shell’s standards regarding health, safety, security, the environment and social performance are being implemented in practice. During 2012, the Committee visited the Niger Delta, Nigeria and a production platform in the UK North Sea. Examples of non-permitted services are actuarial services, bookkeeping services, valuation services (unless the services are unrelated to financial reporting), management or recruitment services, legal services and expert services unrelated to the audit, tax advice and broker or dealer, investment adviser or banking services. For other services, because of their knowledge, experience and/or for reasons of confidentiality it can be more efficient or necessary to engage the external auditors rather than another party. Under the policy, permitted services must not present a conflict of interest. The Committee reviews quarterly reports from management on the extent of the permitted non-audit services provided in accordance with the policy or for which specific approval is being sought. Non-audit services in the following categories can be contracted without further individual prior approval provided the fee value for each contract does not exceed $500,000: ▪ tax compliance work that is part of the assurance process for the audit of the Consolidated or Parent Company Financial Statements or the accounts of subsidiaries; ▪ regulatory compliance audits; and ▪ verification of non-financial data for public disclosure. Any other non-audit services must be specifically preapproved before the external auditor is contracted. The scope of the permitted non-audit services contracted with the external auditors in 2012 consisted mainly of tax compliance work and the associated compensation amounted to approximately 2% of total Auditors’ remuneration. Fees Note 26 to the “Consolidated Financial Statements” provides the detail of the Auditors’ remuneration. C ORP ORA TE A N D S OC I A L RE S P ON S I B I LITY C OM M I TTE E The members of the Corporate and Social Responsibility Committee are Charles O. Holliday (Chairman of the Committee), Sir Nigel Sheinwald (with effect from July 1, 2012), Jeroen van der Veer and Gerrit Zalm (with effect from January 1, 2013). Lord Kerr of Kinlochard stood down as a Director of the Company and member of the Committee with effect from the close of business of the 2012 AGM. The Committee met four times during the year; the Committee members’ attendances are shown on page 79. The Committee has a mandate to maintain a comprehensive overview of the policies and performance of the subsidiaries of the Company with respect to the Shell General Business Principles and the Code of Conduct as well as major issues of public concern. Conclusions and recommendations made by the Committee are reported directly to executive management and the Board. The Committee fulfils its responsibilities by reviewing the management of health, safety, security, environmental and social impacts of projects and operations. It also monitors emerging environmental and social issues. It additionally provides input into the Shell Sustainability Report and reviews a draft of the report before publication. N OM I N A TI ON A N D S U C C E S S I ON C OM M I TTE E The members of the Nomination and Succession Committee are Jorma Ollila (Chairman of the Committee), Josef Ackermann (with effect from May 23, 2012) and Hans Wijers. Lord Kerr of Kinlochard stood down as a Director of the Company and member of the Committee with effect from the close of business of the 2012 AGM. The Committee met six times during the year; the Committee members’ attendances are shown on page 79. The Committee keeps under review the leadership needs of the Company and identifies and nominates suitable candidates for the Board’s approval to fill vacancies as and when they arise. In addition, it makes recommendations on who should be appointed Chairman of the Audit Committee, the Corporate and Social Responsibility Committee and the Remuneration Committee and, in consultation with the relevant chairman, recommends who should sit on the Board committees. It also makes recommendations on corporate governance guidelines, monitors compliance with corporate governance requirements and makes recommendations on disclosures connected with corporate governance and its appointment processes. During 2012, the Committee dealt with issues related to: director search, succession and nomination; the terms of appointment for the Non-executive Directors; the appointment of the Upstream International Director and the Downstream Director; the Executive Committee talent pipeline; and the terms of reference of the Audit Committee and the Corporate and Social Responsibility Committee. It also considered the UK’s Department for Business, Innovation & Skills (BIS) Executive Pay- Shareholder Voting Rights Consultation and the 2012 UK Corporate Governance Code. Additionally, the Committee conducted an evaluation of the Company’s corporate governance arrangements, led the Board evaluation process and considered any potential conflicts of interest and the independence of the Non-executive Directors. The Board takes the issue of Boardroom diversity very seriously and believes that maintaining an appropriate balance of experience, skills, knowledge and background is key to its effective performance. It believes gender diversity is an important element of this mix. In 2011, it issued a statement welcoming the recommendations of the Davies Report and stated that by 2015 at least 25% of the Directors would, as recommended by the report, be expected to be women. At the end of 2012 there were two women on the Board (16%). As part of its role in identifying and nominating suitable candidates for the Board’s approval, the Nomination and Succession Committee will be reviewing candidates from a variety of backgrounds and will seek to produce a list of candidates that fully reflects the Board’s aim in relation to diversity, and in particular with reference to gender diversity. The Board will endeavour to increase the number of women Non-executive Directors from two to three by 2015. The Committee maintains regular contact with leading global search firms (including Egon Zehnder International) to identify and consider suitable candidates who reflect the Board’s preferred profile in terms of experience, skills, knowledge, nationality and gender, however it was not considered necessary to use such services nor advertising in relation C O R P O R A T E G O V E R N A N C E 82 Shell Annual Report and Form 20-F 2012 reports.shell.com Corporate governance to appointments made during the year. These firms have no other connection with the Company than that of search consultants. R E M U N E R A T I O N C O M M I T T E E The members of the Remuneration Committee are Hans Wijers (Chairman of the Committee), Josef Ackermann and Charles O. Holliday. The Committee met five times during the year; the Committee members’ attendances are shown on page 79. The Committee determines and agrees with the Board the remuneration policy for the Chairman, Chief Executive Officer and Executive Directors and, within the terms of this policy, determines their individual remuneration. The Committee also considers and advises on the terms of any contract to be offered to an Executive Director. It monitors the remuneration for other senior executives and makes recommendations. The Committee’s terms of reference were reviewed and confirmed in 2012. They are available from the Company Secretary and can be found at www.shell.com/investor. In 2012, the Committee continued its constructive engagements with major shareholders and shareholder bodies. This dialogue will continue in 2013; after publication of the 2012 Annual Report and Form 20-F, further meetings with major shareholders are planned. The Committee will continue to monitor developments in respect of executive remuneration governance and reporting, and prepare for revised regulations in this area for the 2013 Directors’ Remuneration Report. Further information on the work of the Committee and details of the remuneration of all the Directors for the year ended December 31, 2012, are set out in the “Directors’ Remuneration Report” beginning on page 60. Board evaluation The Board carried out a performance evaluation of itself, its Committees, the Chairman and each of the Directors. This was led by the Nomination and Succession Committee and, like the process in 2011, was conducted in-house. In accordance with the provisions of the Code, it is the intention to engage an external facilitator to assist in the process for 2013. The 2012 process consisted of the Chairman holding one-to-one interviews with each of the Directors. The Directors were asked to consider certain specific matters in advance, such as the functioning and effectiveness of the Board and the major issues and challenges for 2013 and beyond. The Deputy Chairman and Senior Independent Director conducted a separate review of the Chairman’s performance which involved each Director completing a confidential questionnaire and an offer to meet and discuss any particular issues. A review of each Board committee was undertaken by the respective Committee Chairman by questionnaire discussed in the relevant committee. The performance of the Board and the Board Committees was discussed by the Nomination and Succession Committee and the full Board. The Chairman reported on the views of the Directors in relation to: functioning and effectiveness, performance, individual contributions, major challenges for the Company in 2013 and beyond, reputation and information and training. Successes and points for further improvement were noted in each of these categories. Suggestions for 2013 included further consideration of the balance of discussion held on strategy, operational and performance matters, and an increased focus on people issues. It was concluded that while the Company faced a number of challenges and disappointments in 2012, the Board and Board committees continued to operate effectively. The performance evaluation of the Chairman was reviewed in a session led by the Deputy Chairman with attendance by all other Directors excluding the Chairman. Directors had answered five questions concerning the performance evaluation of the Chairman (in relation to handling of the Board, representational role, internal role, suggestions for 2013 and key 2013 issues). The Board’s evaluation of the Chairman’s 2012 performance was unanimously positive. Directors noted that the Chairman was very accessible to them, the 2012 AGM had gone well, and that the external engagements by the Chairman had made a good impression. Individual Directors made a number of Board planning and meeting suggestions for consideration. Shareholder communications The Board recognises the importance of two-way communication with the Company’s shareholders. As well as giving a balanced report of results and progress at each AGM, the Company meets with institutional and retail shareholders to respond to their questions. Shell’s corporate website at www.shell.com/investor has information for institutional and retail shareholders alike. Shareholders have an opportunity to ask questions in person at the AGM and are free to contact the Company directly at any time of the year. Shareholders can contact Shell directly via dedicated shareholder email addresses or via dedicated shareholder telephone numbers as given on the inside back cover of this Report. The Company’s Registrar, Equiniti, operates an internet access facility for shareholders, providing details of their shareholdings at www.shareview.co.uk. Facilities are also provided for shareholders to lodge proxy appointments electronically. The Company’s Corporate Nominee provides a facility for investors to hold their shares in the Company in paperless form. Results presentations and analysts’ meetings The quarterly, half-yearly and annual results presentations as well as all major analysts’ meetings are announced in advance on the Shell website and through a regulatory release. These presentations are broadcast live via webcast and teleconference. Other meetings with analysts or investors are not normally announced in advance, nor can they be followed remotely by webcast or any other means. Procedures are in place to ensure that discussions in such meetings are always limited to non-material information or information already in the public domain. Results and meeting presentations can be found at www.shell.com. This is in line with the requirement to ensure that all shareholders and other parties in the financial market have equal and simultaneous access to information that may influence the price of the Company’s securities. The Chairman, the Deputy Chairman and Senior Independent Director, the Chief Executive Officer, the Chief Financial Officer and the Executive Vice President Investor Relations meet regularly with major shareholders and report the views of such shareholders to the Board. Notification of major shareholdings Information concerning notifications of major shareholdings is given on page 90. Responsibility for preparing the annual report and accounts Information concerning the responsibility for preparing the annual report and accounts is given on page 57. Going concern The Business Review on pages 8-51 includes information about Shell’s financial strategy, financial condition, and liquidity and cash flows, as well as the factors, including the principal risks, likely to affect Shell’s future development. Further information on the management of Shell’s capital structure and use of financial instruments to support its operating plan is given in Notes 15 and 21 to the “Consolidated Financial Statements” respectively. Shell’s operating plan for the foreseeable future demonstrates its ability to operate its cash-generating activities, selling products to a diversified customer base. These activities are expected to generate sufficient cash to enable Shell to fund its investment activities, dividends and service its financing requirements. As a result, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future and continue to adopt the going concern basis of accounting in preparing the financial statements contained in this Report. Controls and procedures The Board is responsible for maintaining a sound system of risk management and internal control, and for regularly reviewing its effectiveness. It has delegated authority to the Audit Committee to assist it in fulfilling its responsibilities in relation to internal control and financial reporting. A single overall control framework is in place for the Company and its subsidiaries that is designed to manage rather than eliminate the risk of failure to achieve business objectives. It therefore only provides a reasonable and not an absolute assurance against material misstatement or loss. The following diagram illustrates the Control Framework’s key components, Foundations, Organisation and Processes. “Foundations” comprise the objectives, principles and rules that underpin and establish boundaries for Shell’s activities. “Organisation” sets out how the various legal entities relate to each other and how their business activities are organised and managed. “Processes” refer to the more material processes, including how authority is delegated, how strategy, planning and appraisal are used to improve performance, how compliance is managed and how assurance is provided. All control activities relate to one or more of these components. The system of risk management and internal control over financial reporting is an integral part of the Shell Control Framework. Regular reviews are performed to identify the significant risks to financial reporting and the key controls designed to address them. These controls are documented, responsibility is assigned and they are monitored for design and operating effectiveness. Controls found not to be effective are remediated. reports.shell.com Shell Annual Report and Form 20-F 2012 Corporate governance 83 CO N TROL FRAMEW ORK External Regulatory and Legal Environment, External Stakeholders Shell General Business Principles Royal Dutch Shell plc Board, Chief Executive Officer and Executive Committee Statement on Risk Management Code of Conduct Standards, Manuals and Guides Delegation of Authority Strategy, Planning and Appraisal Compliance and Assurance Businesses, Functions Legal Entities C O R P O R A T E G O V E R N A N C E Foundations Organisation Processes The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks to the achievement of Shell’s objectives. This has been in place throughout the year and, up to the date of this Report, is regularly reviewed by the Board and accords with the guidance for directors, known as the Turnbull Guidance. Shell has a variety of processes for obtaining assurance on the adequacy of risk management and internal control. The Executive Committee and the Audit Committee regularly consider group-level risks and associated control mechanisms. The Board has conducted its annual review of the effectiveness of Shell’s system of risk management and internal control, including financial, operational and compliance controls. P E N S I O N FU N D S In general, local trustees manage the defined benefit pension funds and set the required contributions based on independent actuarial valuations in accordance with local regulations rather than the IFRS measures. For further information regarding the judgement applied in setting the actuarial assumptions and its relationship to the financial position of Shell, see Notes 3 and 18 to the “Consolidated Financial Statements”. Shell has a number of ways to address key pension risks. Principal among these is the Pensions Forum, a joint Finance/Human Resources body, chaired by the Chief Financial Officer, which provides guidance on Shell’s input to pension strategy, policy and operation. The Forum is supported by the Pensions Risk Committee in reviewing the results of assurance processes with respect to pension risks (see “Risk factors”). TRE A S U RY A N D TRA D I N G In the normal course of business, Shell uses financial instruments of various kinds for the purposes of managing exposure to interest rate, currency and commodity price movements. Shell has treasury standards applicable to all subsidiaries, and each subsidiary is required to adopt a treasury policy consistent with these standards. These policies cover financing structure, interest rate and foreign exchange risk management, insurance, counterparty risk management and use of derivative instruments. Wherever possible, treasury operations are carried out through specialist regional organisations without removing from each subsidiary the responsibility to formulate and implement appropriate treasury policies. 84 Shell Annual Report and Form 20-F 2012 reports.shell.com Corporate governance Most of Shell’s debt is raised from central borrowing programmes. The financing of most subsidiaries is structured on a floating-rate basis and, except in special cases, further interest rate risk management is discouraged. Each subsidiary has treasury policies in place that are designed to measure and manage their foreign exchange exposures by reference to their functional currency. Many of the markets in which Shell operates are priced, directly or indirectly, in dollars. As a result, the functional currency of most Upstream subsidiaries and those with significant cross-border business is the dollar. For Downstream subsidiaries, the local currency is typically also the functional currency. Apart from forward foreign exchange contracts to meet known commitments, the use of derivative financial instruments by most subsidiaries is not permitted by their treasury policy. Certain subsidiaries have a mandate to trade crude oil, natural gas, LNG, refined products, chemical feedstocks, power and environmental products, and to use commodity derivatives (forwards, futures, swaps and options) as a means of managing price and timing risks arising from this trading. In effecting these transactions, the subsidiaries concerned operate within procedures and policies designed to ensure that risks, including those relating to the default of counterparties, are managed within authorised limits. Shell uses risk management systems for recording and valuing instruments. There is regular review of mandated trading limits by senior management, daily monitoring of market risk exposure using value-at-risk (VAR) techniques (see below), daily monitoring of trading positions against limits and marking-to-market of trading exposures with a department independent of traders reviewing the market values applied to trading exposures. Although trading losses can and do occur, the nature of Shell’s trading portfolio and its management are considered adequate mitigants against the risk of significant losses. Shell utilises VAR techniques based on variance/covariance or Monte Carlo simulation models to make a statistical assessment of the market risk arising from possible future changes in market values over a 24-hour period and within a 95% confidence level. The calculation of the range of potential changes in fair value takes into account positions, the history of price movements and the correlation of these price movements. Each of the models is regularly back-tested against actual fair-value movements to ensure that model integrity is maintained. Other than in exceptional cases, the use of external derivative instruments is confined to specialist trading and central treasury organisations that have appropriate skills, experience, supervision, control and reporting systems. Information on derivatives and other financial instruments and derivative commodity instruments is provided in Note 21 to the “Consolidated Financial Statements”. M A N A GE M E N T’S E V A LUA TI ON OF D I S C LOSU RE C ON TROLS A N D P ROC E D U RE S OF S HE LL As indicated in the certifications in Exhibits 12.1 and 12.2 of this Report, Shell’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Shell’s disclosure controls and procedures as at December 31, 2012. On the basis of that evaluation, these officers have concluded that Shell’s disclosure controls and procedures are effective. M A N A GE M E N T’S RE P ORT ON IN TE RN A L C ON TROL OV E R FIN A N C I A L RE P ORTIN G OF S HE LL Management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over Shell’s financial reporting and the production of the Consolidated Financial Statements. It conducted an evaluation of the effectiveness of Shell’s internal control over financial reporting and the production of the Consolidated Financial Statements based on the “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. On the basis of this evaluation, management concluded that, as at December 31, 2012, the Company’s internal control over Shell’s financial reporting and the production of the Consolidated Financial Statements was effective. PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements, has issued an attestation report on the Company’s internal control over financial reporting, as stated in their report on page 97. THE TRUS TE E ’S A N D M A N A GE M E N T’S E V A LUA TI ON OF DISCLOSURE CON TROLS A N D PROCE D URE S FOR THE ROYA L D U T C H SH E L L D I V I D E N D A C C E S S T R U S T The Trustee of the Royal Dutch Shell Dividend Access Trust (the Trustee) and Shell’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the disclosure controls and procedures in respect of the Dividend Access Trust (the Trust) as at December 31, 2012. On the basis of this evaluation, these officers have concluded that the disclosure controls and procedures of the Trust are effective. THE TRUS TE E ’S A N D M A N A GE M E N T’S RE P ORT ON IN TE RN A L C ON TROL OV E R FI N A N C I A L RE P ORTIN G OF THE ROY A L D U TC H S H E L L D I V I D E N D A C C E S S T R U S T The Trustee is responsible for establishing and maintaining adequate internal control over the Trust’s financial reporting. The Trustee and the Company’s management conducted an evaluation of the effectiveness of internal control over financial reporting based on the “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. On the basis of this evaluation, the Trustee and management concluded that, as at December 31, 2012, the Trust’s internal control over financial reporting was effective. PricewaterhouseCoopers CI LLP, the independent registered public accounting firm that audited the financial statements, has issued an attestation report on the Trustee’s and management’s internal control over financial reporting, as stated in their report on page 168. C HA N GE S I N I N TE RN A L C ON TROL OV E R FI N A N C I A L RE P ORTIN G There has not been any change in the internal control over financial reporting of Shell or the Trust that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting. Material financial information of the Trust is included in the Consolidated Financial Statements of Shell and is therefore subject to the same disclosure controls and procedures as Shell. See below and the Royal Dutch Shell Dividend Access Trust Financial Statements for additional information. reports.shell.com Shell Annual Report and Form 20-F 2012 Corporate governance 85 Articles of Association The following summarises certain provisions of the Articles [A] and of the applicable laws of England. This summary is qualified in its entirety by reference to the Articles and the Act. [A] Copies of the Articles have been previously filed with the SEC and are incorporated by reference as exhibits to this Report. They can be found at www.shell.com. M A N A GE M E N T A N D D I RE C TORS The Articles provide that the Company’s Board of Directors must consist of not less than three members nor more than 20 members at any time. The Company has a single tier Board of Directors headed by a Chairman, with management led by a Chief Executive Officer. See “Board structure and composition” on page 78. Under the Articles, at every AGM any Director who was in office at the time of the two previous AGMs and who did not retire at either of them must retire. Further, a Director who would not otherwise be required to retire must retire if he or she has been in office, other than as a Director holding an executive position, for a continuous period of nine years or more at the date of the meeting, and any such Director will be eligible to stand for reappointment. However, notwithstanding the provisions of the Articles, the Company complies with the Code that requires all Directors to stand for annual reappointment by shareholders. At the AGM, shareholders can pass an ordinary resolution to reappoint each of the Directors or to appoint another eligible person in his or her place. Under the Articles: ▪ a Director may not vote or be counted in the quorum in respect of any matter in which he or she is materially interested including any matter related to his or her own compensation; ▪ the Directors may exercise the Company’s power to borrow money provided that the borrowings of Shell shall not, without the consent of an ordinary resolution of the Company’s shareholders, exceed two times the Company’s adjusted capital and reserves (these powers relating to borrowing may only be varied by special resolution of shareholders); and ▪ Directors are not required to hold shares of the Company to qualify as a director. RIGHTS A TTA CHIN G TO SHA RE S Dividend rights and rights to share in the Company’s profit Under the applicable laws of England, dividends are payable on A and B shares only out of profits available for distribution, as determined in accordance with the Act and under IFRS. Subject to the Act, if the Directors consider that the Company’s financial position justifies the payment of a dividend, the Company can pay an interim dividend. Shareholders can declare dividends by passing an ordinary resolution although such dividends cannot exceed the amount recommended by the Board. It is the intention that dividends will be announced and paid quarterly. Dividends are payable to persons registered as shareholders on the record date relating to the relevant dividend. All dividends will be divided and paid in proportions based on the amounts paid up on the Company’s shares during any period for which that dividend is paid. Any dividend or other money payable in cash relating to a share can be paid by sending a cheque, warrant or similar financial instrument payable to the shareholder entitled to the dividend by post addressed to the shareholder’s registered address. Alternatively, it can be made payable to someone else named in a written instruction from the shareholder (or all joint shareholders) and sent by post to the address specified in that instruction. A dividend can also be paid by inter-bank transfer or by other electronic means (including payment through CREST) directly to an account with a bank or other financial institution (or other organisation operating deposit accounts if allowed by the Company) named in a written instruction from the person entitled to receive the payment under the Articles. Such an account must be held at an institution based in the UK unless the share on which the payment is to be made is held by Euroclear Nederland and is subject to the Securities Giro Act (“Wet giraal effectenverkeer”). Alternatively, a dividend can be paid in some other way requested in writing by a shareholder (or all joint shareholders) and agreed to by the Company. The Company will not be responsible for a payment which is lost or delayed. Where any dividends or other amounts payable on a share have not been claimed, the Directors can invest them or use them in any other way for the Company’s benefit until they are claimed. The Company will not be a trustee of the money and will not be liable to pay interest on it. If a dividend or other money has not been claimed for 12 years after being announced or becoming due for payment, it will be forfeited and go back to the Company, unless the Directors decide otherwise. The Company expects that dividends on B shares will be paid under the dividend access mechanism described below. The Articles provide that if any amount is paid by the issuer of the dividend access share by way of dividend on the dividend access share and paid by the Trustee to any holder of B shares, the dividend that the Company would otherwise pay to such holder of B shares will be reduced by an amount equal to the amount paid to such holder of B shares by the Trustee. Dividend access mechanism for B shares General A and B shares are identical, except for the dividend access mechanism, which will only apply to B shares. Dividends paid on A shares have a Dutch source for tax purposes and are subject to Dutch withholding tax. It is the expectation and the intention, although there can be no certainty, that holders of B shares will receive dividends through the dividend access mechanism. Any dividends paid on the dividend access share will have a UK source for UK and Dutch tax purposes. There will be no Dutch withholding tax on such dividends and certain holders (not including US holders of B shares or B American Depositary Shares (ADSs)) will be entitled to a UK tax credit in respect of their proportional shares of such dividends. For further details regarding the tax treatment of dividends paid on the A and B shares and ADSs, refer to “Taxation” on pages 94-95. Description of dividend access mechanism A dividend access share has been issued by The Shell Transport and Trading Company Limited (Shell Transport) to Computershare Trustees (Jersey) Limited (formerly EES Trustees International Limited) as Trustee. EES Trustees International Limited replaced Lloyds TSB Offshore Trust Company Limited as Trustee on January 26, 2012. Pursuant to a declaration of trust, the Trustee will hold any dividends paid in respect of the dividend access share on trust for the holders of B shares and will arrange for prompt disbursement of such dividends to holders of B shares. Interest and other income earned on unclaimed dividends will be for the account of Shell Transport and any dividends which are unclaimed after 12 years will revert to Shell Transport. Holders of B shares will not have any interest in the dividend access share and will not have any rights against Shell Transport as issuer of the dividend C O R P O R A T E G O V E R N A N C E 86 Shell Annual Report and Form 20-F 2012 reports.shell.com Corporate governance access share. The only assets held on trust for the benefit of the holders of B shares will be dividends paid to the Trustee in respect of the dividend access share. Transport, for any reason and without financial recompense. This might, for instance, occur in response to changes in relevant tax legislation. The declaration and payment of dividends on the dividend access share will require board action by Shell Transport and will be subject to any applicable limitations in law or in the Shell Transport articles of association in effect. In no event will the aggregate amount of the dividend paid by Shell Transport under the dividend access mechanism for a particular period exceed the aggregate of the dividend announced by the Board of the Company on B shares in respect of the same period. Operation of the dividend access mechanism If, in connection with the announcement of a dividend by the Company on B shares, the board of Shell Transport elects to declare and pay a dividend on the dividend access share to the Trustee, the holders of B shares will be beneficially entitled to receive their share of that dividend pursuant to the declaration of trust (and arrangements will be made to ensure that the dividend is paid in the same currency in which they would have received a dividend from the Company). If any amount is paid by Shell Transport by way of a dividend on the dividend access share and paid by the Trustee to any holder of B shares, the dividend which the Company would otherwise pay on B shares will be reduced by an amount equal to the amount paid to such holders of B shares by the Trustee. The Company will have a full and unconditional obligation, in the event that the Trustee does not pay an amount to holders of B shares on a cash dividend payment date (even if that amount has been paid to the Trustee), to pay immediately the dividend announced on B shares. The right of holders of B shares to receive distributions from the Trustee will be reduced by an amount equal to the amount of any payment actually made by the Company on account of any dividend on B shares. If for any reason no dividend is paid on the dividend access share, holders of B shares will only receive dividends from the Company directly. Any payment by the Company will be subject to Dutch withholding tax (unless an exemption is obtained under Dutch law or under the provisions of an applicable tax treaty). The dividend access mechanism has been approved by the Dutch Revenue Service pursuant to an agreement (“vaststellingsovereenkomst”) with the Company and N.V. Koninklijke Nederlandsche Petroleum Maatschappij (Royal Dutch Petroleum Company) dated October 26, 2004, as supplemented and amended by an agreement between the same parties dated April 25, 2005. The agreement states, among other things, that dividend distributions on the dividend access share by Shell Transport will not be subject to Dutch dividend withholding tax provided that the dividend access mechanism is structured and operated substantially as set out above. The Company may not extend the dividend access mechanism to any future issuances of B shares without the approval of the Dutch Revenue Service. Accordingly, the Company would not expect to issue additional B shares unless that approval were obtained or the Company were to determine that the continued operation of the dividend access mechanism was unnecessary. Any further issue of B shares is subject to advance consultation with the Dutch Revenue Service. The dividend access mechanism may be suspended or terminated at any time by the Company’s Directors or the Directors of Shell The daily operations of the Trust are administered on behalf of Shell by the Trustee. Material financial information of the Trust is included in the Consolidated Financial Statements of Shell and is therefore subject to the same disclosure controls and procedures as Shell. Disputes between a shareholder or American Depositary Share holder and Royal Dutch Shell plc, any subsidiary, Director or professional service provider The Articles generally require that, except as noted below, all disputes (i) between a shareholder in such capacity and the Company and/or its Directors, arising out of or in connection with the Articles or otherwise; (ii) so far as permitted by law, between the Company and any of its Directors in their capacities as such or as the Company’s employees, including all claims made by the Company or on its behalf against Directors; (iii) between a shareholder in such capacity and the Company’s professional service providers (which could include the Company’s auditors, legal counsel, bankers and ADS depositaries); and (iv) between the Company and its professional service providers arising in connection with any claim within the scope of (iii) above, shall be exclusively and finally resolved by arbitration in The Hague, the Netherlands, under the Rules of Arbitration of the International Chamber of Commerce (ICC), as amended from time to time. This would include all disputes arising under UK, Dutch or US law (including securities laws), or under any other law, between parties covered by the arbitration provision. Accordingly, the ability of shareholders to obtain monetary or other relief, including in respect of securities law claims, may be determined in accordance with these provisions, and the ability of shareholders to obtain monetary or other relief may therefore be limited and their cost of seeking and obtaining recoveries in a dispute may be higher than otherwise would be the case. The tribunal shall consist of three arbitrators to be appointed in accordance with the ICC rules. The chairman of the tribunal must have at least 20 years’ experience as a lawyer qualified to practise in a common law jurisdiction which is within the Commonwealth (as constituted on May 12, 2005) and each other arbitrator must have at least 20 years’ experience as a qualified lawyer. Pursuant to the exclusive jurisdiction provision in the Articles, if a court or other competent authority in any jurisdiction determines that the arbitration requirement described above is invalid or unenforceable in relation to any particular dispute in that jurisdiction, then that dispute may only be brought in the courts of England and Wales, as is the case with any derivative claim brought under the Act. The governing law of the Articles is the substantive law of England. Disputes relating to the Company’s failure or alleged failure to pay all or part of a dividend which has been announced and which has fallen due for payment will not be subject to the arbitration and exclusive jurisdiction provisions of the Articles. Any derivative claim brought under the Act will not be subject to the arbitration provisions of the Articles. Pursuant to the relevant Depositary agreement, each holder of ADSs is bound by the arbitration and exclusive jurisdiction provisions of the Articles as described in this section as if that holder were a shareholder. Voting rights and general meetings of shareholders Shareholders meetings Under the applicable laws of England, the Company is required in each year to hold an AGM of shareholders in addition to any other meeting of shareholders that may be held. Each AGM must be held in the period six months from the date following the Company’s accounting reference date each year. Additionally, shareholders may submit resolutions in accordance with Section 338 of the Act. Directors have the power to convene a general meeting of shareholders at any time. In addition, Directors must convene a meeting upon the request of shareholders holding not less than 5% of the Company’s paid-up capital carrying voting rights at general meetings of shareholders pursuant to Section 303 of the Act. A request for a general meeting of shareholders must state the general nature of the business to be dealt with at the meeting, and must be authenticated by the requesting shareholders. If Directors fail to call such a meeting within 21 days from receipt of the request, the shareholders that requested the general meeting, or any of them representing more than half of the total voting rights of all shareholders that requested the meeting, may themselves convene a meeting which must be called within three months. Any such meeting must be convened in the same manner, as nearly as possible, as that in which meetings are required to be convened by the Directors. The Company is required to give at least 21 clear days’ notice of any AGM or any other general meeting of the Company. The Articles require that in addition to any requirements under the legislation, the notice for any general meeting must state where the meeting is to be held (the principal meeting place) and the location of any satellite meeting place, which shall be identified as such in the notice. At the same time that notice is given for any general meeting, an announcement of the date, time and place of that meeting will, if practicable, be published in a national newspaper in the Netherlands. The rules of the UKLA, Euronext Amsterdam and the NYSE require the Company to inform holders of its securities of the holding of meetings which they are entitled to attend. A shareholder is entitled to appoint a proxy (who is not required to be another shareholder) to represent and vote on behalf of the shareholder at any general meeting of shareholders, including the AGM. Business may not be transacted at any general meeting, including the AGM, unless a quorum is present. A quorum is two people who are entitled to vote at that general meeting. They can be shareholders who are personally present or proxies for shareholders entitled to vote at that general meeting or a combination of both. If a quorum is not present within five minutes of the time fixed for a general meeting to start or within any longer period not exceeding one hour which the chairman of the meeting can decide, and if the meeting was called by shareholders, it will be cancelled. Any other meeting will be adjourned to a day (being not less than 10 days later, excluding the day on which it is adjourned and the day for which it is reconvened), time and place decided upon by the chairman of the meeting. One shareholder present in person or by proxy and entitled to vote will constitute a quorum at any adjourned general meeting. Record dates Entitlement to attend and vote at the AGM is determined by reference to the Company’s Register of Members. In order to attend and vote at the AGM, a member must be entered on the Register of Members or the register of the Royal Dutch Shell Corporate Nominee reports.shell.com Shell Annual Report and Form 20-F 2012 Corporate governance 87 no later than the record date. The record date will not be more than 48 hours before the meeting, not taking account of any part of a day that is not a working day. Voting rights A and B shares have identical voting rights and vote together as a single class on all matters including the election of directors unless a matter affects the rights of one class as a separate class. If a resolution affects the rights attached to either class of shares as a separate class, it must be approved either in writing by shareholders holding at least three-quarters of the issued shares of that class by amount, excluding any shares of that class held as treasury shares, or by special resolution passed at a separate meeting of the registered holders of the relevant class of shares. It is the intention that all voting at general meetings will take place on a poll. A poll is voting by means of a ballot where the number of shares held by each voting shareholder is counted, as opposed to voting by way of a show of hands where the actual number of shares held by voting shareholders is not taken into account. Under the Act, if a poll is demanded, the resolution conducted on a poll must be approved by holders of at least a majority of the votes cast at the meeting. Special resolutions require the affirmative vote of at least three-quarters of the votes cast at the meeting to be approved. On a poll, every holder of A shares or B shares present in person or by proxy has one vote for every share he or she holds. This is subject to any rights or restrictions which are given to any class of shares in accordance with the Articles. No shareholder is entitled to vote if he or she has been served with a restriction order after failure to provide the Company with information concerning interests in his or her shares required to be provided under Section 793 of the Act. Major shareholders have no differing voting rights. Rights in a winding up If the Company is voluntarily wound up, the liquidator can distribute to shareholders any assets remaining after the liquidator’s fees and expenses have been paid and all sums due to prior ranking creditors (as defined under the laws of England) have been paid. Under the Articles, the holders of the sterling deferred shares would be entitled (such entitlement ranking in priority to the rights of holders of ordinary shares) to receive an amount equal to the aggregate of the capital paid up or credited as paid up on each sterling deferred share but would not be entitled to participate further in the profits or assets of the Company. Any assets remaining after the entitlements of the holders of sterling deferred shares are satisfied would be distributed to the holders of A and B shares pro rata according to their shareholdings. C O R P O R A T E G O V E R N A N C E Redemption provisions Ordinary shares are not subject to any redemption provisions. Sinking fund provisions Ordinary shares are not subject to any sinking fund provision under the Articles or as a matter of the laws of England. Liability to further calls No holder of the Company’s ordinary shares is currently liable to make additional contributions of capital in respect of the Company’s ordinary shares. Discriminating provisions There are no provisions discriminating against a shareholder because of his or her ownership of a particular number of shares. Variation of rights The Act provides that the Articles can be amended by a special resolution of the Company’s shareholders. 88 Shell Annual Report and Form 20-F 2012 reports.shell.com Corporate governance The Articles provide that, if permitted by legislation, the rights attached to any class of shares can be changed if this is approved either in writing by shareholders holding at least three-quarters of the issued shares of that class by amount (excluding any shares of that class held as treasury shares) or by a special resolution passed at a separate meeting of the holders of the relevant class of shares. At each such separate meeting, all of the provisions of the Articles relating to proceedings at a general meeting apply, except that: (i) a quorum will be present if at least one shareholder who is entitled to vote is present in person or by proxy who owns at least one-third in amount of the issued shares of the class; (ii) any shareholder who is present in person or by proxy and entitled to vote can demand a poll; and (iii) at an adjourned meeting, one person entitled to vote and who holds shares of the class, or his or her proxy, will be a quorum. These provisions are not more restrictive than required by law in England. Limitations on rights to own shares There are no limitations imposed by the Articles or the applicable laws of England on the rights to own shares, including the right of non-residents or foreign persons to hold or vote the Company’s shares, other than limitations that would generally apply to all shareholders. Change of control There are no provisions in the Articles or of corporate legislation in England that would delay, defer or prevent a change of control. Threshold for disclosure of share ownership The Disclosure and Transparency Rules of the UK’s Financial Services Authority impose an obligation on persons [A] to notify the Company of the percentage of voting rights held as a shareholder, or through the direct or indirect holding of financial instruments, if the percentage of voting rights held in the Company reaches, exceeds or falls below 3% or any 1% threshold above 3%. [A] For this purpose “persons” includes companies, natural persons, legal persons and partnerships. Section 793 of the Act governs the Company’s right to investigate who has an interest in its shares. Under that section, a public company can serve a notice on any person it knows or has reasonable cause to believe is, or was at any time in the preceding three years, interested in its shares in order to obtain certain information about that interest. The Articles provide that in any statutory notice under the relevant legislation, the Company will ask for details of those who have an interest and the extent of their interest in a particular holding. The Articles also provide that when a person receives a statutory notice, he has 14 days to comply with it. If he does not do so or if he makes a statement in response to the notice which is false or inadequate in some important way, the Company may, on notice, restrict the rights relating to the identified shares. The restriction notice will state that the identified shares no longer give the shareholder any right to attend or vote either personally or by proxy at a shareholders’ meeting or to exercise any right in relation to shareholders’ meetings. Where the identified shares make up 0.25% or more (in amount or in number) of the existing shares of a class at the date of delivery of the restriction notice, the restriction notice can also contain the following further restrictions: (i) Directors can withhold any dividend or part of a dividend or other money otherwise payable in respect of the identified shares without any liability to pay interest when such money is finally paid to the shareholder; and (ii) Directors can refuse to register a transfer of any of the identified shares which are certificated shares unless Directors are satisfied that they have been sold outright to an independent third party. Once a restriction notice has been given, Directors are free to cancel it or exclude any shares from it at any time they think fit. In addition, they must cancel the restriction notice within seven days of being satisfied that all information requested in the statutory notice has been given. Also, where any of the identified shares are sold and Directors are satisfied that they were sold outright to an independent third party, they must cancel the restriction notice within seven days of receipt of notification of the sale. The Articles do not restrict in any way the provision of the legislation which applies to failures to comply with notices under the legislation. The UK City Code on Takeovers and Mergers (the Takeover Code) imposes disclosure obligations on parties subject to the Takeover Code’s disclosure regime. This code requires any person who is interested in 1% or more of any class of relevant securities of an offeree company to make an opening position disclosure following the commencement of an offer period. The Takeover Code also requires any person who is, or becomes, interested in 1% or more of any class of relevant securities of an offeree company to make a dealing disclosure if the person deals in any relevant securities of the offeree company during an offer period. If two or more persons act together pursuant to an agreement or understanding, whether formal or informal, to acquire or control an interest in relevant securities of an offeree company, they will normally be deemed to be a single person for the purpose of the relevant provisions of the Takeover Code. Rule 13d-1 of the US Securities Exchange Act of 1934 requires that a person or group acquiring beneficial ownership of more than 5% of equity securities registered under the US Securities Exchange Act discloses such information to the SEC within 10 days after the acquisition. Capital changes The conditions imposed by the Articles for changes in capital are not more stringent than those required by the applicable laws of England. Further information The following information can be found at www.shell.com/investor: ▪ the terms of reference of the Audit Committee, Corporate and Social Responsibility Committee, Nomination and Succession Committee and Remuneration Committee (these documents explain the Committees’ roles and the authority the Board delegates to them); ▪ the full list of matters reserved to the Board for decision; ▪ Shell General Business Principles; ▪ Shell Code of Conduct; ▪ Code of Ethics for Executive Directors and Senior Financial Officers; and ▪ Articles of Association. Signed on behalf of the Board /s/ Michiel Brandjes Michiel Brandjes Company Secretary March 13, 2013 reports.shell.com Shell Annual Report and Form 20-F 2012 Additional shareholder information 89 ADDITIONAL SHAREHOLDER INFORMATION The Company was incorporated in England and Wales on February 5, 2002, as a private company under the Companies Act of England and Wales 1985, as amended. On October 27, 2004, the Company was re-registered as a public company limited by shares and changed its name from Forthdeal Limited to Royal Dutch Shell plc. The Company is registered at Companies House, Cardiff, under company number 4366849, and at the Chamber of Commerce, The Hague, under company number 34179503. The business address for the Directors and Senior Management is: Carel van Bylandtlaan 30, 2596 HR, The Hague, The Netherlands. The Company is resident in the Netherlands for Dutch and UK tax purposes and its primary objective is to carry on the business of a holding company. It is not directly or indirectly owned or controlled by another corporation or by any government and does not know of any arrangements that may result in a change of control of the Company. Nature of trading market The Company has two classes of ordinary shares: A and B shares. The principal trading market for A shares is Euronext Amsterdam and the principal trading market for B shares is the London Stock Exchange. Ordinary shares are traded in registered form. A and B American Depositary Shares (ADSs) are listed on the New York Stock Exchange [A]. A depositary receipt is a certificate that evidences ADSs. Depositary receipts are issued, cancelled and exchanged at the office of The Bank of New York Mellon, 101 Barclay Street, New York, NY 10286, USA, as depositary (the Depositary) under a deposit agreement between the Company, the Depositary and the holders of ADSs. Each ADS represents two €0.07 shares of Royal Dutch Shell plc deposited under the agreement. More information relating to ADSs is given on page 93. [A] At February 19, 2013, there were outstanding 414,589,396 A ADSs and 183,614,697 B ADSs representing 22.0% and 14.0% of the respective share capital class, held by 7,199 and 969 holders of record with an address in the USA respectively. In addition to holders of ADSs, as at February 19, 2013, there were 65,619 A shares and 763,521 B shares of €0.07 each representing 0.002% and 0.029% of the respective share capital class, held by 103 and 875 holders of record registered with an address in the USA respectively. LISTING INFORMATION Ticker symbol London Ticker symbol Amsterdam Ticker symbol New York (ADS [A]) ISIN Code CUSIP SEDOL Number London SEDOL Number Euronext Weighting on FTSE as at 31/12/12 Weighting on AEX as at 31/12/12 A shares RDSA RDSA RDS.A B shares RDSB RDSB RDS.B GB00B03MLX29 GB00B03MM408 G7690A100 G7690A118 B03MLX2 B09CBL4 5.31% 13.70% B03MM40 B09CBN6 3.85% not included [A] Each A ADS represents two A shares of €0.07 each and each B ADS represents two B shares of €0.07 each. Share capital The issued and fully paid share capital of the Company as at February 19, 2013, was as follows: SHARE CAPITAL Issued and fully paid Number Nominal value Ordinary shares of €0.07 each A shares B shares 3,772,388,687 2,617,715,189 Sterling deferred shares of £1 each 50,000 €264,067,208 €183,240,063 £50,000 The Directors may only allot new ordinary shares if they have authority from shareholders to do so. The Company seeks to renew this authority annually at its Annual General Meeting (AGM). Under the resolution passed at the Company’s 2012 AGM, the Directors were granted authority to allot ordinary shares up to an aggregate nominal amount equivalent to approximately one-third of the issued ordinary share capital of the Company (in line with the guidelines issued by institutional investors). The following is a summary of the material terms of the Company’s ordinary shares, including brief descriptions of the provisions contained in the Articles of Association (the Articles) and applicable laws of England and Wales in effect on the date of this document. This summary does not purport to include complete statements of these provisions: ▪ upon issuance, A and B shares are fully paid and free from all liens, equities, charges, encumbrances and other interest of the Company and not subject to calls of any kind; ▪ all A and B shares rank equally for all dividends and distributions on ordinary share capital announced; and ▪ A and B shares are admitted to the Official List of the UK Listing Authority and to trading on the market for listed securities of the London Stock Exchange. A and B shares are also admitted to trading on Euronext Amsterdam. A and B ADSs are listed on the New York Stock Exchange. A D D I T I O N A L S H A R E H O L D E R I N F O R M A T I O N 90 Shell Annual Report and Form 20-F 2012 reports.shell.com Additional shareholder information As at December 31, 2012, trusts and trust-like entities holding shares for the benefit of employee plans of Shell held (directly and indirectly) 84.2 million shares of the Company with an aggregate market value of $2,909 million and an aggregate nominal value of €5.9 million. Significant shareholdings The Company’s A and B shares have identical voting rights, and accordingly the Company’s major shareholders do not have different voting rights. S I GN I FI C A N T I N D I RE C T A N D D I RE C T S HA RE HOLD I N GS As at February 19, 2013, interests of major investors with 3% or more of either class of the Company’s shares is given below. INDIRECT BlackRock, Inc. Legal & General Group plc The Capital Group Companies, Inc. A shares B shares Number 190,215,159 112,654,650 83,555,345 % 5.04 2.99 2.21 Number 169,732,143 85,580,421 236,641,320 % 6.48 3.27 9.04 Number 359,947,302 198,235,071 320,196,665 As at February 19, 2013, direct holdings of 3% or more of either class of the Company’s shares held by registered members representing the interests of underlying investors is given below. DIRECT BNY (Nominees) Limited Chase Nominees Limited Chase Nominees Limited (LEND) Euroclear Nederland Lynchwood Nominees Limited (2006420) State Street Nominees Limited (OM04) N OTIFICA TION OF MA J OR SHA RE HOLDIN GS During the year ended December 31, 2012, the Company was notified by the following investor of its interests in the Company’s shares pursuant to Disclosure and Transparency Rule 5. INVESTOR A shares B shares Number % Number % Number 684,582,945 18.15 355,282,916 13.57 1,039,865,861 16.27 22,241,791 29,806,628 0.59 0.79 200,578,854 89,982,649 7.66 3.44 222,820,645 119,789,277 3.49 1.87 1,807,403,075 47.91 14,071,113 0.54 1,821,474,188 28.50 32,478,265 54,054,818 0.86 1.43 102,681,807 133,411,145 3.92 5.10 135,160,072 187,465,963 2.12 2.93 The Capital Group Companies, Inc. [A] 103,649,913 2.79 248,240,789 9.44 351,890,702 A shares B shares Number % Number % Number Total % 5.54 [A] The Capital Group Companies, Inc. (CGC) stated in its reason for notification to the Company that, due to a company reorganisation, Capital Research and Management Company (CRMC) and Capital Group International, Inc. (CGII) would no longer report relevant holdings under management separately. Instead the relevant holdings under management by CRMC and CGII would be reported in aggregate by CGC. It stated that it was solely for this reason (and not as a result of any additional acquisition or disposal) that CGC reported this aggregated holding. The Company received no notifications pursuant to Disclosure and Transparency Rule 5 in the period from December 31, 2012, to February 19, 2013 (being a date not more than one month prior to the date of the Company’s Notice of AGM 2013). Total % 5.63 3.10 5.01 Total % Dividends The following tables show the dividends on each class of share and each class of ADS for the years 2008-2012. A AND B SHARES $ Q1 Q2 Q3 Q4 Total announced in 2012 2011 2010 2009 2008 0.43 0.43 0.43 0.43 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.40 0.40 0.40 0.40 respect of the year 1.72 1.68 1.68 1.68 1.60 A SHARES Q1 Q2 Q3 Q4 Total announced in 2012 2011 2010 2009 0.35 0.34 0.33 0.33 0.29 0.29 0.32 0.32 0.32 0.32 0.31 0.30 0.32 0.30 0.28 0.30 € [A] 2008 0.26 0.26 0.31 0.30 respect of the year 1.35 1.22 1.25 1.21 1.13 Amount paid during the year 1.34 1.20 1.25 1.21 1.07 [A] Euro equivalent, rounded to the nearest euro cent. B SHARES PENCE [A] Q1 Q2 Q3 Q4 Total announced in 2012 27.92 27.08 26.86 28.79 2011 25.71 25.77 27.11 26.74 2010 27.37 26.89 26.72 25.82 2009 28.65 25.59 25.65 26.36 2008 20.05 20.21 24.54 27.97 respect of the year 110.65 105.33 106.80 106.25 92.77 Amount paid during the year 108.60 104.41 107.34 107.86 82.91 [A] Sterling equivalent. A AND B ADSs $ Q1 Q2 Q3 Q4 Total announced in 2012 2011 2010 2009 2008 0.86 0.86 0.86 0.86 0.84 0.84 0.84 0.84 0.84 0.84 0.84 0.84 0.84 0.84 0.84 0.84 0.80 0.80 0.80 0.80 respect of the year 3.44 3.36 3.36 3.36 3.20 Amount paid during the year 3.42 3.36 3.36 3.32 3.12 reports.shell.com Shell Annual Report and Form 20-F 2012 Additional shareholder information 91 A D D I T I O N A L S H A R E H O L D E R I N F O R M A T I O N 92 Shell Annual Report and Form 20-F 2012 reports.shell.com Additional shareholder information High, low and year-end share prices The following table shows the high, low and year-end prices of the Company’s registered ordinary shares: ▪ of €0.07 nominal value on the London Stock Exchange; ▪ of €0.07 nominal value on Euronext Amsterdam; and ▪ in the form of ADSs on the New York Stock Exchange (ADSs do not have a nominal value). ANNUAL SHARE PRICES 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 QUARTERLY SHARE PRICES 2011 Q1 Q2 Q3 Q4 2012 Q1 Q2 Q3 Q4 MONTHLY SHARE PRICES 2012 September October November December 2013 January February Euronext Amsterdam New York Stock Exchange Low € 16.25 15.27 19.53 20.12 24.30 A shares Year-end € 18.75 21.10 24.73 28.15 25.98 High $ 88.73 63.75 68.54 77.96 74.51 A ADSs Low Year-end $ 41.62 38.29 49.16 57.97 60.62 $ 52.94 60.11 66.78 73.09 68.95 London Stock Exchange New York Stock Exchange Low pence 1,223 1,315 1,550 1,768 2,020 B shares Year-end pence 1,726 1,812 2,115 2,454 2,175 High $ 87.54 62.26 68.32 78.75 77.52 Low $ 41.41 37.16 47.12 58.42 63.05 B ADSs Year-end $ 51.43 58.13 66.67 76.01 70.89 High € 29.63 21.46 25.28 28.40 29.18 High pence 2,245 1,897 2,149 2,476 2,499 Euronext Amsterdam A shares Low € 23.80 23.49 20.12 21.97 26.07 24.30 26.53 25.29 Euronext Amsterdam A shares Low € 26.87 25.90 25.29 25.51 25.85 24.36 High € 26.74 26.37 26.04 28.40 29.18 27.12 28.99 27.32 High € 28.31 27.21 27.32 26.49 27.06 26.02 London New York New York Stock Exchange Stock Exchange Stock Exchange High pence 2,289 2,352 2,323 2,476 2,499 2,286 2,384 2,271 B shares Low pence 1,772 2,000 1,768 1,900 2,187 2,020 2,170 2,093 High $ 73.84 77.96 75.56 73.50 74.51 72.07 73.96 70.61 A ADSs Low $ 65.30 66.90 59.85 57.97 68.36 60.62 66.51 64.17 High $ 73.87 78.75 76.13 76.51 77.52 74.19 76.13 72.67 B ADSs Low $ 65.00 67.36 60.05 58.42 69.46 63.05 69.04 66.25 London New York New York Stock Exchange Stock Exchange Stock Exchange High pence 2,349 2,248 2,271 2,241 2,375 2,309 B shares Low pence 2,198 2,155 2,093 2,140 2,165 2,143 High $ 73.96 70.58 70.61 69.93 73.00 70.92 A ADSs Low $ 69.00 67.13 64.17 66.63 68.35 64.53 High $ 76.13 72.50 72.67 72.00 74.95 72.79 B ADSs Low $ 70.93 69.12 66.25 68.83 70.48 66.00 reports.shell.com Shell Annual Report and Form 20-F 2012 Additional shareholder information 93 Method of holding shares or an interest in shares There are several ways in which Royal Dutch Shell plc registered shares or an interest in these shares can be held, including: ▪ directly as registered shares either in uncertificated form or in certificated form in a shareholder’s own name; ▪ indirectly through Euroclear Nederland (in respect of which the Dutch Securities Giro Act (“Wet giraal effectenverkeer”) is applicable); ▪ through the Royal Dutch Shell Corporate Nominee; and ▪ as a direct or indirect holder of either an A or a B ADS with the Depositary. American Depositary Shares The Depositary is the registered shareholder of the shares underlying the A or B American Depositary Shares (ADSs) and enjoys the rights of a shareholder under the Articles. Holders of ADSs will not have shareholder rights. The rights of the holder of an A or a B ADS are specified in the respective Depositary agreements with the Depositary and are summarised below. The Depositary will receive all cash dividends and other cash distributions made on the deposited shares underlying the ADSs and, where possible and on a reasonable basis, will distribute such dividends and distributions to holders of ADSs. Rights to purchase additional shares will also be made available to the Depositary who may make such rights available to holders of ADSs. All other distributions made on the Company’s shares will be distributed by the Depositary in any means that the Depositary thinks is equitable and practical. The Depositary may deduct its fees and expenses and the amount of any taxes owed from any payments to holders and it may sell a holder’s deposited shares to pay any taxes owed. The Depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to holders of ADSs. The Depositary will notify holders of ADSs of shareholders’ meetings of the Company and will arrange to deliver voting materials to such holders of ADSs if requested by the Company. Upon request by a holder, the Depositary will endeavour to appoint such holder as proxy in respect of such holder’s deposited shares entitling such holder to attend and vote at shareholders’ meetings. Holders of ADSs may also instruct the Depositary to vote their deposited securities and the Depositary will try, as far as practical and lawful, to vote deposited shares in accordance with such instructions. The Company cannot ensure that holders will receive voting materials or otherwise learn of an upcoming shareholders’ meeting in time to ensure that holders can instruct the Depositary to vote their shares. Upon payment of appropriate fees, expenses and taxes, (i) shareholders may deposit their shares with the Depositary and receive the corresponding class and amount of ADSs and (ii) holders of ADSs may surrender their ADSs to the Depositary and have the corresponding class and amount of shares credited to their account. Further, subject to certain limitations, holders may, at any time, cancel ADSs and withdraw their underlying shares or have the corresponding class and amount of shares credited to their account. The Depositary may also deliver ADSs prior to deposit of the underlying securities subject to certain conditions, including, without limitation, that such pre-released ADSs are fully collateralised and that the underlying securities are assigned to and held for the account of the Depositary. FE E S P A I D B Y HOLD E RS OF A D S s The Depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The Depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The Depositary may generally refuse to provide fee-attracting services until its fees for those services are paid. (See page 94.) RE IMBURSE M E N TS TO THE C OMPA N Y The Bank of New York Mellon, as Depositary, has agreed to reimburse the Company for expenses it incurs that are related maintenance expenses of the ADS programme. The Depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The Depositary has also agreed to pay certain legal expenses and the standard out-of-pocket maintenance costs for the ADSs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend cheques, electronic filing of US Federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls. It has also agreed to reimburse the Company annually for certain costs associated with the AGM, investor relationship programmes and special investor relations promotional activities. There are limits on the amount of expenses for which the Depositary will reimburse the Company, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the Depositary collects from investors. From January 1, 2012, to February 19, 2013, the Company received $2,000,413 from the Depositary. Scrip Dividend Programme In September 2010, the Company introduced a Scrip Dividend Programme which enables shareholders to increase their shareholding by choosing to receive new shares instead of cash dividends, if approved by the Board. Only new A shares are issued under the programme, including to shareholders who hold B shares. Full details of the programme can be found at www.shell.com/dividend. When the programme was introduced, the Dividend Reinvestment Plans (DRIPs) provided by Equiniti and Royal Bank of Scotland N.V. were withdrawn; the dividend reinvestment feature of the plan provided by The Bank of New York Mellon was likewise withdrawn. If shareholders had been participating in one of these plans, they were not necessarily enrolled automatically in the Scrip Dividend Programme; in most cases, they had to elect to join the programme. A D D I T I O N A L S H A R E H O L D E R I N F O R M A T I O N 94 Shell Annual Report and Form 20-F 2012 reports.shell.com Additional shareholder information PERSONS DEPOSITING OR WITHDRAWING SHARES MUST PAY: FOR: $5.00 or less per 100 ADSs (or portion of 100 ADSs) Issuance of ADSs, including those resulting from a distribution of shares, rights Registration and transfer fees Expenses of the Depositary or other property; Cancellation of ADSs for the purpose of their withdrawal, including if the deposit agreement terminates; Distribution of securities to holders of deposited securities by the Depositary to ADS registered holders. Registration and transfer of shares on the share register to or from the name of the Depositary or its agent when they deposit or withdraw shares. Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement); Converting foreign currency to US dollars. Taxes and other governmental charges the Depositary or the custodian has to pay As necessary. on any ADS or share underlying an ADS, for example, share transfer taxes, stamp duty or withholding taxes Exchange controls and other limitations affecting security holders Other than those individuals and entities that are subject to EU sanctions, for example regarding Iran and Syria, there is no legislative or other legal provision currently in force in the UK, the Netherlands or arising under the Articles restricting remittances to non-resident holders of the Company’s ordinary shares or affecting the import or export of capital for use by the Company. Taxation GE N E RA L The Company is incorporated in England and Wales and tax-resident in the Netherlands. As a tax resident of the Netherlands, it is generally required by Dutch law to withhold tax at a rate of 15% on dividends on its ordinary shares and ADSs, subject to the provisions of any applicable tax convention or domestic law. The following sets forth the operation of the provisions on dividends on the Company’s various ordinary shares and ADSs to UK and US holders, as well as certain other tax rules pertinent to holders. Holders should consult their tax adviser for more details. D I V I D E N D S P A I D ON THE D I V I D E N D A C C E S S S HA RE There is no Dutch withholding tax on dividends on B shares or B ADSs provided that such dividends are paid on the dividend access share pursuant to the dividend access mechanism (see “Dividend access mechanism for B shares” on pages 85-86). Dividends paid on the dividend access share are treated as UK-source for tax purposes and there is no UK withholding tax on them. Also, under UK law, individual shareholders resident in the UK are entitled to a UK tax credit with dividends paid on the dividend access share. The amount of the UK tax credit is 10/90ths of the cash dividend; it is not repayable when it exceeds the individual’s UK tax liability. In 2012, all dividends with respect to B shares and B ADSs were paid on the dividend access share pursuant to the dividend access mechanism. DUTCH WITHHOLDING TAX When Dutch withholding tax applies on dividends paid to a US holder (that is, dividends on A shares or A ADSs, or on B shares or B ADSs that are not paid on the dividend access share pursuant to the dividend access mechanism), the US holder will be subject to Dutch withholding tax at the rate of 15%. A US holder who is entitled to the benefits of the 1992 Double Taxation Convention (the Convention) between the USA and the Netherlands as amended by the protocol signed on March 8, 2004, will be entitled to a reduction in the Dutch withholding tax, either by way of a full or a partial exemption at source or by way of a partial refund or a credit as follows: ▪ if the US holder is an exempt pension trust as described in article 35 of the Convention, or an exempt organisation as described in article 36 thereof, the US holder will be exempt from Dutch withholding tax; or ▪ if the US holder is a company that holds directly at least 10% of the voting power in the Company, the US holder will be subject to Dutch withholding tax at a rate not exceeding 5%. In general, the entire dividend (including any amount withheld) will be dividend income to the US holder, and the withholding tax will be treated as a foreign income tax that is eligible for credit against the US holder’s income tax liability or a deduction subject to certain limitations. A “US holder” includes, but is not limited to, a citizen or resident of the USA, or a corporation or other entity organised under the laws of the USA or any of its political subdivisions. When Dutch withholding tax applies on dividends paid to UK-resident holders (that is, dividends on A shares or A ADSs, or on B shares or B ADSs that are not paid on the dividend access share pursuant to the dividend access mechanism), the dividend will typically be subject to withholding tax at a rate of 15%. Such UK holder will be entitled to a credit (not repayable) for withholding tax against their UK tax liability. However, from July 1, 2009, certain corporate shareholders are, subject to conditions, exempt from UK tax on dividends. Withholding tax suffered cannot be offset against such exempt dividends. Pension funds meeting certain defined criteria can, however, claim a full refund of the dividend tax withheld. Also, resident corporate shareholders holding at least a 5% shareholding and meeting other defined criteria are exempted at source from dividend tax. For shareholders who are resident in any other country, the availability of a whole or partial exemption or refund of Dutch withholding tax is governed by Dutch tax law and/or the tax convention, if any, between the Netherlands and the country of the shareholder’s residence. S C R I P D I V I D E N D P R O G R A M M E As mentioned on pages 56 and 93, in September 2010 the Company introduced a Scrip Dividend Programme which enables shareholders to increase their shareholding by choosing to receive new shares instead of cash dividends, if approved by the Board. Only new A shares are issued under the programme, including to shareholders who hold B shares. reports.shell.com Shell Annual Report and Form 20-F 2012 Additional shareholder information 95 The tax consequences of electing to receive new A shares in place of a cash dividend will depend on individual circumstances. FINANCIAL CALENDAR Financial year ends Further details regarding the taxation consequences of the Scrip Dividend Programme can be found at www.shell.com/dividend. D U TC H C A P I TA L GA I N S TA X A TI ON Capital gains on the sale of shares of a Dutch tax-resident company by a US holder are generally not subject to taxation by the Netherlands unless the US shareholder has a permanent establishment therein and the capital gain is derived from the sale of shares that are part of the business property of the permanent establishment. DUTCH SUCCE SSION DUTY A N D GIFT TA X E S Shares of a Dutch tax-resident company held by an individual who is not a resident or a deemed resident of the Netherlands will generally not be subject to succession duty in the Netherlands on the individual’s death unless the shares are part of the business property of a permanent establishment situated in the Netherlands. A gift of shares of a Dutch tax-resident company by an individual, who is not a resident or deemed a resident of the Netherlands, is generally not subject to Dutch gift tax. Announcements Full year results for 2012 First quarter results for 2013 Second quarter results for 2013 Third quarter results for 2013 Dividend timetable [A] 2012 Fourth quarter interim [B] Announced Ex-dividend date Record date Scrip reference share price announcement date Closing date for scrip election and currency election [C] Euro and sterling equivalents announcement date Payment date 2013 First quarter interim Announced Ex-dividend date Record date U K S TA M P D U TY A N D S TA M P D U TY RE S E RV E TA X Sales or transfers of the Company’s ordinary shares within a clearance service (such as Euroclear Nederland) or of the Company’s ADSs within the ADS depositary receipts system will not give rise to a stamp duty reserve tax (SDRT) liability and should not in practice require the payment of UK stamp duty. Scrip reference share price announcement date Closing date for scrip election and currency election [C] Euro and sterling equivalents announcement date Payment date The transfer of the Company’s ordinary shares to a clearance service (such as Euroclear Nederland) or to an issuer of depositary shares (such as ADSs) will generally give rise to a UK stamp duty or SDRT liability at the rate of 1.5% of consideration given or, if none, of the value of the shares. A sale of the Company’s ordinary shares that are not held within a clearance service (for example, settled through the UK’s CREST system of paperless transfers) will generally be subject to UK stamp duty or SDRT at the rate of 0.5% of the amount of the consideration, normally paid by the purchaser. C A P I TA L GA I N S TA X For the purposes of UK capital gains tax, the market values [A] of the shares of the former public parent companies of the Royal Dutch/Shell Group at the relevant dates were: 2013 Second quarter interim Announced Ex-dividend date Record date Scrip reference share price announcement date Closing date for scrip election and currency election [C] Euro and sterling equivalents announcement date Payment date 2013 Third quarter interim Announced Ex-dividend date Record date Scrip reference share price announcement date Closing date for scrip election and currency £ election [C] December 31, 2012 January 31, 2013 May 2, 2013 August 1, 2013 October 31, 2013 January 31, 2013 February 13, 2013 February 15, 2013 February 20, 2013 March 1, 2013 March 8, 2013 March 28, 2013 May 2, 2013 May 15, 2013 May 17, 2013 May 22, 2013 June 3, 2013 June 10, 2013 June 27, 2013 August 1, 2013 August 14, 2013 August 16, 2013 August 21, 2013 September 2, 2013 September 9, 2013 September 26, 2013 October 31, 2013 November 13, 2013 November 15, 2013 November 20, 2013 November 29, 2013 Royal Dutch Petroleum Company (N.V. Koninklijke Nederlandsche Petroleum Maatschappij) which ceased to exist on December 21, 2005 The “Shell” Transport and Trading Company, p.l.c. March 31, 1982 July 20, 2005 Euro and sterling equivalents announcement date December 6, 2013 Payment date December 23, 2013 1.1349 17.6625 Annual General Meeting May 21, 2013 [A] This timetable is the intended timetable as announced on November 1, 2012. [B] The Directors do not propose to recommend any further distribution in respect of 2012. which delisted on July 19, 2005 1.4502 Not applicable [C] Different scrip and dividend currency election dates may apply to [A] Restated where applicable to reflect all capitalisation issues since the shareholders holding shares in a securities account with a bank or other relevant date. This includes the change in the capital structure in 2005, financial institution ultimately holding through Euroclear Nederland. Such when Royal Dutch Shell plc became the single parent company of Royal shareholders can obtain the applicable deadlines from their broker, financial Dutch Petroleum Company and of The “Shell” Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited, intermediary, bank or other financial institution where they hold their securities account. A different scrip election date may also apply to and one share in Royal Dutch Petroleum Company was exchanged for two registered and non-registered ADS holders. Registered ADS holders can Royal Dutch Shell plc A shares and one share in The “Shell” Transport and contact The Bank of New York Mellon for the applicable deadline. Trading Company, p.l.c. was exchanged for 0.287333066 Royal Dutch Non-registered ADS holders can contact their broker, financial intermediary, Shell plc B shares. bank or other financial institution for the applicable election deadline. A D D I T I O N A L S H A R E H O L D E R I N F O R M A T I O N 96 Shell Annual Report and Form 20-F 2012 reports.shell.com Report on the Annual Report and Accounts REPORT ON THE ANNUAL REPORT AND ACCOUNTS Independent auditors’ report to the members of Royal Dutch Shell plc We have audited the Consolidated Financial Statements of Royal Dutch Shell plc (the Company) and its subsidiaries (collectively Shell) for the year ended December 31, 2012, which comprise the Consolidated Statement of Income, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related Notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. RE SPE C TIVE RE SPON SIBILITIE S OF DIRE CTORS A N D A UDITORS As explained more fully in the statement of the Directors’ responsibilities in respect of the preparation of the financial statements set out on page 57, the Directors are responsible for the preparation of the Consolidated Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Consolidated Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. SEPARATE OPINION IN RELATION TO IFRSs AS ISSUED BY THE IASB As explained in Note 1 to the Consolidated Financial Statements, Shell in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the Consolidated Financial Statements comply with IFRSs as issued by the IASB. OPIN ION ON OTHE R MA TTE RS PRE SCRIBE D BY THE C OMPA N IE S ACT 2006 In our opinion the information given in the Report of the Directors for the financial year for which the Consolidated Financial Statements are prepared is consistent with the Consolidated Financial Statements. MA TTE RS ON WHICH WE A RE RE QUIRE D TO RE PORT BY E X C E P TI ON We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: ▪ certain disclosures of Directors’ remuneration specified by law are not made; or ▪ we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. ▪ the Directors’ statement, set out on page 83, in relation to going concern; ▪ the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and ▪ certain elements of the report to shareholders by the Board on Directors’ remuneration. S C OP E OF THE A U D I T OF THE FIN A N C I A L STA TE M E N TS An audit involves obtaining evidence about the amounts and disclosures in the Consolidated Financial Statements sufficient to give reasonable assurance that the Consolidated Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to Shell’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the Consolidated Financial Statements. In addition, we read all the financial and non-financial information in the Royal Dutch Shell plc Annual Report and Form 20-F for 2012 to identify material inconsistencies with the audited Consolidated Financial Statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. OP I N I ON ON FI N A N C I A L STA TE M E N TS In our opinion the Consolidated Financial Statements: ▪ give a true and fair view of the state of Shell’s affairs as at December 31, 2012, and of its income and cash flows for the year then ended; ▪ have been properly prepared in accordance with IFRSs as adopted by the European Union; and ▪ have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation. OTHE R M A TTE R We have reported separately on the Parent Company Financial Statements of Royal Dutch Shell plc for the year ended December 31, 2012, and on the information in the Directors’ Remuneration Report that is described as having been audited. Stephen Johnson (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London March 13, 2013 Note: ▪ The report set out above is included for the purposes of Royal Dutch Shell plc’s Annual Report and Accounts for 2012 only and does not form part of Royal Dutch Shell plc’s Annual Report on Form 20-F for 2012. ▪ The maintenance and integrity of the Royal Dutch Shell plc website (www.shell.com) are the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Consolidated Financial Statements since they were initially presented on the website. ▪ Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. reports.shell.com Shell Annual Report and Form 20-F 2012 Report on the Annual Report on Form 20-F 97 REPORT ON THE ANNUAL REPORT ON FORM 20-F Report of independent registered public accounting firm TO THE BOA RD OF DIRE CTORS A N D ROYA L D UTCH SHE LL P LC SHAREHOLDERS In our opinion, the accompanying Consolidated Statement of Income, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheets, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related Notes to the Consolidated Financial Statements present fairly, in all material respects, the financial position of Royal Dutch Shell plc (the Company) and its subsidiaries at December 31, 2012, and December 31, 2011, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2012, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these Consolidated Financial Statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting of Shell set out on page 84. Our responsibility is to express opinions on these Consolidated Financial Statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the Consolidated Financial Statements included examining, on a test basis, evidence supporting the amounts and disclosures in the Consolidated Financial Statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP London March 13, 2013 Note that the report set out above is included for the purposes of Royal Dutch Shell plc’s Annual Report on Form 20-F for 2012 only and does not form part of Royal Dutch Shell plc’s Annual Report and Accounts for 2012. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 98 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS 99 99 100 101 102 103 103 103 108 110 112 113 113 114 114 116 118 118 119 119 119 122 122 124 127 128 128 132 134 135 136 136 136 137 Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Note 1 Basis of preparation Note 2 Accounting policies Note 3 Key accounting estimates and judgements Note 4 Segment information Note 5 Employees, Directors and Senior Management Note 6 Interest and other income Note 7 Interest expense Note 8 Intangible assets Note 9 Property, plant and equipment Note 10 Joint ventures and associates Note 11 Investments in securities Note 12 Trade and other receivables Note 13 Inventories Note 14 Cash and cash equivalents Note 15 Debt and lease arrangements Note 16 Trade and other payables Note 17 Taxation Note 18 Retirement benefits Note 19 Decommissioning and other provisions Note 20 Share capital Note 21 Financial instruments and other derivative contracts Note 22 Share-based compensation plans and shares held in trust Note 23 Other reserves Note 24 Dividends Note 25 Legal proceedings and other contingencies Note 26 Auditors’ remuneration Note 27 Earnings per share Note 28 Post-balance sheet events CONSOLIDATED STATEMENT OF INCOME Revenue Share of profit of equity-accounted investments Interest and other income Total revenue and other income Purchases Production and manufacturing expenses Selling, distribution and administrative expenses Research and development Exploration Depreciation, depletion and amortisation Interest expense Income before taxation Taxation Income for the period Income attributable to non-controlling interest Income attributable to Royal Dutch Shell plc shareholders All results are from continuing activities. EARNINGS PER SHARE Basic earnings per share Diluted earnings per share CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Income for the period Other comprehensive income, net of tax: Currency translation differences Unrealised (losses)/gains on securities Cash flow hedging gains/(losses) Share of other comprehensive (loss)/income of equity-accounted investments Other comprehensive income/(loss) for the period Comprehensive income for the period Comprehensive income attributable to non-controlling interest Comprehensive income attributable to Royal Dutch Shell plc shareholders reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements 99 NOTES 10 6 7 17 4 NOTES 27 27 NOTES 23 2012 467,153 8,948 5,599 481,700 369,725 26,280 14,616 1,314 3,104 14,615 1,757 50,289 23,449 26,840 248 26,592 2012 4.25 4.24 2012 26,840 1,644 (815) 31 (222) 638 27,478 300 27,178 2011 470,171 8,737 5,581 484,489 370,044 26,458 14,335 1,125 2,266 13,228 1,373 55,660 24,475 31,185 267 30,918 2011 4.98 4.97 2011 31,185 (3,328) 1,684 (222) 60 (1,806) 29,379 (348) 29,727 $ MILLION 2010 368,056 5,953 4,143 378,152 283,176 24,458 15,528 1,019 2,036 15,595 996 35,344 14,870 20,474 347 20,127 $ 2010 3.28 3.28 $ MILLION 2010 20,474 (142) (298) (2) 488 46 20,520 389 20,131 F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S The Notes on pages 103 to 137 form an integral part of these Consolidated Financial Statements. NOTES Dec 31, 2012 Dec 31, 2011 $ MILLION 8 9 10 11 17 18 12 13 12 14 15 16 17 18 19 15 16 17 18 19 20 22 23 4,470 172,293 38,350 4,867 4,045 12,575 8,991 4,521 152,081 37,990 5,492 4,732 11,408 9,256 245,591 225,480 30,781 65,403 18,550 114,734 360,325 29,921 4,175 15,590 6,298 17,435 73,419 7,833 72,839 12,684 402 3,221 96,979 170,398 542 (2,287) 10,021 180,218 188,494 1,433 189,927 360,325 28,976 79,509 11,292 119,777 345,257 30,463 4,921 14,649 5,931 15,631 71,595 6,712 81,846 10,606 387 3,108 102,659 174,254 536 (2,990) 8,984 162,987 169,517 1,486 171,003 345,257 100 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements CONSOLIDATED BALANCE SHEET Assets Non-current assets Intangible assets Property, plant and equipment Equity-accounted investments Investments in securities Deferred tax Retirement benefits Trade and other receivables Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Liabilities Non-current liabilities Debt Trade and other payables Deferred tax Retirement benefits Decommissioning and other provisions Current liabilities Debt Trade and other payables Taxes payable Retirement benefits Decommissioning and other provisions Total liabilities Equity Share capital Shares held in trust Other reserves Retained earnings Equity attributable to Royal Dutch Shell plc shareholders Non-controlling interest Total equity Total liabilities and equity Signed on behalf of the Board /s/ Simon Henry Simon Henry Chief Financial Officer March 13, 2013 The Notes on pages 103 to 137 form an integral part of these Consolidated Financial Statements. reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements 101 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY $ MILLION Equity attributable to Royal Dutch Shell plc shareholders At January 1, 2012 Comprehensive income for the period Capital contributions from, and other changes in, non-controlling interest Dividends paid (see Note 24) Scrip dividends (see Note 24) Repurchases of shares Shares held in trust: net sales and dividends received Share-based compensation At December 31, 2012 At January 1, 2011 Comprehensive income for the period Capital contributions from, and other changes in, non-controlling interest Dividends paid (see Note 24) Scrip dividends (see Note 24) Repurchases of shares Shares held in trust: net (purchases)/sales and dividends received Share-based compensation At December 31, 2011 At January 1, 2010 Comprehensive income for the period Capital contributions from, and other changes in, non-controlling interest Dividends paid (see Note 24) Scrip dividends (see Note 24) Shares held in trust: net (purchases)/sales and dividends received Share-based compensation At December 31, 2010 Share capital Shares held in trust Other reserves (see Note 20) (see Note 22) (see Note 23) 536 (2,990) – – – 9 (3) – – 542 529 – – – 10 (3) – – 536 527 – – – 2 – – – – – – – 703 – (2,287) (2,789) – – – – – (201) – (2,990) (1,711) – – – – (1,078) – 8,984 586 – – (9) 3 – 457 10,021 10,094 (1,191) – – (10) 3 – 88 8,984 9,982 4 – – (2) – 110 Retained earnings 162,987 26,592 Total 169,517 27,178 Non- controlling interest 1,486 300 39 39 (10,955) (10,955) (61) (292) 3,565 (1,728) 150 (432) 180,218 140,179 30,918 3,565 (1,728) 853 25 188,494 148,013 29,727 41 41 (10,457) (10,457) 3,580 (1,106) 3,580 (1,106) 142 (310) 162,987 127,633 20,127 (59) (222) 169,517 136,431 20,131 – – – – 1,433 1,767 (348) 505 (438) – – – – 1,486 1,704 389 Total equity 171,003 27,478 (22) (11,247) 3,565 (1,728) 853 25 189,927 149,780 29,379 546 (10,895) 3,580 (1,106) (59) (222) 171,003 138,135 20,520 283 283 (10,196) (10,196) 69 (395) 352 (10,591) 612 1,521 199 612 443 309 – – – 612 443 309 529 (2,789) 10,094 140,179 148,013 1,767 149,780 F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S The Notes on pages 103 to 137 form an integral part of these Consolidated Financial Statements. 102 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements CONSOLIDATED STATEMENT OF CASH FLOWS Cash flow from operating activities Income for the period Adjustment for: Current taxation Interest expense (net) Depreciation, depletion and amortisation Net gains on sale of assets Increase in inventories Decrease/(increase) in accounts receivable (Decrease)/increase in accounts payable and accrued liabilities Share of profit of equity-accounted investments Dividends received from equity-accounted investments Deferred taxation and decommissioning and other provisions Other Net cash from operating activities (pre-tax) Taxation paid Net cash from operating activities Cash flow from investing activities Capital expenditure Investments in equity-accounted investments Proceeds from sale of assets Proceeds from sale of equity-accounted investments Proceeds from (purchases)/sale of securities (net) Interest received Net cash used in investing activities Cash flow from financing activities NOTES 2012 2011 $ MILLION 2010 26,840 31,185 20,474 22,722 1,543 14,615 (4,228) (1,746) 14,145 (9,008) (8,948) 10,573 461 201 67,170 (21,030) 46,140 (32,576) (3,028) 6,346 698 (86) 193 23,009 1,164 13,228 (4,485) (1,930) (10,109) 5,568 (8,737) 9,681 1,768 (949) 59,393 (22,622) 36,771 (26,301) (1,886) 6,990 468 90 196 16,384 842 15,595 (3,276) (2,888) (11,931) 8,890 (5,953) 6,519 (1,934) (10) 42,712 (15,362) 27,350 (26,940) (2,050) 3,325 3,591 (34) 136 (28,453) (20,443) (21,972) 4 4 Net (decrease)/increase in debt with maturity period within three months (165) (3,724) 4,647 Other debt: New borrowings Repayments Interest paid Change in non-controlling interest Cash dividends paid to: Royal Dutch Shell plc shareholders Non-controlling interest Repurchases of shares Shares held in trust: net (purchases)/sales and dividends received Net cash used in financing activities Currency translation differences relating to cash and cash equivalents Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 5,108 (4,960) (1,428) 23 (7,390) (292) (1,492) (34) (10,630) 201 7,258 11,292 18,550 1,249 (4,649) (1,665) 8 (6,877) (438) (1,106) (929) (18,131) (349) (2,152) 13,444 11,292 7,849 (3,240) (1,312) 381 (9,584) (395) – 187 (1,467) (186) 3,725 9,719 13,444 24 15 The Notes on pages 103 to 137 form an integral part of these Consolidated Financial Statements. reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 103 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 BASIS OF PREPARATION Under the provisions of the Companies Act 2006 and Article 4 of the International Accounting Standards (IAS) Regulation, the Consolidated Financial Statements of Royal Dutch Shell plc (the Company) and its subsidiaries (collectively known as Shell) have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. As applied to Shell, there are no material differences from IFRS as issued by the International Accounting Standards Board (IASB); therefore, the Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB. As described in the accounting policies in Note 2, the Consolidated Financial Statements have been prepared under the historical cost convention except for certain items measured at fair value. Those accounting policies have been applied consistently in all periods presented and there were no material changes during 2012. The Consolidated Financial Statements were approved and authorised for issue by the Board of Directors on March 13, 2013. Accounting standards not yet adopted Revised IAS 19 Employee Benefits was issued during 2011 and will be adopted, with retrospective effect, from 2013. The revision eliminates the use of the corridor method of accounting for actuarial gains and losses arising in connection with defined benefit plans and introduces changes to the way in which such plans are accounted for in income and other comprehensive income. As presented in Note 18, unrecognised net actuarial losses and past service costs were $19,266 million at December 31, 2012; after deferred taxation impacts of $5,521 million, Shell’s total equity would have been reduced by $13,745 million had the revised standard been applied at that date. The impact of the change on Shell’s income for 2011 and 2012 is not significant. IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and revised standards IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures were issued during 2011 and will be adopted in 2013. The standards reinforce the principles for determining when an investor controls another entity, amend in certain cases the accounting for arrangements where an investor has joint control and introduce changes to certain disclosures. The impact of the changes on the accounting for Shell’s interests is not significant. IFRS 13 Fair Value Measurement was issued during 2011 and will be adopted, with prospective effect, from 2013. The standard affects nearly all instances where assets and liabilities are currently recognised or disclosed at fair value, primarily by refining the measurement concept to represent an asset or liability’s exit value. The standard also introduces certain additional considerations to the measurement process. The impact of the changes for Shell is not significant. Revised standards IAS 32 Financial Instruments: Presentation and IFRS 7 Financial Instruments: Disclosures were issued during 2011 and will be adopted, with retrospective effect, in 2014 and 2013 respectively. The revisions amend the requirements for the offsetting of certain financial assets and financial liabilities and related disclosures. The impact of the changes is currently under review, although adoption of these revised standards will not affect Shell’s income for the period or total equity. IFRS 9 Financial Instruments, as issued in 2009 and revised in 2010, is required to be adopted by 2015. The standard’s impact on Shell is principally limited to its investments in securities, some of which may be measured differently under the standard; the full impact of the changes in accounting for financial instruments will not be known until the IASB’s project has been completed. 2 ACCOUNTING POLICIES Nature of the Consolidated Financial Statements The Consolidated Financial Statements are presented in US dollars (dollars) and include the financial statements of the Company and its subsidiaries, being those companies over which the Company, either directly or indirectly, has control through a majority of the voting rights or the right to exercise control or to obtain the majority of the benefits and be exposed to the majority of the risks. Subsidiaries are consolidated from the date on which control is obtained until the date that such control ceases, using consistent accounting policies. All inter-company balances and transactions, including unrealised profits arising from such transactions, are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Non-controlling interest represents the proportion of income, other comprehensive income and net assets in subsidiaries that is not attributable to the Company’s shareholders. Nature of operations and segmental reporting Shell is engaged in the principal aspects of the oil and gas industry in more than 70 countries and reports its business through three segments. Upstream combines the operating segments Upstream International and Upstream Americas, which have similar characteristics and are engaged in exploring for and recovering crude oil and natural gas; the liquefaction and transportation of gas; the extraction of bitumen from oil sands that F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 104 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 2 continued] is converted into synthetic crude oil; and wind energy. Downstream is engaged in manufacturing; distribution and marketing activities for oil products and chemicals; alternative energy (excluding wind); and CO2 management. Corporate represents the key support functions, comprising holdings and treasury, headquarters, central functions and Shell’s self-insurance activities. Integrated within the Upstream and Downstream segments are Shell’s trading activities. Sales between segments are based on prices generally equivalent to commercially available prices. Segment earnings are presented on a current cost of supplies basis (CCS earnings). On this basis, the purchase price of volumes sold during the period is based on the current cost of supplies during the same period after making allowance for the tax effect. CCS earnings therefore exclude the effect of changes in the oil price on inventory carrying amounts. Net capital investment is defined as capital expenditure as reported in the Consolidated Statement of Cash Flows, adjusted for: proceeds from disposals; exploration expense excluding exploration wells written off; investments in equity- accounted investments; and leases and other items. CCS earnings and net capital investment information are the dominant measures used by the Chief Executive Officer for the purposes of making decisions about allocating resources and assessing performance. Revenue recognition Revenue from sales of oil, natural gas, chemicals and all other products is recognised at the fair value of consideration received or receivable, after deducting sales taxes, excise duties and similar levies, when the significant risks and rewards of ownership have been transferred, which is when title passes to the customer. For sales by Upstream operations, this generally occurs when product is physically transferred into a vessel, pipe or other delivery mechanism; for sales by refining operations, it is either when product is placed onboard a vessel or offloaded from the vessel, depending on the contractually agreed terms; and for wholesale sales of oil products and chemicals it is either at the point of delivery or the point of receipt, depending on contractual conditions. Revenue resulting from the production of oil and natural gas from properties in which Shell has an interest with partners in joint ventures is recognised on the basis of Shell’s working interest (entitlement method). Revenue resulting from the production of oil and natural gas under production-sharing contracts is recognised for those amounts relating to Shell’s cost recoveries and Shell’s share of the remaining production. Gains and losses on derivative contracts and the revenue and costs associated with other contracts that are classified as held for trading purposes are reported on a net basis in the Consolidated Statement of Income. Purchases and sales of hydrocarbons under exchange contracts that are necessary to obtain or reposition feedstock for refinery operations are presented net in the Consolidated Statement of Income. Property, plant and equipment and intangible assets A – RECOGNITION Property, plant and equipment comprise assets owned by Shell, assets held by Shell under finance leases and assets operated by Shell as contractor in production-sharing contracts. They include rights and concessions in respect of properties with proved reserves (proved properties) and with no proved reserves (unproved properties). Property, plant and equipment, including expenditure on major inspections, and intangible assets are initially recognised in the Consolidated Balance Sheet at cost where it is probable that they will generate future economic benefits. This includes capitalisation of decommissioning and restoration costs associated with provisions for asset retirement (see “Provisions”), certain development costs (see “Research and development”) and the effects of associated cash flow hedges (see “Derivative contracts”) as applicable. The accounting for exploration costs is described separately below (see “Exploration costs”). Intangible assets include goodwill, capitalised software costs and trademarks. Interest is capitalised, as an increase in property, plant and equipment, on major capital projects during construction. Property, plant and equipment and intangible assets are subsequently carried at cost less accumulated depreciation, depletion and amortisation (including any impairment). Gains and losses on disposals are determined by comparing the proceeds with the carrying amounts of assets sold and are recognised in income, within interest and other income. B – DE PRE C IA TION , D E P LE TION A N D A M ORTISA TION Property, plant and equipment related to hydrocarbon production activities are depreciated on a unit-of-production basis over the proved developed reserves of the field concerned, except in the case of assets whose useful lives differ from the lifetime of the field, in which case the straight-line method is applied. Rights and concessions in respect of proved properties are depleted on the unit-of-production basis over the total proved reserves of the relevant area. Where individually insignificant, unproved properties may be grouped and depreciated based on factors such as the average concession term and past experience of recognising proved reserves. Other property, plant and equipment and intangible assets are depreciated and amortised on a straight-line basis over their estimated useful lives, except for goodwill, which is not amortised. They include major inspection costs, which are depreciated over the estimated period before the next planned major inspection (three to five years), and the following: Asset type Upgraders Refineries and chemical plants Retail service stations Property, plant and equipment held under finance leases Software Trademarks Useful life 30 years 20 years 15 years lease term 5 years 40 years reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 105 [Note 2 continued] Estimates of the useful lives and residual values of property, plant and equipment and intangible assets are reviewed annually and adjusted if appropriate. C – I M P A I R M E N T The carrying amount of goodwill is tested for impairment annually; in addition, assets other than unproved properties (see “Exploration costs”) are tested for impairment whenever events or changes in circumstances indicate that the carrying amounts for those assets may not be recoverable. If assets are determined to be impaired, the carrying amounts of those assets are written down to their recoverable amount, which is the higher of fair value less costs to sell and value-in-use. Value-in-use is determined as the amount of estimated risk-adjusted discounted future cash flows. For this purpose, assets are grouped into cash- generating units based on separately identifiable and largely independent cash inflows. Estimates of future cash flows used in the evaluation of impairment of assets are made using management’s forecasts of commodity prices, market supply and demand, product margins and, in the case of exploration and production assets, expected production volumes. The latter takes into account assessments of field and reservoir performance and includes expectations about both proved reserves and volumes that are expected to constitute proved reserves in the future (unproved volumes), which are risk-weighted utilising geological, production, recovery and economic projections. Cash flow estimates are risk-adjusted to reflect local conditions as appropriate and discounted at a rate based on Shell’s marginal cost of debt. Impairments, except those related to goodwill, are reversed as applicable to the extent that the events or circumstances that triggered the original impairment have changed. Impairment charges and reversals are reported within depreciation, depletion and amortisation. On reclassification as held for sale, the carrying amounts of intangible assets and property, plant and equipment are also reviewed and, where appropriate, written down to their fair value less costs to sell. No further provision for depreciation, depletion or amortisation is charged. Exploration costs Oil and natural gas exploration costs are accounted for under the successful efforts method: exploration costs are recognised in income when incurred, except that exploratory drilling costs are included in property, plant and equipment pending determination of proved reserves. Exploration costs capitalised in respect of exploration wells that are more than 12 months old are written off unless (a) proved reserves are booked, or (b) (i) they have found commercially producible quantities of reserves, and (ii) they are subject to further exploration or appraisal activity in that either drilling of additional exploratory wells is underway or firmly planned for the near future or other activities are being undertaken to sufficiently progress the assessing of reserves and the economic and operating viability of the project. Joint ventures and associates Arrangements under which Shell has contractually agreed to share control with another party or parties are joint ventures, which may be incorporated (jointly controlled entities) or unincorporated (jointly controlled assets). Investments in entities over which Shell has the right to exercise significant influence but not control are classified as associates. Interests in jointly controlled entities and associates are accounted for using the equity method, under which the investment is initially recognised at cost and subsequently adjusted for the Shell share of post-acquisition income less dividends received and the Shell share of other comprehensive income and other movements in equity, together with any loans of a long-term investment nature. Interests in jointly controlled assets are recognised by including the Shell share of assets, liabilities, income and expenses on a line-by-line basis. Where necessary, adjustments are made to the financial statements of joint ventures and associates to bring the accounting policies used into line with those of Shell. In an exchange of assets and liabilities for an interest in a jointly controlled entity, the non-Shell share of any excess of the fair value of the assets and liabilities transferred over the pre-exchange carrying amounts is recognised in income. Unrealised gains on other transactions between Shell and its joint ventures and associates are eliminated to the extent of Shell’s interest in them; unrealised losses are treated similarly but may also result in an assessment of whether the asset transferred is impaired. Inventories Inventories are stated at cost or net realisable value, whichever is lower. Cost comprises direct purchase costs (including transportation), cost of production and manufacturing and taxes, and is determined using the first-in, first-out (FIFO) method for oil and chemicals and by the weighted average cost method for materials. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S Income taxes The charge for current tax is calculated based on the income reported by the Company and its subsidiaries, as adjusted for items that are non-taxable or disallowed and using rates that have been enacted or substantively enacted by the balance sheet date. Deferred taxation is determined, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Balance Sheet. Deferred tax assets and liabilities are calculated using the enacted or substantively enacted rates that are expected to apply when the asset or liability is recovered. They are not recognised where they arise on the initial recognition of an asset or liability in a transaction (other than in a 106 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 2 continued] business combination) that, at the time of the transaction, affects neither accounting nor taxable profit, or in respect of taxes on possible future distributions of retained earnings of subsidiaries and equity-accounted investments where the timing of the distribution can be controlled by Shell and it is probable that the retained earnings will be reinvested by the companies concerned. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Income taxes are recognised in income except when they relate to items recognised in other comprehensive income, in which case the tax is also recognised in other comprehensive income. Income tax assets and liabilities are presented separately in the Consolidated Balance Sheet except where there is a right of set-off within fiscal jurisdictions and an intention to settle such balances on a net basis. Employee benefits A – E M P LOY E E RE TIRE M E N T P LA N S ( P E N S I ON S ) Retirement plans that define the amount of pension benefit to be provided (“defined benefit plans”) generally are funded by payments to independent trusts. Where a plan is not funded, a provision is made. Valuations of both funded and unfunded plans are carried out annually by independent actuaries, using the projected unit credit method to calculate the defined benefit obligation. Pension expense principally represents the increase in the actuarial present value of the obligation for pension benefits based on employee service during the year and the interest on this obligation in respect of employee service in previous years, net of the expected return on plan assets. Actuarial gains and losses are accounted for using the corridor method. Under this method, to the extent that any cumulative unrecognised actuarial gain or loss exceeds 10% of the greater of the present value of the defined benefit obligation and the fair value of plan assets, that excess is recognised in income over the expected average remaining working lives of the employees participating in the plan. Otherwise, the actuarial gain or loss is not recognised. For retirement plans where benefits depend solely on the amount contributed to the employee’s account and the investment returns earned on these contributions (“defined contribution plans”), pension expense is the amount of employer contributions payable for the period. B – RE TIRE ME N T BE N E FITS OTHE R THA N P E N SION S Retirement healthcare and life insurance benefits are provided to certain retirees, the entitlement to which is usually dependent upon the employee remaining in service up to retirement age and the completion of a minimum service period. These plans are not funded and a provision is made. Valuations of benefits are carried out annually by independent actuaries, using the projected unit credit method to calculate the defined benefit obligation. The expected cost of retirement benefits other than pensions is accrued over the periods employees render service. Actuarial gains and losses are accounted for using the corridor method, as described above. C – S HA RE - B A S E D C OM P E N S A TI ON P LA N S The fair value of share-based compensation for the Performance Share Plan (the main equity-settled plan) is estimated using a Monte Carlo pricing model and is recognised in income from the date of grant over the vesting period with a corresponding increase directly in equity. The periodic change in the fair value of share-based compensation for cash-settled plans is recognised in income with a corresponding change in liabilities. Leases Agreements under which payments are made to owners in return for the right to use an asset for a period are accounted for as leases. Leases that transfer substantially all the risks and rewards of ownership are recognised at the commencement of the lease term as finance leases within property, plant and equipment and debt at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Finance lease payments are apportioned between interest expense and repayments of debt. All other leases are recorded as operating leases, and the cost is recognised in income on a straight-line basis. Financial instruments and other derivative contracts A – FIN A N C I A L A S S E TS Investments in securities Investments in securities (also referred to as “securities”) comprise equity and debt securities classified on initial recognition as available-for-sale and are carried at fair value, except where their fair value cannot be measured reliably, in which case they are carried at cost, less any impairment. Unrealised holding gains and losses other than impairments are recognised in other comprehensive income, except for translation differences arising on foreign currency debt securities, which are recognised in income. On maturity or disposal, net gains and losses previously deferred in accumulated other comprehensive income are recognised in income. Interest income on debt securities is recognised in income using the effective interest method. Dividends on equity securities are recognised in income when receivable. reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 107 [Note 2 continued] Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand, including offsetting bank overdrafts, short-term deposits, money market funds and similar instruments that have a maturity of three months or less at the date of acquisition. Receivables Receivables are recognised initially at fair value based on amounts exchanged and subsequently at amortised cost less any impairment. B – FIN A N C I A L LI A B I LITIE S Debt and accounts payable are recognised initially at fair value based on amounts exchanged, net of transaction costs, and subsequently at amortised cost, except for fixed rate debt subject to fair value hedging, which is remeasured for the hedged risk (see “Derivative contracts”). Interest expense on debt is accounted for using the effective interest method and, other than interest capitalised, is recognised in income. C – D E R I V A T I V E C O N T R A C T S Derivatives are used in the management of interest rate risk, foreign currency risk and commodity price risk, and in the management of foreign currency cash balances. These derivative contracts are recognised at fair value. Those derivatives qualifying and designated as hedges are either: (i) a “fair value” hedge of the change in fair value of a recognised asset or liability or an unrecognised firm commitment, or (ii) a “cash flow” hedge of the change in cash flows to be received or paid relating to a recognised asset or liability or a highly probable forecasted transaction. A change in the fair value of a hedging instrument designated as a fair value hedge is recognised in income, together with the consequential adjustment to the carrying amount of the hedged item. The effective portion of a change in fair value of a derivative designated as a cash flow hedge is recognised in other comprehensive income until the hedged transaction occurs; any ineffective portion is recognised in income. Where the hedged item is a non-financial asset or liability, the amount in accumulated other comprehensive income is transferred to the initial carrying amount of the asset or liability; for other hedged items, the amount in accumulated other comprehensive income is recognised in income when the hedged transaction affects income. All relationships between hedging instruments and hedged items are documented, as well as risk management objectives and strategies for undertaking hedge transactions. The effectiveness of a hedge is also continually assessed and, when it ceases, hedge accounting is discontinued. Gains and losses on derivatives not qualifying and designated as hedges, including forward sale and purchase contracts for commodities in trading operations that may be settled by the physical delivery or receipt of the commodity, are recognised in income. Unless designated as hedging instruments, contracts to sell or purchase non-financial items that can be settled net as if the contracts were financial instruments and that do not meet expected own use requirements (typically, forward sale and purchase contracts for commodities in trading operations), and contracts that are or contain written options, are recognised at fair value; associated gains and losses are recognised in income. Derivatives embedded within contracts that are not already required to be recognised at fair value, and that are not closely related to the host contract in terms of economic characteristics and risks, are separated from their host contract and recognised at fair value; associated gains and losses are recognised in income. Fair value measurements Fair value measurements are estimates of the amounts for which assets or liabilities (generally financial instruments and other derivative contracts) could be exchanged at the measurement date, based on the assumption that such exchanges take place between knowledgeable, unrelated parties in unforced transactions. Where available, fair value measurements are derived from prices quoted in active markets for identical assets or liabilities. In the absence of such information, other observable inputs are used to estimate fair value. Inputs derived from external sources are corroborated or otherwise verified, as appropriate. In the absence of publicly available information, fair value is determined using estimation techniques that take into account market perspectives relevant to the asset or liability, in as far as they can reasonably be ascertained, based on predominantly unobservable inputs. For derivative contracts where publicly available information is not available and for share-based compensation plans, fair value estimations are generally determined using models and other valuation methods, the key inputs for which include future prices, volatility, price correlation, counterparty credit risk and market liquidity, as appropriate; for other assets and liabilities, fair value estimations are generally based on the net present value of expected future cash flows. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S Provisions Provisions are recognised at the balance sheet date at management’s best estimate of the expenditure required to settle the present obligation. Non-current amounts are discounted at a rate intended to reflect the time value of money. Specific details for decommissioning and restoration costs are described below. The carrying amounts of provisions are regularly reviewed and adjusted for new facts or changes in law or technology. Provisions for decommissioning and restoration costs, which arise principally in connection with hydrocarbon production facilities and pipelines, are measured on the basis of current requirements, technology and price levels; the present value is calculated using amounts discounted over the useful economic life of the assets. The liability is recognised (together with a corresponding amount as part of the related property, plant and 108 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 2 continued] equipment) once an obligation crystallises in the period when a reasonable estimate can be made. The effects of changes resulting from revisions to the timing or the amount of the original estimate of the provision are reflected on a prospective basis, generally by adjustment to the carrying amount of the related property, plant and equipment. Other provisions are recognised in income in the period in which an obligation arises and the amount can be reasonably estimated. Provisions are measured based on current legal requirements and existing technology where applicable. Recognition of any joint and several liability is based on management’s best estimate of the final pro rata share of the liability. Provisions are determined independently of expected insurance recoveries. Recoveries are recognised and reported as separate events and brought into account when virtually certain of realisation. Shares held in trust Shares in the Company held by employee share ownership trusts are not included in assets but are reflected at cost as a deduction from equity as shares held in trust. Research and development Development costs that are expected to generate probable future economic benefits are capitalised as intangible assets. All other research and development expenditure is recognised in income as incurred. Acquisitions and disposals of interests in a business Assets acquired and liabilities assumed when control is obtained over a business are recognised at their fair value at the date of the acquisition; the amount of the purchase consideration above this value is recognised as goodwill, with any non-controlling interest recognised as the proportionate share of the identifiable net assets. Acquisitions of the non-controlling interest in subsidiaries and disposals of shares in subsidiaries while retaining control are accounted for as transactions within equity. The difference between the purchase consideration or disposal proceeds and the relevant proportion of the non-controlling interest is reported in retained earnings as a movement in equity attributable to the Company’s shareholders. Currency translation Foreign currency transactions are translated using the exchange rate at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at quarter-end exchange rates of monetary assets and liabilities denominated in foreign currencies (including those in respect of inter-company balances unless related to quasi- equity loans) are recognised in income, except when deferred in equity as qualifying cash flow hedges, and presented within interest and other income or within purchases where not related to financing. Share capital issued in currencies other than the dollar is translated at the exchange rate at the date of issue. On consolidation, assets and liabilities of non-dollar entities are translated to dollars at year-end rates of exchange, while their statements of income, other comprehensive income and cash flows are translated at quarterly average rates. The resulting translation differences are recognised as currency translation differences within other comprehensive income. Upon divestment of all or part of an interest in, or upon liquidation of, an entity, cumulative currency translation differences related to that entity are generally recognised in income. Consolidated Statement of Income presentation Purchases reflect all costs related to the acquisition of inventories, the effects of the changes therein, and include supplies used for conversion into finished or intermediate products. Production and manufacturing expenses are the costs of operating, maintaining and managing production and manufacturing assets. Selling, distribution and administrative expenses include direct and indirect costs of marketing and selling products. 3 KEY ACCOUNTING ESTIMATES AND JUDGEMENTS In order to prepare the Consolidated Financial Statements in conformity with IFRS, management has to make estimates and judgements. The matters described below are considered to be the most important in understanding the judgements that are involved in preparing these statements and the uncertainties that could impact the amounts reported in the results of operations, financial condition and cash flows. Shell’s accounting policies are described in Note 2. Estimation of proved oil and gas reserves Unit-of-production depreciation, depletion and amortisation charges are principally measured based on management’s estimates of proved developed oil and gas reserves. Estimates of proved reserves are also used in the determination of impairment charges and reversals. Also, exploration drilling costs are capitalised pending the results of further exploration or appraisal activity, which may take several years to complete and before any related proved reserves can be booked. Proved reserves are estimated by reference to available geological and engineering data and only include volumes for which access to market is assured with reasonable certainty. Estimates of proved reserves are inherently imprecise, require the application of judgement and are subject to regular revision, either upward or downward, based on new information such as from the drilling of additional wells, observation of long-term reservoir performance under producing conditions and changes in economic factors, including product prices, contract terms or development plans. reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 109 [Note 3 continued] Changes to estimates of proved developed reserves affect prospectively the amounts of depreciation, depletion and amortisation charged and, consequently, the carrying amounts of exploration and production assets. It is expected, however, that in the normal course of business the diversity of the asset portfolio will limit the effect of such revisions. The outcome of, or assessment of plans for, exploration or appraisal activity may result in the related capitalised exploration drilling costs being recorded in income in that period. Information about the carrying amounts of exploration and production assets and the amounts charged to income, including depreciation, depletion and amortisation, is presented in Note 9. Impairment of assets For the purposes of determining whether impairment of assets has occurred, and the extent of any impairment or its reversal, the key assumptions management uses in estimating risk-adjusted future cash flows for value-in-use measures are future oil and gas prices, expected production volumes and refining margins appropriate to the local circumstances and environment. These assumptions and the judgements of management that are based on them are subject to change as new information becomes available. Changes in economic conditions can also affect the rate used to discount future cash flow estimates. Future price assumptions tend to be stable because management does not consider short-term increases or decreases in prices as being indicative of long-term levels, but they are nonetheless subject to change. Expected production volumes, which comprise proved reserves and unproved volumes, are used for impairment testing because management believes this to be the most appropriate indicator of expected future cash flows. As discussed in “Estimation of proved oil and gas reserves”, reserves estimates are inherently imprecise. Furthermore, projections about unproved volumes are based on information that is necessarily less robust than that available for mature reservoirs. Due to the nature and geographical spread of the business activity in which those assets are used, it is typically not practicable to estimate the likelihood or extent of impairments under different sets of assumptions. The discount rate applied is reviewed annually, although it has been stable in recent years. Changes in assumptions could affect the carrying amounts of assets, and impairment charges and reversals will affect income. Information about the carrying amounts of assets and impairments is presented in Notes 8 and 9. Defined benefit pension plans The amounts reported for employee retirement plans are presented in Note 18. Defined benefit plan assets and obligations are subject to significant volatility as market values and actuarial assumptions change. Under the accounting policy applied, volatility in the amounts recognised in the Consolidated Financial Statements is reduced as the methodology provides for unexpected changes in the amount of plan assets and benefit obligation (actuarial gains and losses) to be amortised over the expected average remaining working lives of the employees participating in the plan rather than being recognised immediately in the Consolidated Financial Statements. Local trustees manage the pension funds and set the required contributions based on independent actuarial valuation in accordance with local regulations rather than the IFRS measures. Pension expense for these plans principally represents the change in actuarial present value of the obligation for benefits based on employee service during the year and the interest on the obligation in respect of employee service in previous years, net of the expected return on plan assets. The calculations are sensitive to changes in the assumptions made regarding future outcomes. Substantial judgement is required in determining the assumptions, which vary for the different plans to reflect local conditions but are determined under a common process in consultation with independent actuaries. The principal assumptions and their bases include: ▪ rates of increase in pensionable remuneration: historical outturns and management’s long-term expectation; ▪ mortality rates: the latest available standard mortality tables for the individual countries concerned. The assumptions for each country are reviewed each year and are adjusted where necessary to reflect changes in fund experience and actuarial recommendations; ▪ discount rates used to convert future cash flows to current values: prevailing long-term AA corporate bond yields, which can be volatile, chosen to match the duration of the relevant obligation; and ▪ expected rates of return on plan assets: a projection of real long-term bond yields and an equity risk premium, which are combined with local inflation assumptions and applied to the actual asset mix of each plan. The amount of the expected return on plan assets is calculated using the expected rate of return for the year and the fair value of assets at the beginning of the year. The assumptions are reviewed annually. The weighted average values applicable for the principal plans are presented in Note 18, together with information on sensitivities. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S Decommissioning and restoration costs Provisions are recognised for the future decommissioning and restoration of hydrocarbon production facilities and pipelines at the end of their economic lives. The estimated cost is recognised in income over the life of the proved developed reserves on a unit-of-production basis or on a straight-line basis, as applicable. Changes in the estimates of costs to be incurred, proved developed reserves or in the rate of production will therefore impact income, generally over the remaining economic life of the related assets. 110 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 3 continued] Estimates of the amounts of provisions recognised are based on current legal and constructive requirements, technology and price levels. Because actual outflows can differ from estimates due to changes in laws, regulations, public expectations, technology, prices and conditions, and can take place many years in the future, the carrying amounts of provisions are regularly reviewed and adjusted to take account of such changes. The discount rate applied is reviewed annually, although it has been stable in recent years. Information about decommissioning and restoration provisions is presented in Note 19. Taxation Tax liabilities are recognised when it is considered probable that there will be a future outflow of funds to a taxing authority. In such cases, provision is made for the amount that is expected to be settled, where this can be reasonably estimated. This requires the application of judgement as to the ultimate outcome, which can change over time depending on facts and circumstances. A change in estimate of the likelihood of a future outflow and/or in the expected amount to be settled would be recognised in income in the period in which the change occurs. Deferred tax assets are recognised only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse, and a judgement as to whether or not there will be sufficient taxable profits available to offset the tax assets when they do reverse. This requires assumptions regarding future profitability and is therefore inherently uncertain. To the extent assumptions regarding future profitability change, there can be an increase or decrease in the amounts recognised in respect of deferred tax assets as well as in the amounts recognised in income in the period in which the change occurs. Information about taxation charges, deferred tax liabilities and recognised and unrecognised deferred tax assets is presented in Note 17. 4 SEGMENT INFORMATION A – Income information by business segment 2012 Revenue and other income Revenue Third party Inter-segment Share of profit/(loss) of equity-accounted investments Interest and other income Total Earnings on a current cost of supplies basis Other items Depreciation, depletion and amortisation charge of which: Impairment losses Impairment reversals Interest expense Taxation charge/(credit) 2011 Revenue and other income Revenue Third party Inter-segment Share of profit/(loss) of equity-accounted investments Interest and other income Total Earnings on a current cost of supplies basis Other items Depreciation, depletion and amortisation charge of which: Impairment losses Impairment reversals Interest expense Taxation charge/(credit) Upstream Downstream Corporate Total $ MILLION 43,431 51,119 8,001 4,836 423,638 772 1,240 305 22,162 5,350 11,387 980 – 774 3,083 138 24 89 23,630 1,129 84 – (293) 458 (209) 145 3 – 894 (1,310) 467,153 8,948 5,599 481,700 27,303 14,615 1,121 24 1,757 23,449 $ MILLION Upstream Downstream Corporate Total 42,260 49,431 7,127 4,150 427,864 782 1,896 1,106 24,455 4,289 8,827 325 – 756 4,251 1,194 4 83 23,994 1,632 47 – (286) 325 86 150 – – 534 (1,151) 470,171 8,737 5,581 484,489 28,830 13,228 1,519 4 1,373 24,475 reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 111 [Note 4 continued] 2010 Revenue and other income Revenue Third party Inter-segment Share of profit/(loss) of equity-accounted investments Interest and other income Total Earnings on a current cost of supplies basis Other items Depreciation, depletion and amortisation charge of which: Impairment losses Impairment reversals Interest expense Taxation charge/(credit) Upstream Downstream Corporate Total $ MILLION 32,395 35,803 4,900 3,616 335,604 612 1,167 418 57 – (114) 109 15,935 2,950 91 11,144 1,724 40 663 14,822 4,254 1,192 8 84 998 197 39 – 249 (950) 368,056 5,953 4,143 378,152 18,976 15,595 2,955 48 996 14,870 Segment earnings on a current cost of supplies basis reconcile to income for the period as follows: Total segment earnings on a current cost of supplies basis Current cost of supplies adjustment: Purchases Taxation Share of (loss)/profit of equity-accounted investments Income for the period 2012 27,303 2011 28,830 $ MILLION 2010 18,976 (514) 165 (114) 2,825 (789) 319 1,789 (510) 219 26,840 31,185 20,474 B – Net capital investment and equity-accounted investments by business segment NET CAPITAL INVESTMENT Net capital investment Upstream Downstream Corporate Total Proceeds from disposals Capital investment Exploration expense, excluding exploration wells written off Investments in equity-accounted investments Leases and other adjustments Capital expenditure EQUITY-ACCOUNTED INVESTMENTS Upstream Downstream Corporate Total 2012 2011 2010 $ MILLION 25,320 4,275 208 29,803 6,958 36,761 (2,114) (3,028) 957 32,576 19,083 4,342 78 23,503 7,548 31,051 (1,462) (1,886) (1,402) 26,301 Dec 31, 2012 21,766 16,576 8 21,222 2,358 100 23,680 6,882 30,562 (1,214) (2,050) (358) 26,940 $ MILLION Dec 31, 2011 21,683 16,303 4 38,350 37,990 F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 112 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 4 continued] C – Information by geographical area 2012 Third-party revenue, by origin Intangible assets, property, plant and equipment and equity-accounted Asia, Oceania, Africa 156,310 Europe 184,223 USA 91,571 Other Americas 35,049 $ MILLION Total 467,153 investments at December 31 31,275 91,602 51,865 40,371 215,113 2011 Third-party revenue, by origin Intangible assets, property, plant and equipment and equity-accounted Asia, Oceania, Africa 148,260 Europe 187,498 USA 91,946 Other Americas 42,467 $ MILLION Total 470,171 investments at December 31 27,509 83,409 44,234 39,440 194,592 2010 Third-party revenue, by origin Intangible assets, property, plant and equipment and equity-accounted Asia, Oceania, Africa 110,955 Europe 137,359 USA 77,660 Other Americas 42,082 $ MILLION Total 368,056 investments at December 31 28,580 76,553 39,934 36,091 181,158 5 EMPLOYEES, DIRECTORS AND SENIOR MANAGEMENT A – Employee expense Remuneration Social law taxes Retirement benefits (see Note 18) Share-based compensation (see Note 22) Total 2012 11,133 789 2,502 909 2011 11,158 774 1,804 754 $ MILLION 2010 10,667 758 1,980 701 15,333 14,490 14,106 In addition, redundancy costs in 2012 were $114 million (2011: $373 million; 2010: $142 million). See also Note 19. B – Average employee numbers Upstream Downstream Corporate Total Employees working in business service centres are included in the Corporate segment. 2012 2011 2010 THOUSAND 26 48 13 87 27 51 12 90 26 59 12 97 reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 113 [Note 5 continued] C – Remuneration of Directors and Senior Management Short-term benefits Retirement benefits Share-based compensation Realised gains on exercise of share options 2012 24.8 3.4 47.2 5.0 2011 27.3 3.2 36.0 2.1 $ MILLION 2010 27.8 2.9 22.6 2.6 Directors and Senior Management comprise the members of the Executive Committee and the Non-executive Directors of the Company. Short-term benefits comprise salaries and fees, annual bonuses (recognised in the period for which performance is assessed), other benefits and employer social security contributions. Retirement benefits comprise employer contributions. Share-based compensation in 2012 includes exceptional costs recognised in respect of an Executive Director who stood down during the year. In addition to the amounts presented above for 2012 are termination and related amounts of $5.9 million in respect of the Executive Director who stood down during the year and gains of $2.9 million arising on the exercise of share options after standing down. 6 INTEREST AND OTHER INCOME Interest income Dividend income (from investments in securities) Net gains on sale of assets Foreign exchange gains/(losses) on financing activities Other Total 2012 214 799 4,228 194 164 5,599 2011 209 830 4,485 63 (6) $ MILLION 2010 153 399 3,276 (17) 332 5,581 4,143 Net gains on sale of assets in 2012 arose from divestments of interests and other portfolio transactions including Upstream interests in Australia, Nigeria and the USA (2011: Upstream interests in the USA, Nigeria, Brazil and Cameroon and Downstream interests in Chile; 2010: Upstream interests in Australia, Nigeria and the USA). Other net foreign exchange losses of $67 million (2011: $31 million losses; 2010: $18 million gains) are included in purchases. 7 INTEREST EXPENSE Interest incurred and similar charges Less: interest capitalised Other net fair value losses/(gains) on fair value hedges of debt Accretion expense (see Note 19) Total The rate applied in determining the amount of interest capitalised in 2012 was 3% (2011: 3%; 2010: 3%). 2012 1,251 (567) 210 863 1,757 2011 1,292 (674) (83) 838 1,373 $ MILLION 2010 1,231 (969) (13) 747 996 F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 114 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements 8 INTANGIBLE ASSETS 2012 Cost At January 1 Additions Sales, retirements and other movements Currency translation differences At December 31 Depreciation, depletion and amortisation, including impairments At January 1 Charge for the year Sales, retirements and other movements Currency translation differences At December 31 Net carrying amount at December 31 2011 Cost At January 1 Additions Sales, retirements and other movements Currency translation differences At December 31 Depreciation, depletion and amortisation, including impairments At January 1 Charge for the year Sales, retirements and other movements Currency translation differences At December 31 Net carrying amount at December 31 Goodwill Software and other $ MILLION Total 2,980 4,411 7,391 – (51) 26 228 (166) 74 228 (217) 100 2,955 4,547 7,502 360 39 (63) 4 340 2,615 2,510 2,870 336 (199) 45 2,692 1,855 375 (262) 49 3,032 4,470 Goodwill Software and other $ MILLION Total 3,383 – (358) (45) 2,980 393 31 (62) (2) 360 2,620 4,429 7,812 291 (241) (68) 291 (599) (113) 4,411 7,391 2,380 2,773 350 (177) (43) 2,510 1,901 381 (239) (45) 2,870 4,521 Goodwill at December 31, 2012 and 2011, principally related to Pennzoil-Quaker State Company, a lubricants business in the Downstream segment based largely in North America. For impairment testing purposes, cash flow projections for this business reflected long-term growth rates that were assumed to be equal to the average expected inflation rate for the USA (2012: 2.0%; 2011: 2.0%) and were adjusted for a variety of risks, in particular volume and margin deterioration. The nominal pre-tax discount rate applied was 6% (2011: 6%). 9 PROPERTY, PLANT AND EQUIPMENT 2012 Cost At January 1 Additions Sales, retirements and other movements Currency translation differences At December 31 Depreciation, depletion and amortisation, including impairments At January 1 Charge for the year Sales, retirements and other movements Currency translation differences At December 31 Net carrying amount at December 31 Exploration and production assets Exploration Manufacturing and evaluation Production and distribution Other Total $ MILLION 28,351 11,754 (7,473) 239 32,871 2,351 1,218 (1,477) 18 2,110 30,761 175,065 18,366 1,939 3,481 198,851 96,794 9,303 (2,163) 2,196 106,130 92,721 65,412 2,980 (1,622) 690 67,460 30,377 2,660 (1,892) 468 31,613 35,847 26,729 1,913 (2,742) 671 26,571 13,954 1,059 (1,744) 338 13,607 12,964 295,557 35,013 (9,898) 5,081 325,753 143,476 14,240 (7,276) 3,020 153,460 172,293 reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 115 [Note 9 continued] 2011 Cost At January 1 Additions Sales, retirements and other movements Currency translation differences At December 31 Depreciation, depletion and amortisation, including impairments At January 1 Charge for the year Sales, retirements and other movements Currency translation differences At December 31 Net carrying amount at December 31 Exploration and production assets Exploration Manufacturing and evaluation Production and distribution Other Total $ MILLION 26,052 7,971 (5,451) (221) 28,351 2,095 595 (315) (24) 2,351 26,000 166,345 11,859 (1,363) (1,776) 175,065 94,944 7,814 (5,008) (956) 96,794 78,271 65,908 3,919 (3,722) (693) 65,412 30,797 3,359 (3,353) (426) 30,377 35,035 27,220 2,950 (2,644) (797) 26,729 14,984 1,079 (1,697) (412) 13,954 12,775 285,525 26,699 (13,180) (3,487) 295,557 142,820 12,847 (10,373) (1,818) 143,476 152,081 The net carrying amount at December 31, 2012, includes $35,429 million (2011: $24,494 million) of assets in the course of construction. This amount excludes exploration and evaluation assets. The minimum contractual commitments for capital expenditure at December 31, 2012, amounted to $9.3 billion (2011: $4.9 billion). Exploration and production assets at December 31, 2012, include rights and concessions in respect of proved and unproved properties of $29,842 million (2011: $26,422 million). Exploration and evaluation assets principally include rights and concessions in respect of unproved properties and capitalised exploration drilling costs. The net carrying amounts at December 31 include assets held under finance leases of: Exploration and production assets Manufacturing and distribution Other Total The depreciation, depletion and amortisation charge for the year includes impairment losses and reversals as follows: 2012 1,618 813 618 3,049 $ MILLION 2011 1,759 802 574 3,135 Impairment losses Exploration and production assets Manufacturing and distribution Other Total Impairment reversals Exploration and production assets Manufacturing and distribution Other Total 2012 2011 2010 $ MILLION 940 49 93 1,082 – 23 1 24 317 1,134 36 1,487 – 4 – 4 1,620 1,140 33 2,793 40 7 1 48 Impairment losses and reversals have been recognised in the year in respect of a number of cash-generating units, although no single instance is individually significant. Impairment charges were driven generally by changes in development and production plans in Upstream and, in 2011 and 2010, by lower refining margins in Downstream. Information on the segments affected is presented in Note 4. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 116 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 9 continued] Capitalised exploration drilling costs were as follows: At January 1 Additions pending determination of proved reserves Amounts charged to expense Reclassifications to productive wells on determination of proved reserves Other movements, including acquisitions, disposals and currency translation differences At December 31 2012 5,298 6,395 (990) (2,748) (69) 7,886 2011 4,218 4,195 (804) (2,022) (289) 5,298 $ MILLION 2010 3,614 3,141 (822) (1,779) 64 4,218 With effect from 2012, amounts charged to expense include expenditures capitalised and expensed in the same year. Comparative information is reclassified. Exploration drilling costs capitalised for periods greater than one year at December 31, analysed according to the most recent year of activity, are as follows: Between one and five years Between six and ten years Total 2012 Number of wells 154 36 190 $ million 2,118 508 2,626 Amounts capitalised for periods greater than one year at December 31, 2012, comprise $1,174 million relating to 22 projects where drilling activities were underway or firmly planned for the future and $1,452 million relating to 22 projects awaiting development concepts, and are analysed according to the most recent year of activity, as follows: Between one and five years Between six and ten years Total 2012 Number $ million of projects 2,536 90 2,626 41 3 44 10 JOINT VENTURES AND ASSOCIATES A – Information on the Shell share of equity-accounted investments Jointly controlled Jointly controlled Jointly controlled 2012 2011 $ MILLION 2010 Revenue Income for the period entities Associates Total entities Associates Total entities Associates Total 72,740 4,071 39,991 112,731 4,877 8,948 66,349 4,781 36,688 103,037 3,956 8,737 44,641 3,643 27,759 72,400 2,310 5,953 Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Total assets less total liabilities Dec 31, 2012 $ MILLION Dec 31, 2011 Jointly controlled entities Associates 12,804 34,228 47,032 9,114 12,114 21,228 25,804 7,936 27,315 35,251 7,498 15,207 22,705 12,546 Jointly controlled Total 20,740 61,543 82,283 16,612 27,321 43,933 38,350 entities Associates Total 14,048 30,689 44,737 8,953 11,246 20,199 24,538 7,809 21,857 27,467 58,156 35,276 80,013 7,078 16,031 14,746 25,992 21,824 42,023 13,452 37,990 reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 117 [Note 10 continued] B – Major investments in joint ventures and associates Description Country of incorporation Shell interest (%) Fair value ($ million) DECEMBER 31, 2012 Segment Upstream Downstream Name Aera Arrow Brunei LNG Brunei Shell NAM Nigeria LNG Oman LNG Qatargas 4 LNG Sakhalin Energy Woodside CNOOC and Shell Jointly controlled entity Jointly controlled entity Associate Jointly controlled entity USA Australia Brunei Brunei Jointly controlled entity The Netherlands Associate Associate Associate Associate Associate Nigeria Oman Qatar Bermuda Australia China USA The Netherlands USA Petrochemicals (Nanhai) Jointly controlled entity Jointly controlled entity Jointly controlled entity Jointly controlled entity Deer Park Infineum Motiva Raízen Jointly controlled entity Brazil Saudi Arabia Petrochemical Jointly controlled entity Saudi Aramco Shell Refinery Jointly controlled entity Showa Shell Associate Saudi Arabia Saudi Arabia Japan 52 50 25 50 50 26 30 30 28 23 50 50 50 50 50 50 50 35 6,687 751 All shareholdings in the above entities are in ordinary shares or the equivalent and are stated to the nearest percentage point. Fair value information is stated for those associates for which there are published price quotations, and represent the relevant share price on December 31, 2012, multiplied by the number of shares held. Although Shell has a 52% investment in Aera, the governing agreements and constitutive documents for this entity do not allow Shell to control this entity as voting control is either split 50:50 between the shareholders or requires unanimous approval of the shareholders or their representatives. Consequently, this entity has not been consolidated. In 2011, Shell and Cosan S.A. established Raízen, a biofuel venture operating in Brazil. Under the terms of the agreement, Shell’s contribution comprised cash of $1,699 million and ethanol production technology and other Downstream assets. Shell has other major Upstream joint venture activities that operate as jointly controlled assets. C – Transactions between subsidiaries and equity-accounted investments Transactions with equity-accounted investments principally comprise sales and purchases of goods and services in the ordinary course of business and in total amounted to: Charges to equity-accounted investments Charges from equity-accounted investments 2012 51,484 44,597 2011 55,280 47,615 $ MILLION 2010 38,368 34,827 Balances outstanding at December 31, 2012 and 2011, in respect of the above transactions are presented in Notes 12 and 16. Other arrangements in respect of equity-accounted investments at December 31 were as follows: F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S Commitments to make purchases from equity-accounted investments Amounts guaranteed in respect of equity-accounted investments Commitments to provide debt or equity funding to equity-accounted investments 2012 158.9 2.2 3.8 $ BILLION 2011 192.0 2.2 0.5 118 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements 11 INVESTMENTS IN SECURITIES Investments in securities at December 31, 2012, comprise equity and debt securities. Equity securities principally comprise 15% interests in each of Malaysia LNG Dua Sendirian Berhad and Malaysia LNG Tiga Sendirian Berhad. Debt securities comprise a portfolio required to be held by Shell’s insurance companies as security for their activities. Equity and debt securities carried at fair value totalled $4,623 million at December 31, 2012 (2011: $5,248 million), with the remainder carried at cost. Of these, $1,342 million (2011: $1,218 million) are measured by reference to prices in active markets for identical assets, and $3,281 million (2011: $4,030 million) are measured by reference to predominantly unobservable inputs. Assets in the latter category, all of which are equity securities, are measured based on expected dividend flows, adjusted for country and other risks as appropriate and discounted to their present value. In the case of the Malaysia LNG investments referred to above, were the oil price assumption used in their valuation to be decreased by $10 per barrel, their carrying amount would decrease by $230 million (2011: $379 million). Movements in the carrying amounts of investments in securities measured using predominantly unobservable inputs were as follows: At January 1 (Losses)/gains recognised in other comprehensive income Purchases Sales Currency translation differences At December 31 12 TRADE AND OTHER RECEIVABLES Trade receivables Other receivables Amounts due from equity-accounted investments Derivative contracts (see Note 21) Prepayments and deferred charges Total 2012 4,030 (762) 16 (15) 12 $ MILLION 2011 2,388 1,633 25 (18) 2 3,281 4,030 Current 40,210 8,844 3,716 9,191 3,442 65,403 Dec 31, 2012 Non-current – 2,542 2,630 1,882 1,937 8,991 $ MILLION Dec 31, 2011 Non-current – 3,375 2,580 1,615 1,686 9,256 Current 48,307 8,204 3,231 16,394 3,373 79,509 The fair value of financial assets included above approximates the carrying amount. Other receivables principally include income tax recoverable (see Note 17), other taxes recoverable and balances due from joint venture partners. Provisions for impairments deducted from trade and other receivables amounted to $466 million at December 31, 2012 (2011: $544 million). The ageing of trade receivables at December 31 is as follows: Not overdue Overdue 1–30 days Overdue 31–60 days Overdue 61–90 days Overdue 91–180 days Overdue more than 180 days Total Information about credit risk is presented in Note 21. 2012 37,379 1,792 239 148 156 496 $ MILLION 2011 44,433 2,573 297 99 394 511 40,210 48,307 reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 119 13 INVENTORIES Oil and chemicals Materials Total Dec 31, 2012 Dec 31, 2011 $ MILLION 29,217 1,564 30,781 27,343 1,633 28,976 The cost of inventories recognised in income in 2012 includes net write-downs of $51 million (2011: $151 million net write-downs; 2010: $184 million net reversals). 14 CASH AND CASH EQUIVALENTS Cash Short-term bank deposits Money market funds and other cash equivalents Total Dec 31, 2012 Dec 31, 2011 $ MILLION 4,498 5,177 8,875 4,592 3,260 3,440 18,550 11,292 Included in cash and cash equivalents at December 31, 2012, are amounts totalling $703 million (2011: $557 million) that are subject to currency controls or other legal restrictions. Information about credit risk is presented in Note 21. 15 DEBT AND LEASE ARRANGEMENTS A – Debt Debt (excluding finance lease Finance lease obligations) obligations 1,798 5,708 7,506 26,054 33,560 – 327 327 3,867 4,194 Dec 31, 2012 $ MILLION Dec 31, 2011 Debt (excluding finance lease Finance lease obligations) obligations 2,262 4,140 6,402 26,450 32,852 – 310 310 4,013 4,323 Total 1,798 6,035 7,833 29,921 37,754 18,550 19,204 Total 2,262 4,450 6,712 30,463 37,175 11,292 25,883 Short-term debt Long-term debt due within one year Current debt Non-current debt Total debt Cash and cash equivalents (see Note 14) Net debt C A P I TA L STRU C TURE M A N A GE M E N T Shell management’s financial strategy is to manage Shell’s assets and liabilities with the aim that, across the business cycle, “cash in” at least equals “cash out” while maintaining a strong balance sheet. A key measure of Shell’s capital structure management is the proportion of debt to equity. Across the business cycle, management aims to manage gearing (net debt to net debt plus total equity) within the range of 0-30%. During 2012, gearing ranged from 8.1% to 13.1% (2011: 10.8% to 17.1%) and at December 31, 2012, it was 9.2% (2011: 13.1%), calculated as follows: F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S Net debt Total equity Total capital Gearing $ MILLION, EXCEPT WHERE OTHERWISE INDICATED 2012 19,204 189,927 209,131 9.2% 2011 25,883 171,003 196,886 13.1% With respect to the objective of maintaining a strong balance sheet, management prioritises the application of cash to investing for organic and inorganic growth, the servicing of debt commitments, paying dividends and returning surplus cash to shareholders. 120 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 15 continued] Management’s policy is to grow the US dollar dividend through time in line with its view of Shell’s underlying earnings and cash flow. The movement in net debt was as follows: At January 1, 2012 Cash flow Other movements Currency translation differences At December 31, 2012 At January 1, 2011 Cash flow Other movements Currency translation differences At December 31, 2011 Current Non-current Cash and cash debt (6,712) 4,480 (5,549) (52) (7,833) (9,951) 7,157 (4,079) 161 debt equivalents (30,463) (4,463) 5,040 (35) (29,921) (34,381) (33) 3,930 21 11,292 7,057 – 201 18,550 13,444 (1,803) – (349) $ MILLION Net debt (25,883) 7,074 (509) 114 (19,204) (30,888) 5,321 (149) (167) (6,712) (30,463) 11,292 (25,883) The following information at December 31 is also relevant to obtaining an understanding of Shell’s indebtedness: Net present value of operating lease obligations [A] Under-funded retirement benefit obligation [B] Fair value hedges related to debt [C] Cash required for operational requirements 2012 29,224 13,391 (1,182) 2,400 $ MILLION 2011 18,770 10,711 (983) 2,300 [A] Total future minimum operating lease payments at December 31 discounted at 1.2% in 2012 (2011: 1.5%). [B] The excess of pension and other retirement benefit obligation over related plan assets of $8,712 million (2011: $6,325 million) and $4,679 million (2011: $4,386 million) respectively (see Note 18). [C] The fair value of hedging derivatives in designated fair value hedges, net of related accrued interest. BORROWIN G FA CILITIE S Shell has access to international debt capital markets via two commercial paper (CP) programmes, a euro medium-term note (EMTN) programme and a US universal shelf (US shelf) registration. Issuances under the CP programmes are supported by a committed credit facility and cash. These arrangements and undrawn facilities at December 31 are summarised as follows: CP programmes EMTN programme US shelf registration Committed credit facility 2012 20,000 25,000 Facility 2011 20,000 25,000 unlimited unlimited 5,100 5,100 $ MILLION Amount undrawn 2012 20,000 14,697 n/a 5,100 2011 20,000 12,443 n/a 5,100 Under the CP programmes, Shell can issue debt of up to $10 billion with maturities not exceeding 270 days and $10 billion with maturities not exceeding 397 days. The EMTN programme is updated annually, most recently in June 2012. No debt was issued under this programme in 2012 (2011: $nil). The US shelf registration provides Shell with the flexibility to issue debt securities, ordinary shares, preferred shares and warrants. The registration is updated every three years and was last updated in October 2011. During 2012, debt totalling $4,250 million (2011: $nil) was issued under the registration. The committed credit facility is available on same-day terms, at pre-agreed margins, and is due to expire in 2015. The terms and availability are not conditional on Shell’s financial ratios or its financial credit ratings. In addition, other subsidiaries have access to short-term bank facilities totalling $3,717 million at December 31, 2012 (2011: $3,542 million). Information about liquidity risk is presented in Note 21. reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 121 [Note 15 continued] B – Debt (excluding finance lease obligations) In accordance with risk management policy, interest rate swaps were entered into against most of the fixed rate debt due to mature after more than one year, affecting the effective interest rate on these balances (see Note 21). The following tables compare contractual cash flows for debt (excluding finance lease obligations) owed at December 31, with the carrying amount in the Consolidated Balance Sheet. Contractual amounts reflect the effects of changes in currency exchange rates; differences from carrying amounts reflect the effects of discounting, premiums and, where hedge accounting is applied, fair value adjustments. Interest is estimated assuming interest rates applicable to variable rate debt remain constant and there is no change in aggregate principal amounts of debt other than repayment at scheduled maturity as reflected in the table. 2012 EMTN programme US shelf registration Bank and other borrowings Total (excluding interest) Interest 2011 EMTN programme US shelf registration Bank and other borrowings Total (excluding interest) Interest Less than 1 year 3,299 2,000 2,207 7,506 1,133 Less than 1 year 2,262 1,500 2,640 6,402 1,308 Contractual payments Difference $ MILLION Between 1 and 2 Between 2 and 3 Between 3 and 4 Between 4 and 5 years – 2,500 3 2,503 914 years – 3,500 416 3,916 828 years 1,650 – 310 1,960 777 years 1,979 1,750 9 3,738 680 5 years and later 3,299 9,500 22 12,821 5,944 Total 10,227 19,250 2,967 32,444 10,276 from carrying Carrying amount 845 271 – amount 11,072 19,521 2,967 1,116 33,560 Contractual payments Difference $ MILLION Between 1 and 2 Between 2 and 3 Between 3 and 4 Between 4 and 5 years 3,231 2,000 2 5,233 1,037 years – 2,500 1 2,501 866 years – 2,750 58 2,808 789 years 1,615 – 387 2,002 729 5 years and later 5,169 7,750 37 12,956 6,009 Total 12,277 16,500 3,125 31,902 10,738 from carrying Carrying amount 608 342 – amount 12,885 16,842 3,125 950 32,852 Debt is issued under the EMTN programme and US shelf registration by Shell International Finance B.V., a 100%-owned subsidiary of the Company, and is underwritten by guarantees issued by the Company; bank and other borrowings are raised by other subsidiaries with no recourse beyond the immediate borrower and/or the local assets. The fair value of debt excluding finance lease obligations at December 31, 2012, was $36,389 million (2011: $35,511 million). C – Lease arrangements Leasing arrangements are entered into, as lessee, for in Upstream, principally drilling and ancillary equipment and service vessels; in Downstream, principally tankers, storage capacity and retail sites; and in Corporate, principally land and buildings. The future minimum lease payments for finance and operating leases and the present value of minimum finance lease payments at December 31, by payment date are as follows: 2012 Less than 1 year Between 1 and 5 years 5 years and later Total Total future minimum $ MILLION Finance leases Operating leases Present value of minimum Total future minimum lease payments Interest lease payments lease payments 705 2,372 4,397 7,474 378 1,223 1,679 3,280 327 1,149 2,718 4,194 4,924 13,827 12,160 30,911 F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 122 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 15 continued] 2011 Less than 1 year Between 1 and 5 years 5 years and later Total Total future minimum $ MILLION Finance leases Operating leases Present value of minimum Total future minimum lease payments Interest lease payments lease payments 705 2,425 4,653 7,783 395 1,279 1,786 3,460 310 1,146 2,867 4,323 3,913 9,769 6,230 19,912 Finance lease obligations are secured on the leased assets. Future minimum lease payments are stated before deduction of expected rental income from non-cancellable sub-leases of $589 million (2011: $587 million) in respect of finance leases and $251 million (2011: $284 million) in respect of operating leases. Finance lease obligations include obligations under certain power generation contracts (“tolling agreements”). The present value of the future minimum lease payments under these contracts is $2,129 million at December 31, 2012 (2011: $2,255 million). The leases mature between 2021 and 2024 and the average interest rate is 8%. Operating lease expense was as follows: Rental expense, of which: Contingent rentals Sub-lease income 16 TRADE AND OTHER PAYABLES Trade payables Other payables Amounts due to equity-accounted investments Derivative contracts (see Note 21) Accruals and deferred income Total 2012 3,631 88 (183) 2011 3,520 91 (177) $ MILLION 2010 3,373 172 (99) Dec 31, 2012 Non-current $ MILLION Dec 31, 2011 Current Non-current – 2,237 30 658 1,250 4,175 44,844 4,196 5,162 15,831 11,813 81,846 – 2,200 559 1,002 1,160 4,921 Current 42,448 4,902 4,868 9,145 11,476 72,839 The fair value of financial liabilities included above approximates the carrying amount. Other payables principally include balances due to joint venture partners and liabilities under employee benefit plans. 17 TAXATION A – Taxation charge Current taxation Charge in respect of current period Adjustment in respect of prior periods Total Deferred taxation Relating to the origination and reversal of temporary differences Relating to changes in tax rates Adjustment in respect of prior periods Total Total taxation charge 2012 2011 2010 $ MILLION 22,551 171 22,722 698 247 (218) 727 23,449 22,519 490 23,009 2,295 (45) (784) 1,466 24,475 16,891 (507) 16,384 (2,030) (60) 576 (1,514) 14,870 reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 123 [Note 17 continued] The applicable tax charge at statutory tax rates reconciles to the actual taxation charge as follows: Income before taxation Less: Share of profit of equity-accounted investments Income before taxation and share of profit of equity-accounted investments Applicable tax charge at standard statutory tax rates Adjustment in respect of prior periods Derecognition/(recognition) of tax losses Income not subject to tax at standard statutory rates Expenses not deductible for tax purposes Deductible items not expensed Taxable income not recognised Other reconciling items, including amounts relating to changes in tax rate Taxation charge 2012 50,289 (8,948) 41,341 23,687 (47) 206 (1,369) 965 (562) 259 310 2011 55,660 (8,737) 46,923 25,552 (294) (450) (1,280) 1,117 (473) 310 (7) $ MILLION 2010 35,344 (5,953) 29,391 16,253 69 (99) (1,880) 1,205 (641) 198 (235) 23,449 24,475 14,870 The weighted average of statutory tax rates was 57.3% in 2012 (2011: 54.5%; 2010: 55.3%). The increase from 2011 to 2012 was principally due to a change in the geographical mix of income in the Upstream segment, with a higher proportion of Upstream income in 2012 arising in jurisdictions subject to relatively higher tax rates. The decrease from 2010 to 2011 was principally due to a lower proportion of Upstream income arising in such jurisdictions in 2011. The taxation charge includes not only those of general application but also taxes at special rates levied on income from certain Upstream activities and various other taxes to which these activities are subjected. The adjustments in respect of prior periods relate to events in the current period and reflect the effects of changes in rules, facts or other factors compared with those used in establishing the current tax position or deferred tax balance in prior periods. B – Taxes payable Income taxes Sales taxes, excise duties and similar levies and social law taxes Total $ MILLION Dec 31, 2012 Dec 31, 2011 8,663 4,021 12,684 7,151 3,455 10,606 Included in other receivables at December 31, 2012 (see Note 12), is current tax receivable of $751 million (2011: $864 million). C – Deferred taxation Taking into consideration offsetting balances within the same tax jurisdiction, movements in deferred tax assets/(liabilities) were as follows: 2012 At January 1 Deferred tax assets Deferred tax liabilities Recognised in the period Credited/(charged) to income Other movements Currency translation differences At December 31 Deferred tax assets Deferred tax liabilities Decommissioning and other provisions Losses carried forward Property, plant and equipment Retirement benefits 4,011 3,333 7,344 289 (399) 237 127 1,881 5,590 7,471 1,029 2,219 3,248 1,700 (180) 32 1,552 1,088 3,712 4,800 (1,761) (18,310) (20,071) (2,650) (790) (401) (3,841) (273) (23,639) (23,912) 368 (1,544) (1,176) 349 (65) (62) 222 366 (1,320) (954) $ MILLION Other Total 1,085 (347) 738 (415) 724 3 312 983 67 1,050 4,732 (14,649) (9,917) (727) (710) (191) (1,628) 4,045 (15,590) (11,545) F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 124 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 17 continued] 2011 At January 1 Deferred tax assets Deferred tax liabilities Recognised in the period (Charged)/credited to income Other movements Currency translation differences At December 31 Deferred tax assets Deferred tax liabilities Decommissioning and other provisions 4,311 3,517 7,828 (400) (17) (67) (484) 4,011 3,333 7,344 Losses carried forward 979 1,657 2,636 906 (233) (61) 612 1,029 2,219 3,248 Property, plant and equipment Retirement benefits $ MILLION Other Total (2,463) (15,909) (18,372) (1,854) (39) 194 (1,699) (1,761) (18,310) (20,071) 375 (1,539) (1,164) (58) 20 26 (12) 368 (1,544) (1,176) 2,159 (1,114) 1,045 (60) (286) 39 (307) 1,085 (347) 738 5,361 (13,388) (8,027) (1,466) (555) 131 (1,890) 4,732 (14,649) (9,917) Other movements in deferred tax assets and liabilities principally relate to acquisitions, divestments, reclassifications between assets and liabilities and amounts recognised in other comprehensive income and directly in equity (see Note 23). Where the realisation of deferred tax assets is dependent on future profits, losses carried forward are recognised only to the extent that business forecasts predict that such profits will be available. At December 31, 2012, recognised losses carried forward amounted to $27,006 million (2011: $17,933 million). Unrecognised tax losses, credits and other deductions where recovery is not expected, amounted to $17,623 million at December 31, 2012 (2011: $15,376 million), including amounts of $17,455 million (2011: $15,316 million) that are subject to time limits for utilisation of five years or later or are not time-limited. Earnings retained by subsidiaries and equity-accounted investments amounted to $169,595 million at December 31, 2012 (2011: $147,639 million). Provision has been made for withholding and other taxes that would become payable on the distribution of these earnings only to the extent that either Shell does not control the relevant entity or it is expected that these earnings will be remitted in the foreseeable future. 18 RETIREMENT BENEFITS Retirement plans are provided for employees of major subsidiaries. The nature of such plans varies according to the legal and fiscal requirements and economic conditions of the country in which the employees are engaged. The obligation in respect of defined benefit pension plans is based on employees’ years of service and average/final pensionable remuneration. The calculation of the obligation depends on actuarial assumptions, as described in Note 3. Defined benefit plans are typically structured as separate legal entities managed by trustees, who hold the plan assets in trust. For defined contribution plans, pension expense is the amount of employer contributions payable for the period. Some subsidiaries have established unfunded defined benefit plans to provide certain other retirement healthcare and life insurance benefits (other benefits) to their retirees. Entitlement to these other benefits is usually based on the employee remaining in service up to retirement age and the completion of a minimum service period. Retirement benefit expense comprised the following: Service cost Interest cost Expected return on plan assets Net actuarial losses recognised and other components Total for defined benefit plans Defined contribution plans Total Pension benefits 2012 1,336 3,109 2011 1,262 3,354 2010 1,141 3,227 (3,704) (3,960) (3,645) 1,017 1,758 384 2,142 531 1,187 345 1,532 641 1,364 329 1,693 2012 113 208 39 360 360 $ MILLION Other benefits 2010 62 216 9 287 287 2011 61 206 5 272 272 reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 125 [Note 18 continued] Retirement benefit expense is presented principally within production and manufacturing expenses and selling, distribution and administrative expenses in the Consolidated Statement of Income. Amounts recognised in the Consolidated Balance Sheet at December 31 in respect of defined benefit plans were as follows: Non-current assets Non-current liabilities Current liabilities Net amount recognised Pension and other benefits are derived as follows: 2012 12,575 (6,298) (402) 5,875 Total 2011 11,408 (5,931) (387) 5,090 Pension benefits 2012 12,575 (2,401) (190) 9,984 2011 11,408 (2,196) (180) 9,032 $ MILLION Other benefits 2012 2011 (3,897) (212) (4,109) (3,735) (207) (3,942) Defined benefit obligation At January 1 Increase in present value of the obligation for benefits based on employee service during the year Interest on the obligation for benefits in respect of employee service in previous years Benefit payments made Actuarial losses Other movements Currency translation differences At December 31 Plan assets At January 1 Expected return on plan assets Actuarial gains/(losses) Employer contributions Plan participants’ contributions Benefit payments made Other movements Currency translation differences At December 31 Plan assets less than defined benefit obligation at December 31 Unrecognised net actuarial losses since adoption of IFRS Unrecognised past service cost Net amount recognised Pension benefits $ MILLION Other benefits 2012 2011 2012 2011 69,962 65,848 4,386 4,067 1,336 3,109 (3,063) 8,342 (66) 2,027 81,647 63,637 3,704 4,375 2,304 86 (3,063) (91) 1,983 72,935 (8,712) 18,690 6 9,984 1,262 3,354 (3,104) 3,732 111 (1,241) 69,962 63,262 3,960 (1,888) 2,316 90 (3,104) 71 (1,070) 63,637 (6,325) 15,349 8 9,032 113 208 (160) 537 (408) 3 61 206 (155) 228 2 (23) 4,679 4,386 (4,679) (4,386) 541 29 408 36 (4,109) (3,942) A D D I TION A L I N FORM A TI ON The composition of the defined benefit obligation and the impacts of experience adjustments in respect of the obligation and associated plan assets were as follows: Pension benefits Obligation for pension benefits in respect of unfunded plans Obligation for pension benefits in respect of funded plans Total defined benefit obligation Experience adjustments as a percentage of the total benefit obligation Plan assets Experience adjustments as a percentage of plan assets Plan deficit Actual return on plan assets Other benefits Total benefit obligation (unfunded) Experience adjustments as a percentage of the total benefit obligation 2012 2011 2010 2009 2008 $ MILLION, EXCEPT WHERE OTHERWISE INDICATED 3,933 77,714 81,647 0.0% 72,935 6.0% (8,712) 8,079 4,679 4.9% 3,567 66,395 69,962 0.6% 63,637 (3.0)% (6,325) 2,072 4,386 (4.7)% 3,293 62,555 65,848 0.1% 63,262 5.6% (2,586) 7,200 4,067 (3.4)% 3,087 59,631 62,718 (0.5)% 59,425 10.5% (3,293) 9,398 3,825 (1.9)% 2,684 49,955 52,639 1.0% 44,299 (61.1)% (8,340) (22,087) 3,494 0.6% F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 126 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 18 continued] Employer contributions to defined benefit pension plans in 2013 are estimated to be $2.5 billion. Weighted average plan asset allocations by asset category for the principal pension plans at December 31 were as follows: Equities Debt securities Real estate Other Total Target allocation Percentage of plan assets 2012 51% 39% 6% 4% 100% 2012 48% 40% 3% 9% 100% 2011 48% 40% 3% 9% 100% Long-term investment strategies of plans are generally determined by the relevant pension fund trustees using a structured asset liability modelling approach to define the asset mix that best meets the objectives of optimising returns within agreed risk levels while maintaining adequate funding levels. Assumptions and sensitivities The weighted averages for the most significant assumptions applicable for the principal defined benefit pension plans were as follows: Used to determine benefit expense for year Rates of increase in pensionable remuneration Discount rates Expected rates of return on plan assets Used to determine benefit obligation at December 31 Rates of increase in pensionable remuneration Discount rates Expected age at death for persons aged 60 Men (years) Women (years) 2012 2011 2010 5.1% 4.5% 6.0% 5.0% 3.8% 86 89 5.5% 5.1% 6.3% 5.1% 4.5% 86 88 5.5% 5.5% 6.6% 5.5% 5.1% 86 88 Demographic (including mortality) assumptions are determined in the light of local conditions. Mortality assumptions are reviewed annually to reflect the latest available standard mortality tables for individual countries concerned, adjusted where appropriate to reflect experience. The long-term assumptions for pensionable remuneration increases, used to determine the benefit obligation at December 31, 2011, were decreased by 0.4% on average compared with December 31, 2010. The decrease reflected actuarial experience combined with lower long-term inflation expectations for the UK. The assumptions for discount rates reflected decreases of AA rated corporate bond yields of 1.0% in the eurozone (2011: 0.3%), of 0.4% in the UK (2011: 0.6%) and of 0.6% in the USA (2011: 0.9%). The effect of a one percentage point increase/(decrease) at December 31, 2012, in the rate of increase in pensionable remuneration and in the discount rates would be to increase/(decrease) the defined benefit obligation by $2,849 million/($2,479 million) and (decrease)/increase the defined benefit obligation by ($11,275 million)/$14,456 million respectively. The effect of an increase/(decrease) of one year in life expectancy at December 31, 2012, would be to increase/(decrease) the defined benefit obligation by $2,736 million/($2,771 million). The weighted averages for the most significant assumptions applicable for the principal other defined benefit plans were as follows: Discount rates (used to determine benefit obligation) Healthcare cost trend rates in year after reporting year Ultimate healthcare cost trend rates Year ultimate healthcare cost trend rate is applicable 2012 3.9% 7.1% 4.2% 2028 2011 4.6% 7.4% 4.3% 2028 2010 5.4% 7.7% 4.3% 2027 The effect of a one percentage point increase/(decrease) at December 31, 2012, in the rate of increase in the assumed healthcare cost trend rates would be to increase/(decrease) the defined benefit obligation by $645 million/($522 million). reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 127 19 DECOMMISSIONING AND OTHER PROVISIONS Current Non-current $ MILLION Total Dec 31, 2012 Dec 31, 2011 Dec 31, 2012 Dec 31, 2011 Dec 31, 2012 Dec 31, 2011 Decommissioning and restoration Environmental Redundancy Litigation Other Total Movements in provisions were as follows: 1,356 366 228 390 881 3,221 894 357 406 256 1,195 3,108 14,715 1,032 275 307 1,106 17,435 13,072 1,078 297 330 854 15,631 At January 1, 2012 Additional provisions Amounts charged against provisions Accretion expense Reclassifications and other movements Currency translation differences At December 31, 2012 At January 1, 2011 Additional provisions Amounts charged against provisions Accretion expense Reclassifications and other movements Currency translation differences At December 31, 2011 Decommissioning and restoration Environmental Redundancy Litigation 13,966 382 (686) 784 1,293 332 16,071 13,017 584 (543) 750 242 (84) 1,435 218 (269) 32 (35) 17 1,398 1,122 570 (257) 29 (6) (23) 13,966 1,435 703 114 (307) 11 (29) 11 503 950 373 (567) 8 (46) (15) 703 586 205 (96) 7 (5) – 697 557 160 (155) 13 17 (6) 586 16,071 1,398 503 697 1,987 20,656 Other 2,049 209 (323) 29 (5) 28 1,987 2,007 806 (647) 38 (105) (50) 13,966 1,435 703 586 2,049 18,739 $ MILLION Total 18,739 1,128 (1,681) 863 1,219 388 20,656 17,653 2,493 (2,169) 838 102 (178) 2,049 18,739 The timing and amounts settled in respect of these provisions are uncertain and dependent on various factors that are not always within management’s control. Additional provisions are stated net of reversals of provisions recognised in previous periods. Of the decommissioning and restoration provision at December 31, 2012, an estimated $4,666 million is expected to be utilised within one to five years, $3,483 million within six to ten years, and the remainder in later periods. Reviews of estimated decommissioning and restoration costs are carried out annually, which in 2012 resulted in an increase of $1,586 million (2011: $543 million) in both the provision, reported within reclassifications and other movements, and the corresponding property, plant and equipment assets reported within sales, retirements and other movements in Note 9. Offsetting this increase in 2012 was a reduction resulting from disposals of assets, principally in Nigeria, the USA and Canada, of $242 million (2011: the USA, Nigeria, Cameroon and Norway, of $457 million). Provisions for environmental remediation costs relate to a number of events in different locations, none of which is individually significant. The amounts charged against provisions for redundancy in 2011 principally relate to payments made to staff leaving employment as a result of the restructuring programme announced in 2009. Provisions for litigation costs at December 31, 2012, relate to a number of cases, none of which is individually significant. Further information is presented in Note 25. Included in other provisions at December 31, 2012, are $863 million (2011: $790 million) relating to employee end-of-service benefits. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 128 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements 20 SHARE CAPITAL ISSUED AND FULLY PAID At January 1, 2012 Scrip dividends Repurchases of shares At December 31, 2012 At January 1, 2011 Scrip dividends Repurchases of shares At December 31, 2011 NOMINAL VALUE At January 1, 2012 Scrip dividends Repurchases of shares At December 31, 2012 At January 1, 2011 Scrip dividends Repurchases of shares At December 31, 2011 Ordinary shares of €0.07 each B A Sterling deferred shares of £1 each NUMBER OF SHARES 3,668,550,437 2,661,403,172 50,000 103,838,250 – – (43,687,983) 3,772,388,687 2,617,715,189 3,563,952,539 2,695,808,103 104,597,898 – – (34,404,931) – – 50,000 50,000 – – 3,668,550,437 2,661,403,172 50,000 Ordinary shares of €0.07 each B A 312 9 – 321 302 10 – 312 224 – (3) 221 227 – (3) 224 $ MILLION Total 536 9 (3) 542 529 10 (3) 536 The total nominal value of sterling deferred shares is less than $1 million. At the Company’s Annual General Meeting on May 22, 2012, the Board was authorised to allot ordinary shares in the Company, and to grant rights to subscribe for or to convert any security into ordinary shares in the Company, up to an aggregate nominal amount of €147 million (representing 2,100 million ordinary shares of €0.07 each), and to list such shares or rights on any stock exchange. This authority expires at the earlier of the close of business on August 22, 2013, and the end of the Annual General Meeting to be held in 2013, unless previously renewed, revoked or varied by the Company in a general meeting. 21 FINANCIAL INSTRUMENTS AND OTHER DERIVATIVE CONTRACTS Financial instruments and other derivative contracts in the Consolidated Balance Sheet comprise investments in securities (see Note 11), cash and cash equivalents (see Note 14), debt (see Note 15) and certain amounts (including derivatives) reported within trade and other receivables (see Note 12) and trade and other payables (see Note 16). A – Risks In the normal course of business, financial instruments of various kinds are used for the purposes of managing exposure to interest rate, currency and commodity price movements. Treasury standards are applicable to all subsidiaries, and each subsidiary is required to adopt a treasury policy consistent with these standards. These policies cover: financing structure; interest rate and foreign exchange risk management; insurance; counterparty risk management; and use of derivative instruments. Wherever possible, treasury operations are carried out through specialist regional organisations without removing from each subsidiary the responsibility to formulate and implement appropriate treasury policies. Apart from forward foreign exchange contracts to meet known commitments, the use of derivative financial instruments by most subsidiaries is not permitted by their treasury policy. Other than in exceptional cases, the use of external derivative instruments is confined to specialist trading and central treasury organisations that have appropriate skills, experience, supervision, control and reporting systems. Shell’s operations expose it to market, credit and liquidity risk, as described below. MA RK E T RISK Market risk is the possibility that changes in interest rates, currency exchange rates or the prices of crude oil, natural gas, LNG, refined products, chemical feedstocks, power and environmental products will adversely affect the value of assets, liabilities or expected future cash flows. reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 129 [Note 21 continued] Interest rate risk Most debt is raised from central borrowing programmes. Interest rate swaps and currency swaps have been entered into to effectively convert most centrally issued debt to floating rate linked to dollar LIBOR (London Inter-Bank Offer Rate), reflecting Shell’s policy to have debt principally denominated in dollars and to maintain a largely floating interest rate exposure profile. Consequently, Shell is exposed predominantly to dollar LIBOR interest rate movements. The financing of most subsidiaries is also structured on a floating-rate basis and, except in special cases, further interest rate risk management is discouraged. On the basis of the floating rate net debt position at December 31, 2012, and assuming other factors (principally foreign exchange rates and commodity prices) remained constant and that no further interest rate management action were taken, an increase in interest rates of 1% would decrease pre-tax income by $27 million (2011: $146 million). The carrying amounts and maturities of debt and borrowing facilities are presented in Note 15. Interest expense is presented in Note 7. Foreign exchange risk Many of the markets in which Shell operates are priced, directly or indirectly, in dollars. As a result, the functional currency of most Upstream companies and those with significant cross-border business is the dollar. For Downstream companies, the local currency is typically the functional currency. Consequently, Shell is exposed to varying levels of foreign exchange risk when it enters into transactions that are not denominated in the companies’ functional currencies, when foreign currency monetary assets and liabilities are translated at the reporting date and as a result of holding net investments in operations that are not dollar-functional. The main currencies to which Shell is exposed are sterling, the Canadian dollar, euro and Australian dollar. Each company has treasury policies in place that are designed to measure and manage its foreign exchange exposures by reference to its functional currency. Exchange rate gains and losses arise in the normal course of business from the recognition of receivables and payables and other monetary items in currencies other than individual companies’ functional currency. Currency exchange risk may also arise in connection with capital expenditure. For major projects, an assessment is made at the final investment decision stage whether to hedge any resulting exposure. Hedging of net investments in foreign operations or of income that arises in foreign operations that are non-dollar functional is not undertaken. Assuming other factors (principally interest rates and commodity prices) remained constant and that no further foreign exchange risk management action were taken, a 10% appreciation against the dollar at December 31 of the main currencies to which Shell is exposed would have the following pre-tax effects: 10% appreciation against the dollar of: Sterling Canadian dollar Euro Australian dollar Increase/(decrease) 2012 (185) 131 30 246 in income 2011 (58) (360) 458 153 $ MILLION Increase in net assets 2011 1,042 1,364 1,768 120 2012 1,214 1,384 1,883 142 The above sensitivity information is calculated by reference to carrying amounts of assets and liabilities at December 31 only. The pre-tax effect on income arises in connection with monetary balances denominated in currencies other than the relevant entity’s functional currency; the pre-tax effect on net assets arises principally from the translation of assets and liabilities of entities that are not dollar-functional. Foreign exchange gains and losses arising from foreign currency transactions included in income are presented in Note 6. Price risk Certain subsidiaries have a mandate to trade crude oil, natural gas, LNG, refined products, chemical feedstocks, power and environmental products, and to use commodity derivatives (forwards, futures, swaps and options) as a means of managing price and timing risks arising from this trading. In effecting these transactions, the companies concerned operate within procedures and policies designed to ensure that risks, including those relating to the default of counterparties, are managed within authorised limits. Risk management systems are used for recording and valuing instruments. There is regular review of mandated trading limits by senior management, daily monitoring of market risk exposure using value-at-risk (VAR) techniques (see below), daily monitoring of trading positions against limits and marking-to-market of trading exposures with a department independent of traders reviewing the market values applied to trading exposures. Although trading losses can and do occur, the nature of the trading portfolio and its management are considered adequate mitigants against the risk of significant losses. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 130 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 21 continued] VAR techniques based on variance/covariance or Monte Carlo simulation models are used to make a statistical assessment of the market risk arising from possible future changes in market values over a 24-hour period and within a 95% confidence level. The calculation of the range of potential changes in fair value takes into account positions, the history of price movements and the correlation of these price movements. Each of the models is regularly back-tested against actual fair value movements to ensure model integrity is maintained. VALUE-AT-RISK (PRE-TAX) Global oil North America gas and power Europe gas and power 2012 High 28 21 7 Low Average Year-end High 9 4 1 17 9 3 21 8 3 39 16 17 Low 10 3 3 $ MILLION 2011 Average Year-end 19 8 9 19 12 4 CREDIT RISK Policies are in place to ensure that wholesale sales of products are made to customers with appropriate creditworthiness. These policies include detailed credit analysis and monitoring of trading partners and restricting large-volume trading activities to the highest-rated counterparties. Credit information is regularly shared between business and finance functions, with dedicated teams in place to quickly identify and respond to cases of credit deterioration. Mitigation measures are defined and implemented for high-risk business partners and customers, and include shortened payment terms, collateral or other security posting and vigorous collections. In addition, policies limit the amount of credit exposure to any individual financial institution. There are no material concentrations of credit risk, with individual customers or geographically, and there has been no significant level of counterparty default in recent years. Surplus cash is invested in a range of short-dated, secure and liquid instruments including short-term deposits, money market funds and similar instruments. The portfolio of these investments is diversified to avoid concentrating risk in any one instrument, country or counterparty. Management monitors the investments regularly and adjusts the investment portfolio in light of new market information where necessary to ensure credit risk is effectively diversified. In commodity trading, counterparty credit risk is managed within a framework of credit limits with utilisation being regularly reviewed. Credit checks are performed by a department independent of traders, and are undertaken before contractual commitment. Where appropriate, netting arrangements, credit insurance, prepayments and collateral are used to manage specific risks. LIQUIDITY RISK Liquidity risk is the risk that suitable sources of funding for Shell’s business activities may not be available. Management believes that it has access to sufficient debt funding sources (capital markets), and to undrawn committed borrowing facilities to meet currently foreseeable requirements. Information about borrowing facilities is presented in Note 15. B – Derivative contracts The carrying amounts of derivative contracts as at December 31 (see Notes 12 and 16), designated and not designated as hedging instruments for hedge accounting purposes, were as follows: 2012 Interest rate swaps Forward foreign exchange contracts Currency swaps Commodity derivatives Other contracts Total 2011 Interest rate swaps Forward foreign exchange contracts Currency swaps Commodity derivatives Other contracts Total Designated designated Not 368 45 1,133 – – 1,546 – 314 13 8,746 454 9,527 Designated designated Not 466 2 894 – – – 506 292 15,626 223 Assets Total 368 359 1,146 8,746 454 11,073 Assets Total 466 508 1,186 15,626 223 1,362 16,647 18,009 $ MILLION Liabilities Not Designated designated – – 14 – – 14 – 153 60 8,798 778 9,789 Total – 153 74 8,798 778 9,803 Net 368 206 1,072 (52) (324) 1,270 $ MILLION Liabilities Not Designated designated – 28 23 167 – 218 – 390 351 Total – 418 374 14,882 15,049 992 992 16,615 16,833 Net 466 90 812 577 (769) 1,176 reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 131 [Note 21 continued] Derivative contracts are used principally as hedging instruments; however, because hedge accounting is not always applied, movements in the carrying amounts of derivative contracts that are recognised in income are not always matched in the same period by the recognition of the income effects of the related hedged items. Net losses before tax on derivative contracts, excluding realised commodity contracts and those accounted for as hedges, were $904 million in 2012 (2011: $1,957 million; 2010: $3,213 million). Certain contracts entered into to hedge price risk relating to forecast commodity transactions and foreign exchange risk relating to forecast capital expenditure were designated in cash flow hedging relationships. The net liability carrying amount of commodity derivative contracts designated as cash flow hedging instruments of $162 million at December 31, 2012, is presented after the offset of related margin balances maintained with exchanges. Net losses of $280 million (2011: $226 million) arising on these contracts, the majority of which mature within three years, were recognised in other comprehensive income in 2012; a further $5 million net losses (2011: $3 million) were recognised in income. Certain interest rate and currency swaps were designated in fair value hedges, principally in respect of debt. Information about the impact of these hedges is presented in Note 7 and Note 15. In the course of trading operations, certain contracts are entered into for delivery of commodities that are accounted for as derivatives. The resulting price exposures are managed by entering into related derivative contracts. These contracts are managed on a fair value basis, and the maximum exposure to liquidity risk is the undiscounted fair value of derivative liabilities. For a minority of commodity derivatives, carrying amounts cannot be derived from quoted market prices or other observable inputs, in which case fair value is estimated using valuation techniques such as Black-Scholes, option spread models and extrapolation using quoted spreads with assumptions developed internally based on observable market activity. Other contracts include certain contracts that are held to sell or purchase commodities, and other contracts containing embedded derivatives, which are required to be recognised at fair value because of pricing or delivery conditions, even though they are only entered into to meet operational requirements. These contracts are expected to mature between 2013 and 2025, with certain contracts having early termination rights (for either party). Valuations are derived from quoted market prices for the next six years; thereafter, from forward gas price formulae used in similar contracts. Future gas price assumptions are the most significant input to this model, such that a decrease at December 31, 2012, of 10% in the projected gas price would, assuming other inputs remained unchanged, increase pre-tax income by $203 million (2011: $213 million). The contractual maturities of derivative liabilities at December 31 compare with their carrying amounts in the Consolidated Balance Sheet as follows: 2012 Forward foreign exchange contracts Currency swaps Commodity derivatives Other contracts Total 2011 Forward foreign exchange contracts Currency swaps Commodity derivatives Other contracts Total Less than 1 year 138 50 6,019 163 6,370 Less than 1 year 314 337 11,767 166 12,584 Between 1 and 2 years Between 2 and 3 years Between 3 and 4 years Between 4 and 5 years 5 years and later Total Discounting Contractual maturities 11 7 1,747 165 1,930 4 – 693 158 855 1 – 228 154 383 1 4 89 152 246 – 20 57 234 311 155 81 8,833 1,026 10,095 (2) (7) (35) (248) (292) Between 1 and 2 years Between 2 and 3 years Between 3 and 4 years Between 4 and 5 years 5 years and later Total Discounting Contractual maturities 118 14 2,430 194 2,756 5 – 705 200 910 – – 417 203 620 – 1 166 184 351 – 25 135 410 570 437 377 15,620 1,357 17,791 (19) (3) (571) (365) (958) $ MILLION Carrying amount 153 74 8,798 778 9,803 $ MILLION Carrying amount 418 374 15,049 992 16,833 F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 132 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 21 continued] The net carrying amounts of derivative contracts held at December 31, categorised according to the predominant source and nature of inputs used in determining the fair value of each contract, were as follows: 2012 Interest rate swaps Forward foreign exchange contracts Currency swaps Commodity derivatives Other contracts Total 2011 Interest rate swaps Forward foreign exchange contracts Currency swaps Commodity derivatives Other contracts Total Prices in active markets Other for identical observable Unobservable assets/liabilities – – – 16 8 24 inputs 368 206 1,072 (247) 66 1,465 inputs – – – 179 (398) (219) $ MILLION Total 368 206 1,072 (52) (324) 1,270 $ MILLION Prices in active markets Other for identical observable Unobservable assets/liabilities – – 2 11 14 27 inputs 466 90 810 391 (19) 1,738 inputs – – – 175 (764) (589) Total 466 90 812 577 (769) 1,176 Movements in the net carrying amounts of derivative contracts measured using predominantly unobservable inputs were as follows: At January 1 Net gains recognised in revenue Purchases Sales Recategorisations (net) Currency translation differences At December 31 2012 (589) 276 99 (157) 178 (26) (219) $ MILLION 2011 (1,303) 633 136 (231) 184 (8) (589) Included in net gains recognised in revenue for 2012 are unrealised net gains totalling $482 million relating to assets and liabilities held at December 31, 2012 (2011: $190 million). COLLA TE RA L The carrying amount of financial assets pledged as collateral for liabilities or contingent liabilities at December 31, 2012, and presented within trade and other receivables (see Note 12), was $541 million (2011: $426 million). The carrying amount of collateral held at December 31, 2012, and presented within trade and other payables (see Note 16), was $353 million (2011: $607 million). 22 SHARE-BASED COMPENSATION PLANS AND SHARES HELD IN TRUST A – Share-based compensation plans Share-based compensation is paid to employees as described below. The total share-based compensation expense for the year and the fair value of awards made during the year were as follows: Equity-settled plans Cash-settled plans Total share-based compensation expense Fair value of share-based compensation awards granted in the year 2012 798 111 909 697 2011 662 92 754 676 $ MILLION 2010 478 223 701 466 reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 133 [Note 22 continued] The principal share-based employee compensation plan is the Performance Share Plan (the Plan). Other schemes offer employees opportunities to acquire shares and American Depository Shares (ADSs) of the Company or receive cash benefits measured by reference to the Company’s share price. Awards of shares and ADSs of the Company under the Plan are granted upon certain conditions to eligible employees who are not members of the Executive Committee. The actual amount of shares that may vest range from 0% to 200% of the awards, depending on the outcomes of prescribed performance conditions over a three-year period beginning on January 1 of the award year. Shares and ADSs vest for nil consideration. A Monte Carlo option pricing model is used to estimate the fair value of the share-based compensation expense arising from the Plan. The model projects and averages the results for a range of potential outcomes for the vesting conditions, the principal assumptions for which are the share price volatility and dividend yields for Shell and four of its main competitors over the last three years and the last 10 years. Shares granted, vested and expired or forfeited in respect of the Plan were as follows: At January 1, 2012 Granted Vested Expired/forfeited At December 31, 2012 At January 1, 2011 Granted Vested Expired/forfeited At December 31, 2011 Number of Number of Number of A shares (million) 25 B shares (million) 10 A ADSs (million) 8 10 (8) – 27 25 9 (8) (1) 25 3 (3) – 10 10 3 (3) – 10 3 (2) – 9 8 3 (3) – 8 Weighted average remaining contractual life (years) 1.0 1.1 1.0 1.0 Prior to the introduction in 2005 of the Plan, schemes were operated under which options over shares and ADSs of the Company were awarded to eligible employees, at a price not less than the fair market value of the shares and ADSs at the date the options were granted. The options have a range of expiry dates until 2016 and no additional expense to Shell arises in connection with them. Options outstanding in respect of share option plans at December 31 were as follows: 2012 2011 Number under option (million) 14 29 A shares Weighted average exercise price ($) 24.58 28.84 Number under option (million) 4 7 B shares Weighted average exercise price ($) 21.94 22.53 Number under option (million) 4 6 A ADSs Weighted average exercise price ($) 46.93 48.08 In respect of cash-settled plans, the liability and intrinsic value of vested plans at December 31 were as follows: Liability Intrinsic value of vested plans 2012 92 92 $ MILLION 2011 279 279 F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S B – Shares held in trust Shell employee share ownership trusts purchase the Company’s shares in the open market to meet future obligations arising from share-based compensation granted to employees. At December 31, 2012, they held 40.5 million A shares (2011: 53.5 million), 18.4 million B shares (2011: 22.0 million) and 12.7 million A ADSs (2011: 17.2 million). The total carrying amount of the Company’s shares, which are all held in connection with the share-based compensation plans, at December 31, 2012, was $2,287 million (2011: $2,990 million). 134 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 22 continued] From 2010, dividends received on shares held in trust are reflected in retained earnings; the carrying amount of shares held in trust and retained earnings at December 31, 2010, reflected the cumulative effect of this change. 23 OTHER RESERVES At January 1, 2012 Other comprehensive income attributable to Royal Dutch Shell plc shareholders Scrip dividends Repurchases of shares Share-based compensation At December 31, 2012 At January 1, 2011 Other comprehensive loss attributable to Royal Dutch Shell plc shareholders Scrip dividends Repurchases of shares Share-based compensation At December 31, 2011 At January 1, 2010 Other comprehensive income attributable to Royal Dutch Shell plc shareholders Scrip dividends Share-based compensation At December 31, 2010 Share Capital $ MILLION Accumulated other premium redemption Share plan comprehensive reserve 154 reserve 60 reserve 1,571 – – – – 154 154 – – – – 154 154 – – – – – 3 – 63 57 – – 3 – 60 57 – – – 57 – – – 457 2,028 1,483 – – – 88 1,571 1,373 – – 110 1,483 income 3,767 586 – – – 4,353 4,958 Total 8,984 586 (9) 3 457 10,021 10,094 (1,191) (1,191) – – – 3,767 4,954 4 – – 4,958 (10) 3 88 8,984 9,982 4 (2) 110 10,094 Merger reserve 3,432 – (9) – – 3,423 3,442 – (10) – – 3,432 3,444 – (2) – 3,442 154 The merger reserve and share premium reserve were established as a consequence of Royal Dutch Shell plc becoming the single parent company of Royal Dutch Petroleum Company and The “Shell” Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited, in 2005. The capital redemption reserve was established in connection with repurchases of shares of Royal Dutch Shell plc. The share plan reserve is maintained in respect of equity-settled share-based compensation plans (see Note 22); related deferred taxation derecognised directly within equity was $7 million in 2012 (2011: $26 million recognised; 2010: $12 million recognised). Accumulated other comprehensive income comprises the following: 2012 Currency translation differences Recognised in the period Reclassified to income Net currency translation differences Unrealised gains/(losses) on securities Recognised in the period Reclassified to income Jan 1, 2012 70 Net unrealised gains/(losses) on securities 3,946 Cash flow hedging gains/(losses) Recognised in the period Reclassified to income Net cash flow hedging gains/(losses) Total (249) 3,767 Pre-tax 1,622 32 1,654 (711) (96) (807) (251) 282 31 878 Tax (10) – (10) (9) 1 (8) 9 (9) – (18) $ MILLION Recognised in 2012 Share of equity- Attributable to Non- Royal Dutch After accounted controlling Shell plc Dec 31, tax investments interest shareholders 2012 1,612 32 1,644 (720) (95) (815) (242) 273 31 860 (136) (52) 1,456 1,526 (56) – (871) 3,075 (30) (222) – (52) 1 586 (248) 4,353 reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 135 [Note 23 continued] 2011 Recognised in 2011 Share of equity- Attributable to Non- Royal Dutch $ MILLION Jan 1, 2011 Pre-tax Tax tax investments interest shareholders 2011 After accounted controlling Shell plc Dec 31, Currency translation differences Recognised in the period Reclassified to income Net currency translation differences 2,732 Unrealised gains/(losses) on securities Recognised in the period Reclassified to income Net unrealised gains/(losses) on securities 2,214 Cash flow hedging gains/(losses) Recognised in the period Reclassified to income Net cash flow hedging gains/(losses) Total 2010 12 4,958 Jan 1, 2010 (2,755) (587) (3,342) 1,656 16 1,672 (228) – (228) (1,898) 14 – 14 3 9 12 6 – 6 32 (2,741) (587) (3,328) 1,659 25 1,684 (222) – (222) (1,866) 48 618 (2,662) 70 47 1 1,732 3,946 (35) 60 (4) 615 (261) (1,191) (249) 3,767 Recognised in 2010 Share of equity- Attributable to Non- Royal Dutch $ MILLION Pre-tax Tax tax investments interest shareholders 2010 After accounted controlling Shell plc Dec 31, Currency translation differences Recognised in the period Reclassified to income Net currency translation differences 2,528 Unrealised gains/(losses) on securities Recognised in the period Reclassified to income Net unrealised gains/(losses) on securities 2,464 Cash flow hedging gains/(losses) Recognised in the period Reclassified to income Net cash flow hedging gains/(losses) Total (38) 4,954 138 (276) (138) (272) (25) (297) (13) 12 (1) (436) (4) – (4) (10) 9 (1) (1) – (1) (6) 134 (276) (142) (282) (16) (298) (14) 12 (2) (442) 388 (42) 204 2,732 48 – (250) 2,214 52 488 – (42) 50 4 12 4,958 24 DIVIDENDS Interim dividends – A shares Cash: $1.71 per share (2011: $1.68; 2010: $1.68) Scrip: $1.71 per share (2011: $1.68; 2010: $0.42) Total – A shares Interim dividends – B shares Cash: $1.71 per share (2011: $1.68; 2010: $1.68) Scrip: $1.71 per share (2011: $1.68; 2010: $0.42) Total – B shares Total 2012 2011 2010 $ MILLION 3,583 2,803 6,386 3,807 762 4,569 10,955 3,440 2,556 5,996 3,437 1,024 4,461 10,457 5,239 549 5,788 4,345 63 4,408 10,196 In addition, on January 31, 2013, the Directors announced a further interim dividend in respect of 2012 of $0.43 per A share and $0.43 per B share. The total dividend is estimated to be $2,748 million and is payable on March 28, 2013. Under the Scrip Dividend Programme, shareholders can elect to receive dividends in the form of A shares. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 136 Shell Annual Report and Form 20-F 2012 reports.shell.com Consolidated Financial Statements > Notes to the Consolidated Financial Statements [Note 24 continued] Dividends on A shares are by default paid in euros, although holders may elect to receive dividends in sterling. Dividends on B shares are by default paid in sterling, although holders may elect to receive dividends in euros. Dividends on ADSs are paid in dollars. 25 LEGAL PROCEEDINGS AND OTHER CONTINGENCIES Groundwater contamination Shell Oil Company (including subsidiaries and affiliates, referred to collectively as SOC), along with numerous other defendants, has been sued by public and quasi-public water purveyors, as well as governmental entities. The plaintiffs allege responsibility for groundwater contamination caused by releases of gasoline containing oxygenate additives. Most of these suits assert various theories of liability, including product liability, and seek to recover actual damages, including clean-up costs. Some assert claims for punitive damages. Fewer than 10 of these cases remain. On the basis of court rulings in SOC’s favour in certain cases claiming damages from threats of contamination, the claims asserted in remaining matters, and Shell’s track record with regard to amounts paid to resolve varying claims, the management of Shell currently does not believe that the outcome of the remaining oxygenate-related litigation pending, as at December 31, 2012, will have a material impact on Shell. Nigerian claims Shell subsidiaries and associates operating in Nigeria are parties to various environmental and contractual disputes. These disputes are at different stages in litigation, including at the appellate stage, where judgments have been rendered against Shell. If taken at face value, the aggregate amount of these judgments could be seen as material. The management of Shell, however, believes that these matters will ultimately be resolved in a manner favourable to Shell. While no assurance can be provided as to the ultimate outcome of any litigation, these matters are not expected to have a material effect on Shell. Other In the ordinary course of business, Shell subsidiaries are subject to a number of other loss contingencies arising from litigation and claims brought by governmental and private parties. The operations and earnings of Shell subsidiaries continue, from time to time, to be affected to varying degrees by political, legislative, fiscal and regulatory developments, including those relating to the protection of the environment and indigenous groups, in the countries in which they operate. The industries in which Shell subsidiaries are engaged are also subject to physical risks of various types. The nature and frequency of these developments and events, as well as their effect on future operations and earnings, are unpredictable. 26 AUDITORS’ REMUNERATION Fees in respect of the audit of the Consolidated and Parent Company Financial Statements, including audit of consolidation returns Other audit fees, principally in respect of audits of accounts of subsidiaries Total audit fees Audit-related fees (for other services provided pursuant to legislation) Fees in respect of non-audit services (principally for tax compliance) Total 2012 2011 2010 $ MILLION 5 41 46 1 1 48 5 42 47 2 – 49 4 50 54 1 1 56 In addition, PricewaterhouseCoopers provides audit services to retirement benefit plans for employees of subsidiaries. Remuneration amounted to $2 million in 2012 (2011: $2 million; 2010: $1 million). 27 EARNINGS PER SHARE 2012 2011 2010 Income attributable to Royal Dutch Shell plc Basic weighted Diluted weighted shareholders average number of average number of ($ million) 26,592 30,918 20,127 A and B shares 6,261,184,755 6,212,532,421 6,132,640,190 A and B shares 6,267,839,545 6,221,655,088 6,139,300,098 Basic earnings per share are calculated by dividing the income attributable to Royal Dutch Shell plc shareholders for the year by the weighted average number of A and B shares outstanding during the year. reports.shell.com Shell Annual Report and Form 20-F 2012 Consolidated Financial Statements > Notes to the Consolidated Financial Statements 137 [Note 27 continued] Diluted earnings per share are based on the same income figures. The weighted average number of shares outstanding during the year is adjusted for the number of shares related to share option schemes. Earnings per share are identical for A and B shares. 28 POST-BALANCE SHEET EVENTS Shell entered into an agreement to acquire part of Repsol S.A.’s LNG portfolio for a cash consideration of $4.4 billion. Under the terms of the agreement, which is subject to regulatory approvals and other conditions precedent, Shell will assume the finance lease obligations of the businesses acquired, provisionally estimated at $1.8 billion. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 138 Shell Annual Report and Form 20-F 2012 reports.shell.com Supplementary information – oil and gas (unaudited) SUPPLEMENTARY INFORMATION – OIL AND GAS (UNAUDITED) Proved reserves and related information, and disclosures set out on pages 138-156, are referred to as “unaudited” as a means of clarifying that this information is not covered by the audit opinion of the independent registered public accounting firm that has audited and reported on the Consolidated Financial Statements. Proved oil and gas reserves Proved reserves’ estimates are calculated pursuant to the U.S. Securities and Exchange Commission (SEC) Rules and the Financial Accounting Standard Board’s Topic 932. The definitions used are in accordance with the SEC Rule 4-10 (a) of Regulation S-X. We include proved reserves associated with future production that will be consumed in operations. Proved reserves shown are net of any quantities of crude oil or natural gas that are expected to be taken by others as royalties in kind but do not exclude quantities related to royalties expected to be paid in cash (except in North America and in other situations in which the royalty quantities are owned by government or other parties) or those related to fixed margin contracts. Proved reserves include certain quantities of crude oil or natural gas that will be produced under arrangements that involve Shell subsidiaries and equity-accounted investments in risks and rewards but do not transfer title of the product to those entities. Proved reserves cannot be measured exactly since estimation of reserves involves subjective judgement (see “Risk factors” on pages 13-15). These estimates remain subject to revision and are unaudited supplementary information. Proved reserves assurance process A central group of reserves experts, who on average have around 25 years’ experience in the oil and gas industry, undertake the primary assurance of the proved reserves bookings. This group of experts is part of the Resources Assurance and Reporting (RAR) organisation. A Vice President with 31 years’ experience in the oil and gas industry currently heads the RAR organisation. He is a member of the Society of Petroleum Engineers and holds a diploma of Ingénieur Civil des Ponts et Chaussées de France. The RAR organisation reports directly to an Executive Vice President of Finance, who is a member of the Upstream Reserves Committee (URC). The URC is a multidisciplinary committee consisting of senior representatives from the Finance, Legal, Projects & Technology and Upstream organisations. The URC reviews and endorses all major (larger than 20 million barrels of oil equivalent) proved reserves bookings and endorses the total aggregated proved reserves. Final approval of all proved reserves bookings remains with Shell’s Executive Committee. The Internal Audit function also provides secondary assurance through audits of the control framework. Additional information concerning proved reserves Proved reserves can be either developed or undeveloped. Subsidiaries’ proved reserves at December 31, 2012, were divided into 66% developed and 34% undeveloped on a barrel of oil equivalent basis. For the Shell share of equity-accounted investments, the proved reserves were divided into 81% developed and 19% undeveloped. Proved reserves are recognised under various forms of contractual agreements. Shell’s proved reserves volumes at December 31, 2012, present in agreements such as PSCs or other forms of economic entitlement contracts, where the Shell share of reserves can vary with commodity prices, were approximately 1,172 million barrels of crude oil and natural gas liquids, and 12,227 thousand million scf of natural gas. reports.shell.com Shell Annual Report and Form 20-F 2012 Supplementary information – oil and gas (unaudited) > Crude oil, natural gas liquids, synthetic crude oil and bitumen 139 CRUDE OIL, NATURAL GAS LIQUIDS, SYNTHETIC CRUDE OIL AND BITUMEN Shell subsidiaries’ estimated net proved reserves of crude oil, natural gas liquids, synthetic crude oil and bitumen at the end of the year; their share of the net proved reserves of equity-accounted investments at the end of the year; and the changes in such reserves during the year are set out below. Significant changes in crude oil, natural gas liquids, synthetic crude oil and bitumen proved developed and undeveloped reserves are discussed below. Proved reserves 2012-2011 SHELL SUBSIDIARIES S HE LL SHA RE OF E QU I TY - A C C OU N TE D IN V E S TM E N TS Asia The net increase of 79 million barrels in revisions and reclassifications resulted from field performance studies and development activities. The reservoir analyses and updates in fields supported continuing better performance than historically predicted in Brunei, Russia and the United Arab Emirates. Proved reserves 2011-2010 SHELL SUBSIDIARIES Europe The net increase of 140 million barrels in revisions and reclassifications resulted from field performance studies and development activities. The reservoir performance analyses and updates in multiple fields supported continuing better production performance of major assets than historically predicted, primarily in fields in Italy and the UK. The increase of 81 million barrels from extensions and discoveries are associated with activities in the UK. Europe The increase of 56 million barrels in purchases of minerals in place resulted from the acquisition of additional interests in assets in Norway and the UK. Asia The net increase of 191 million barrels in revisions and reclassifications resulted from field performance studies and development activities. The reservoir performance analyses and updates in multiple fields supported continuing better performance than historically predicted in Iraq, Kazakhstan, Malaysia and Oman. Asia The net decrease of 293 million barrels in revisions and reclassifications resulted from field performance studies and development activities in producing fields in Oman and revised development plans in Kazakhstan. Oceania The increase of 95 million barrels in extensions and discoveries resulted from new bookings in Australia associated with LNG integrated projects. Africa The net increase of 95 million barrels in revisions and reclassifications resulted from field performance studies and development activities. The reservoir analyses and updates in fields supported continuing better performance than historically predicted in Gabon and Nigeria. Africa The net increase of 128 million barrels in revisions and reclassifications resulted from field performance studies and development activities. The reservoir analyses and updates in fields supported continuing better performance than historically predicted. USA The net increase of 80 million barrels in revisions and reclassifications resulted from field performance studies and development activities. Canada The increase of 116 million barrels of synthetic crude oil resulted from an extension of mining operations in Alberta. Canada The synthetic crude oil net increase of 131 million barrels in revisions and reclassifications resulted from field performance studies and development activities. S HE LL SHA RE OF E QU I TY - A C C OU N TE D IN V E S TM E N TS Asia The net increase of 83 million barrels in revisions and reclassifications resulted from better field production performance and ongoing development activities in fields in Brunei and Russia. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 140 Shell Annual Report and Form 20-F 2012 reports.shell.com Supplementary information – oil and gas (unaudited) > Crude oil, natural gas liquids, synthetic crude oil and bitumen Crude oil, natural gas liquids, synthetic crude oil and bitumen PROVED DEVELOPED AND UNDEVELOPED RESERVES 2012 MILLION BARRELS Europe Asia Oceania Africa USA North South America America Canada Oil and Oil and Oil and Oil and Oil and Oil and Synthetic Oil and Oil and Synthetic Total All NGL NGL NGL NGL NGL NGL crude oil Bitumen NGL NGL crude oil Bitumen products Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production [A] At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Total Reserves attributable to non-controlling interest in Shell subsidiaries At December 31 723 1,104 175 24 – 44 56 – 191 6 2 – – (78) (112) 769 1,191 31 (5) 560 79 – – – – – 2 – – (2) 24 (126) 515 793 1,706 5 – – – (24) (10) 146 34 1 – – – (1) (6) 28 174 731 95 – 1 – (33) (106) 688 – – – – – – – – 688 532 35 1,680 55 80 4 30 26 (6) (57) 609 306 10 3 – – – (25) 294 903 3 – 1 – (1) (5) 33 – – – – – – – – 131 – – – – (48) 1,763 – – – – – – – – 1 – 1 – (1) (7) 49 – – – – – – – – 33 1,763 49 63 12 – 7 – – (13) 69 19 2 – – – – (3) 18 87 3,363 1,680 55 5,098 410 131 10 85 82 (64) (381) – – – – (48) 1 – 1 – (1) (7) 542 10 86 82 (65) (436) 3,505 1,763 49 5,317 950 87 3 2 – (1) (162) 879 – – – – – – – – – – – – – – – – 950 87 3 2 – (1) (162) 879 4,384 1,763 49 6,196 – – – 16 – – – – – 16 – – 16 [A] Includes 2 million barrels consumed in operations. PROVED DEVELOPED RESERVES 2012 MILLION BARRELS Europe Asia Oceania Africa USA North South America America Canada Oil and Oil and Oil and Oil and Oil and Oil and Synthetic Oil and Oil and Synthetic Total All NGL NGL NGL NGL NGL NGL crude oil Bitumen NGL NGL crude oil Bitumen products Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 460 425 781 817 30 23 483 460 35 34 21 19 438 496 – – PROVED UNDEVELOPED RESERVES 2012 Europe Asia Oceania Africa 240 283 202 217 USA 22 28 1,249 1,271 – – – – 22 18 – – 35 31 2,011 2,114 1,249 1,271 22 18 3,282 3,403 18 17 754 736 – – – – 754 736 North South America America Canada MILLION BARRELS Total All Oil and Oil and Oil and Oil and Oil and Oil and Synthetic Oil and Oil and Synthetic NGL NGL NGL NGL NGL NGL crude oil Bitumen NGL NGL crude oil Bitumen products Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 263 344 323 374 140 112 293 192 1 1 77 55 13 9 – – 292 326 104 77 13 5 – – 431 492 – – 33 31 – – 28 38 1,352 1,391 431 492 33 31 1,816 1,914 1 1 196 143 – – – – 196 143 reports.shell.com Shell Annual Report and Form 20-F 2012 Supplementary information – oil and gas (unaudited) > Crude oil, natural gas liquids, synthetic crude oil and bitumen 141 Crude oil, natural gas liquids, synthetic crude oil and bitumen PROVED DEVELOPED AND UNDEVELOPED RESERVES 2011 MILLION BARRELS Europe Asia Oceania Africa USA North South America America Canada Oil and Oil and Oil and Oil and Oil and Oil and Synthetic Oil and Oil and Synthetic Total All NGL NGL NGL NGL NGL NGL crude oil Bitumen NGL NGL crude oil Bitumen products Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place 587 140 – 81 – – 1,493 (293) 1 6 – – 74 17 – 95 – – Production [A] At December 31 (85) (103) 723 1,104 (11) 175 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Total Reserves attributable to non-controlling interest in Shell subsidiaries At December 31 30 592 35 3 – – – – 83 1 14 – – (2) 31 (130) 560 754 1,664 6 – 1 – (1) (7) 34 209 750 128 – 1 – (29) (119) 731 – – – – – – – – 731 556 28 – 5 – (5) (52) 532 287 15 31 – – (2) (25) 306 838 3,561 1,567 51 5,179 35 1,567 51 3 – 4 – – 42 – 116 – – 9 – – – – 66 10 1 3 – – 33 2 195 – (34) 42 – 116 – – 9 – – – – (7) 35 (45) 1,680 (5) 55 (17) (394) (45) 63 3,363 1,680 (5) 55 – – – – – – – – – – – – – – – – – – – – – – – – 35 1,680 55 23 (1) – – – – (3) 19 82 967 106 32 15 – (3) (167) 950 – – – – – – – – – – – – – – – – 4,313 1,680 55 6,048 84 2 311 – (34) (444) 5,098 967 106 32 15 – (3) (167) 950 – – – 13 – – – – – 13 – – 13 [A] Includes 3 million barrels consumed in operations. PROVED DEVELOPED RESERVES 2011 MILLION BARRELS Europe Asia Oceania Africa USA North South America America Canada Oil and Oil and Oil and Oil and Oil and Oil and Synthetic Oil and Oil and Synthetic Total All NGL NGL NGL NGL NGL NGL crude oil Bitumen NGL NGL crude oil Bitumen products Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 496 460 382 781 22 30 402 483 36 35 22 21 406 438 – – PROVED UNDEVELOPED RESERVES 2011 Europe Asia Oceania Africa 262 240 205 202 USA 26 22 1,214 1,249 – – – – 23 22 – – 38 35 1,646 2,011 1,214 1,249 23 22 2,883 3,282 21 18 672 754 – – – – 672 754 North South America America Canada MILLION BARRELS Total All Oil and Oil and Oil and Oil and Oil and Oil and Synthetic Oil and Oil and Synthetic NGL NGL NGL NGL NGL NGL crude oil Bitumen NGL NGL crude oil Bitumen products Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 91 1,111 263 323 38 140 344 293 8 1 190 77 13 13 – – 294 292 82 104 9 13 – – 353 431 – – 28 33 – – 28 28 1,915 1,352 353 431 28 33 2,296 1,816 2 1 295 196 – – – – 295 196 F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 142 Shell Annual Report and Form 20-F 2012 reports.shell.com Supplementary information – oil and gas (unaudited) > Crude oil, natural gas liquids, synthetic crude oil and bitumen Crude oil, natural gas liquids, synthetic crude oil and bitumen PROVED DEVELOPED AND UNDEVELOPED RESERVES 2010 MILLION BARRELS Europe Asia Oceania Africa USA North South America America Canada Oil and Oil and Oil and Oil and Oil and Oil and Synthetic Oil and Oil and Synthetic Total All NGL NGL NGL NGL NGL NGL crude oil Bitumen NGL NGL crude oil Bitumen products Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production [A] At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production At December 31 Total Reserves attributable to non-controlling interest in Shell subsidiaries At December 31 422 38 1,599 496 205 1,231 313 – – 11 (23) 8 7 33 – (102) (99) 587 1,493 30 2 – – – – 599 101 4 9 – – (2) 30 (121) 592 77 7 – 1 – – (11) 74 58 2 – – – (15) (10) 35 735 138 – 7 14 (14) (130) 750 – – – – – – – – 617 2,085 109 750 47 54 96 1 (5) (59) 556 288 22 – 4 – – (27) 287 843 2 – 2 – – (4) – – – – (7) 35 (28) 1,567 – – – – – – – – – – – – – – – – 57 (2) – 3 – – (7) 51 – – – – – – – – 38 17 – 31 – – 3,037 1,599 729 62 144 59 (42) (4) – – – – 57 (2) – 3 – – 4,693 723 62 147 59 (42) (20) (428) (28) 66 3,561 1,567 (7) 51 (463) 5,179 19 6 – 1 – – (3) 23 89 994 133 4 14 – (15) (163) 967 – – – – – – – – – – – – – – – – 994 133 4 14 – (15) (163) 967 4,528 1,567 51 6,146 35 1,567 51 – 5 – 13 – – – – – 18 – – 18 [A] Includes 2 million barrels consumed in operations. PROVED DEVELOPED RESERVES 2010 MILLION BARRELS Europe Asia Oceania Africa USA North South America America Canada Oil and Oil and Oil and Oil and Oil and Oil and Synthetic Oil and Oil and Synthetic Total All NGL NGL NGL NGL NGL NGL crude oil Bitumen NGL NGL crude oil Bitumen products Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 384 496 341 382 9 22 420 402 40 36 39 22 379 406 – – PROVED UNDEVELOPED RESERVES 2010 Europe Asia Oceania Africa 249 262 216 205 USA 23 26 691 1,214 – – – – 29 23 – – 35 38 1,451 1,646 691 1,214 29 23 2,171 2,883 17 21 701 672 – – – – 701 672 North South America America Canada MILLION BARRELS Total All Oil and Oil and Oil and Oil and Oil and Oil and Synthetic Oil and Oil and Synthetic NGL NGL NGL NGL NGL NGL crude oil Bitumen NGL NGL crude oil Bitumen products Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 112 890 91 1,111 21 8 179 190 37 38 19 13 356 344 173 294 – – 72 82 15 9 – – 908 353 – – 28 28 – – 3 28 1,586 1,915 908 353 28 28 2,522 2,296 2 2 293 295 – – – – 293 295 NATURAL GAS Shell subsidiaries’ estimated net proved reserves of natural gas at the end of the year; their share of the net proved reserves of equity- accounted investments at the end of the year; and the changes in such reserves during the year are set out below. The volumes in the table below have not been adjusted to standard heat content. Apart from integrated projects, volumes of gas are reported on an “as-sold” basis. The price used to calculate future revenue and cash flows from proved gas reserves is the contract price or the 12-month average on “as-sold” volumes. Volumes associated with integrated projects are those measured at a designated transfer point between the Upstream and Downstream portions of the integrated project. Natural gas volumes are converted to oil equivalent using a factor of 5,800 scf per barrel. Significant changes in natural gas proved developed and undeveloped reserves are discussed below. Proved reserves 2012-2011 SHELL SUBSIDIARIES Oceania The decrease of 303 thousand million scf in sales in place resulted from the sale of part of our interest in the Prelude LNG integrated project in Australia. USA The net decrease of 1,076 thousand million scf in revisions and reclassifications related to reductions from lower commodity prices, partly offset by increases from field performance studies and development activities. The increase of 393 thousand million scf in extensions and discoveries resulted from new bookings and extensions of proved areas by drilling activities. Canada The net decrease of 683 thousand million scf in revisions and reclassifications resulted from lower commodity prices. S HE LL SHA RE OF E QU I TY - A C C OU N TE D IN V E S TM E N TS Asia The net increase of 284 thousand million scf in revisions and reclassifications resulted from field performance studies and development activities. The reservoir performance analyses and updates in multiple fields supported continuing better production performance in Brunei and Russia. reports.shell.com Shell Annual Report and Form 20-F 2012 Supplementary information – oil and gas (unaudited) > Natural gas 143 Proved reserves 2011-2010 SHELL SUBSIDIARIES Europe The net increase of 990 thousand million scf in revisions and reclassifications resulted from better production performance and development activities resulting in extending the end-of-field life primarily in Denmark and Norway, and from development activities in Ireland and development activities and better production performance in the UK. Asia The net decrease of 860 thousand million scf in revisions and reclassifications primarily resulted from a decrease in entitlement share due to higher commodity prices. The increase of 239 thousand million scf in extensions and discoveries resulted from new bookings and extensions of proved areas by drilling activities. Oceania The increase of 1,471 thousand million scf from extensions and discoveries was associated with LNG integrated projects in Australia. USA The net increase of 405 thousand million scf in revisions and reclassifications related to drilling activities and studies. The increase of 694 thousand million scf in extensions and discoveries resulted from new bookings and extensions of proved areas by drilling activities. The decrease of 213 thousand million scf resulted from asset sales. Canada The increase of 816 thousand million scf in extensions and discoveries related to development drilling which resulted in additional proved areas. S HE LL SHA RE OF E QU I TY - A C C OU N TE D IN V E S TM E N TS Asia The net increase of 310 thousand million scf in revisions and reclassifications resulted primarily from studies. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 144 Shell Annual Report and Form 20-F 2012 reports.shell.com Supplementary information – oil and gas (unaudited) > Natural gas Natural gas PROVED DEVELOPED AND UNDEVELOPED RESERVES 2012 THOUSAND MILLION STANDARD CUBIC FEET North America South Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production [A] At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production [B] At December 31 Total Europe Asia Oceania Africa USA Canada America Total 5,498 10,691 14 – 68 22 – 160 – – – – (581) (631) 5,952 136 2,800 (142) 3,196 (1,076) – – – (303) (214) – 89 – (163) (343) 16 393 139 (6) (397) 2,045 (683) – 84 – (191) (244) 5,021 10,220 5,571 2,241 2,265 1,011 9,903 (89) 6,262 284 1,142 15 – 3 – – – 26 – – (670) (481) 9,147 14,168 6,091 16,311 – – – (21) (97) 1,039 6,610 – – – – – – – – 2,241 63 31 – – – – (7) 87 2,352 – – – – – – – – 1,011 104 30,286 8 – 4 – – (21) 95 6 (1) – – – – (1) 4 99 (1,583) 16 638 161 (663) (2,431) 26,424 17,376 240 – 29 – (21) (1,256) 16,368 42,792 Reserves attributable to non-controlling interest in Shell subsidiaries At December 31 – 6 – 7 – – – 13 [A] Includes 161 thousand million standard cubic feet consumed in operations. [B] Includes 60 thousand million standard cubic feet consumed in operations. PROVED DEVELOPED RESERVES 2012 Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 PROVED UNDEVELOPED RESERVES 2012 Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 Europe Asia Oceania Africa USA Canada America Total THOUSAND MILLION STANDARD CUBIC FEET North America South 4,685 4,192 7,837 7,407 9,379 9,366 4,936 5,088 839 843 241 581 1,112 1,012 1,506 1,607 – – 46 67 951 872 – – 92 81 5 3 18,564 17,973 13,065 13,146 Europe Asia Oceania Africa USA Canada America Total THOUSAND MILLION STANDARD CUBIC FEET North America South 813 829 2,066 1,740 1,312 854 1,326 1,003 5,113 4,728 1,688 1,229 1,690 658 1,094 139 901 458 – – 17 20 – – 12 14 1 1 11,722 8,451 4,311 3,222 reports.shell.com Shell Annual Report and Form 20-F 2012 Supplementary information – oil and gas (unaudited) > Natural gas 145 Natural gas PROVED DEVELOPED AND UNDEVELOPED RESERVES 2011 THOUSAND MILLION STANDARD CUBIC FEET North America South Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production [A] At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production [B] At December 31 Total Europe Asia Oceania Africa USA Canada America Total 5,082 990 11,970 (860) – 31 – – (605) – 239 – (120) (538) 5,498 10,691 10,484 6,248 72 – – – (4) (649) 9,903 15,401 310 – 168 – – (464) 6,262 16,953 4,814 (118) – 1,471 – – (215) 5,952 1,335 (112) – 14 – (30) (65) 2,989 2,671 1,308 90 – 71 – (21) (329) 405 – 694 – (213) (361) 2,800 3,196 155 – 816 – (5) (229) 2,045 – – – – – – – 74 (6) 3 – – (1) (7) – – – – – – – 1,142 7,094 – 2,800 63 3,259 – 2,045 149 (23) – – – – (22) 104 11 (4) – – – – 28,983 639 – 3,322 – (359) (2,299) 30,286 18,152 260 3 182 – (35) (1) (1,186) 6 110 17,376 47,662 Reserves attributable to non-controlling interest in Shell subsidiaries At December 31 – 10 – 9 – – – 19 [A] Includes 149 thousand million standard cubic feet consumed in operations. [B] Includes 57 thousand million standard cubic feet consumed in operations. PROVED DEVELOPED RESERVES 2011 Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 PROVED UNDEVELOPED RESERVES 2011 Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 Europe Asia Oceania Africa USA Canada America Total THOUSAND MILLION STANDARD CUBIC FEET North America South 4,358 4,685 8,154 7,837 2,273 9,379 2,510 4,936 1,041 839 1,092 1,112 1,460 1,506 311 241 – – 55 46 869 951 – – 89 92 9 5 11,182 18,564 11,039 13,065 Europe Asia Oceania Africa USA Canada America Total THOUSAND MILLION STANDARD CUBIC FEET North America South 724 813 2,330 2,066 9,697 1,312 3,738 1,326 3,773 5,113 1,024 901 1,897 1,688 1,211 1,690 439 1,094 – – 19 17 – – 60 12 2 1 17,801 11,722 7,113 4,311 F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 146 Shell Annual Report and Form 20-F 2012 reports.shell.com Supplementary information – oil and gas (unaudited) > Natural gas Natural gas PROVED DEVELOPED AND UNDEVELOPED RESERVES 2010 THOUSAND MILLION STANDARD CUBIC FEET North America South Europe Asia Oceania Africa USA Canada America Total Shell subsidiaries At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production [A] At December 31 Shell share of equity-accounted investments At January 1 Revisions and reclassifications Improved recovery Extensions and discoveries Purchases of minerals in place Sales of minerals in place Production [B] At December 31 Total 4,722 1,077 13,733 (1,379) 4,800 262 – – 2 (20) (699) – 122 9 – (515) – 9 – (20) (237) 3,038 2,258 1,172 118 – 194 5 (80) (286) 292 41 432 173 (94) (431) 36 – 334 – (11) (223) 5,082 11,970 4,814 2,989 2,671 1,308 11,113 6,079 1,832 103 – – – – 321 1 184 – – (732) (337) 10,484 15,566 6,248 18,218 52 – – 48 (516) (81) 1,335 6,149 – – – – – – – – 2,989 65 16 – – – – (7) 74 2,745 – – – – – – – – 1,308 11 160 238 (75) – 13 – (2) (25) 149 5 6 – – – – – 29,961 331 41 1,104 189 (227) (2,416) 28,983 19,094 498 1 184 48 (516) (1,157) 18,152 47,135 Reserves attributable to non-controlling interest in Shell subsidiaries At December 31 – 24 – 8 – – – 32 [A] Includes 138 thousand million standard cubic feet consumed in operations. [B] Includes 40 thousand million standard cubic feet consumed in operations. PROVED DEVELOPED RESERVES 2010 Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 PROVED UNDEVELOPED RESERVES 2010 Shell subsidiaries At January 1 At December 31 Shell share of equity-accounted investments At January 1 At December 31 Europe Asia Oceania Africa USA Canada America Total THOUSAND MILLION STANDARD CUBIC FEET North America South 3,574 4,358 8,732 8,154 2,418 2,273 1,973 2,510 1,046 1,041 957 1,092 1,248 1,460 354 311 – – 56 55 754 869 – – 173 89 10,170 11,182 5 9 11,120 11,039 Europe Asia Oceania Africa USA Canada America Total THOUSAND MILLION STANDARD CUBIC FEET North America South 1,148 724 2,381 2,330 11,315 9,697 4,106 3,738 3,754 3,773 1,478 1,024 2,081 1,897 1,010 1,211 – – 9 19 418 439 – – 65 60 – 2 19,791 17,801 7,974 7,113 reports.shell.com Shell Annual Report and Form 20-F 2012 Supplementary information – oil and gas (unaudited) > Standardised measure of discounted future cash flows 147 STANDARDISED MEASURE OF DISCOUNTED FUTURE CASH FLOWS those at the end of each year, currently enacted tax rates and a 10% annual discount factor. The information so calculated does not provide a reliable measure of future cash flows from proved reserves, nor does it permit a realistic comparison to be made of one entity with another because the assumptions used cannot reflect the varying circumstances within each entity. SEC Form 20-F requires the disclosure of a standardised measure of discounted future cash flows, relating to proved reserves’ quantities and based on a 12-month unweighted arithmetic average sales price, calculated on a first-day-of-the-month basis, with cost factors based on In addition, a substantial but unknown proportion of future real cash flows from oil and gas production activities is expected to derive from reserves which have already been discovered, but which cannot yet be regarded as proved. 2012 – SHELL SUBSIDIARIES Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net cash flows Non-controlling interest included Europe Asia Oceania 129,581 154,672 40,891 18,717 43,997 25,976 10,620 15,356 – 30,819 13,151 47,301 63,401 28,859 34,542 8 North America South USA Canada America Total $ MILLION 65,144 14,800 21,943 7,436 20,965 16,586 Africa 82,382 20,830 7,350 33,954 20,248 5,833 65,975 36,543 15,708 4,832 8,892 3,909 150,393 81,516 17,573 13,298 38,006 27,331 4,379 – 14,415 281 4,983 – 10,675 – 6,942 3,459 1,836 721 926 198 728 – 655,089 228,858 96,278 151,539 178,414 93,336 85,078 289 2012 – SHELL SHARE OF EQUITY-ACCOUNTED INVESTMENTS Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net Europe 82,091 57,542 1,817 8,894 13,838 6,277 102,607 15,814 47,685 7,082 19,740 28,100 11,737 3,710 4,188 2,399 5,517 2,169 cash flows 7,561 16,363 3,348 Asia Oceania[A] Africa USA Canada America Total North America South $ MILLION – – – – – – – 31,479 9,434 4,087 6,846 11,112 4,854 6,258 – – – – – – – 1,867 233,858 827 71 520 449 133 119,198 17,245 38,399 59,016 25,170 316 33,846 [A] Includes Shell’s ownership of 23% of Woodside Petroleum Ltd as from April 2012 (previously: 24%), a publicly listed company on the Australian Securities Exchange. We have limited access to data; accordingly, the numbers are estimated. 2011 – SHELL SUBSIDIARIES Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net Europe Asia Oceania 134,985 131,083 39,102 15,548 51,533 28,802 12,002 26,746 13,280 41,412 49,645 22,306 66,460 15,029 23,692 8,257 19,482 17,510 Africa 88,833 25,795 7,325 32,812 22,901 7,454 cash flows 16,800 27,339 1,972 15,447 6,730 16,768 Non-controlling interest included – 12 – 269 – – North America South USA Canada America Total $ MILLION 68,992 37,258 15,004 6,066 10,664 3,934 161,029 69,986 20,935 18,028 52,080 35,312 6,291 2,904 1,370 657,673 216,820 97,154 762 158,870 1,255 184,829 293 98,811 962 – 86,018 281 F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 148 Shell Annual Report and Form 20-F 2012 reports.shell.com Supplementary information – oil and gas (unaudited) > Standardised measure of discounted future cash flows 2011 – SHELL SHARE OF EQUITY-ACCOUNTED INVESTMENTS Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net Europe 85,799 58,419 2,290 9,753 15,337 6,758 103,430 17,173 48,613 6,651 20,679 27,487 11,056 5,089 4,167 2,315 5,602 2,301 cash flows 8,579 16,431 3,301 Asia Oceania[A] Africa USA Canada America Total North America South $ MILLION – – – – – – – 33,018 11,512 3,361 6,350 11,795 5,151 6,644 – – – – – – – 1,909 241,329 826 211 541 331 120 124,459 16,680 39,638 60,552 25,386 211 35,166 [A] Includes Shell’s ownership of 24% of Woodside Petroleum Ltd, a publicly listed company on the Australian Securities Exchange. We have limited access to data; accordingly, the numbers are estimated. 2010 – SHELL SUBSIDIARIES Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net cash flows Non-controlling interest included North America South USA Canada America Total $ MILLION Europe 82,004 28,812 11,719 25,739 15,734 4,150 Asia Oceania 125,394 24,155 17,432 34,635 49,172 29,399 35,794 8,797 11,946 5,090 9,961 8,498 Africa 65,203 22,453 7,770 21,854 13,126 4,111 53,573 25,277 11,753 5,852 10,691 3,835 114,649 67,835 18,988 7,521 20,305 13,524 11,584 19,773 1,463 – 126 – 9,015 166 6,856 6,781 – – 2010 – SHELL SHARE OF EQUITY-ACCOUNTED INVESTMENTS Future cash inflows Future production costs Future development costs Future tax expenses Future net cash flows Effect of discounting cash flows at 10% Standardised measure of discounted future net Europe 71,140 50,406 2,265 6,881 11,588 5,159 Asia 69,452 30,703 5,116 14,750 18,883 7,024 Oceania[A] 12,179 Africa – USA 21,994 Canada – North America 3,083 1,410 1,751 5,935 2,423 – – – – – – 8,099 2,944 3,921 7,030 2,928 4,102 – – – – – – cash flows 6,429 11,859 3,512 [A] Includes Shell’s ownership of 24% of Woodside Petroleum Ltd as from November 2010 (previously: 34%), a publicly listed company on the Australian Securities Exchange. We have limited access to data; accordingly, the numbers are estimated. 4,873 2,507 1,330 572 464 82 382 – 481,490 179,836 80,938 101,263 119,453 63,599 55,854 292 South America 1,667 493 118 531 525 165 $ MILLION Total 176,432 92,784 11,853 27,834 43,961 17,699 360 26,262 reports.shell.com Shell Annual Report and Form 20-F 2012 Supplementary information – oil and gas (unaudited) > Standardised measure of discounted future cash flows 149 Change in standardised measure of discounted future net cash flows relating to proved reserves 2012 At January 1 Net changes in prices and production costs Revisions of previous reserves estimates Extensions, discoveries and improved recovery Purchases and sales of minerals in place Development cost related to future production Sales and transfers of oil and gas, net of production costs Development cost incurred during the year Accretion of discount Net change in income tax At December 31 2011 At January 1 Net changes in prices and production costs Revisions of previous reserves estimates Extensions, discoveries and improved recovery Purchases and sales of minerals in place Development cost related to future production Sales and transfers of oil and gas, net of production costs Development cost incurred during the year Accretion of discount Net change in income tax At December 31 2010 At January 1 Net changes in prices and production costs Revisions of previous reserves estimates Extensions, discoveries and improved recovery Purchases and sales of minerals in place Development cost related to future production Sales and transfers of oil and gas, net of production costs Development cost incurred during the year Accretion of discount Net change in income tax At December 31 Shell share of equity- accounted investments 35,166 6,166 2,696 299 (91) (2,971) (16,139) 2,288 5,130 1,302 33,846 Shell share of equity- accounted investments 26,262 23,636 3,205 1,725 (288) (4,173) (15,296) 2,607 3,727 (6,239) 35,166 Shell share of equity- accounted investments 22,346 10,585 3,732 785 (2,070) (698) (11,432) 2,380 3,393 (2,759) 26,262 $ MILLION Total 121,184 1,535 19,451 4,158 (1,912) (15,150) (59,139) 21,847 21,700 5,250 118,924 $ MILLION Total 82,116 103,828 18,349 16,233 (2,245) (25,906) (62,965) 16,136 14,299 (38,661) 121,184 $ MILLION Total 55,741 59,808 27,020 6,271 (1,753) (13,053) (48,273) 15,834 9,321 (28,800) 82,116 F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S Shell subsidiaries 86,018 (4,631) 16,755 3,859 (1,821) (12,179) (43,000) 19,559 16,570 3,948 85,078 Shell subsidiaries 55,854 80,192 15,144 14,508 (1,957) (21,733) (47,669) 13,529 10,572 (32,422) 86,018 Shell subsidiaries 33,395 49,223 23,288 5,486 317 (12,355) (36,841) 13,454 5,928 (26,041) 55,854 150 Shell Annual Report and Form 20-F 2012 reports.shell.com Supplementary information – oil and gas (unaudited) > Oil and gas exploration and production activities capitalised costs OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES CAPITALISED COSTS The aggregate amount of property, plant and equipment and intangible assets relating to oil and gas exploration and production activities and the aggregate amount of the related depreciation, depletion and amortisation at December 31 are shown in the tables below. Shell subsidiaries Cost Proved properties [A] Unproved properties Support equipment and facilities Depreciation, depletion and amortisation Proved properties [A] Unproved properties Support equipment and facilities Net capitalised costs [A] Includes capitalised asset decommissioning and restoration costs and related depreciation. Shell share of equity-accounted investments Cost Proved properties [A] Unproved properties Support equipment and facilities Depreciation, depletion and amortisation Proved properties [A] Unproved properties Support equipment and facilities Net capitalised costs [A] Includes capitalised asset decommissioning and restoration costs and related depreciation. $ MILLION 2012 2011 191,053 167,690 33,061 6,637 28,474 6,313 230,751 202,477 101,709 2,110 3,549 107,368 92,562 2,351 3,515 98,428 123,383 104,049 $ MILLION 2012 2011 50,227 45,389 3,584 3,480 2,563 3,249 57,291 51,201 25,968 23,669 180 1,893 28,041 29,250 155 1,798 25,622 25,579 reports.shell.com Shell Annual Report and Form 20-F 2012 Supplementary information – oil and gas (unaudited) > Oil and gas exploration and production activities costs incurred 151 OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES COSTS INCURRED Costs incurred during the year in oil and gas property acquisition, exploration and development activities, whether capitalised or charged to income currently, are shown in the table below. Development costs include capitalised asset decommissioning and restoration costs and exclude costs of acquiring support equipment and facilities, but include depreciation thereon. Shell subsidiaries 2012 Acquisition of properties Proved Unproved Exploration Development [A] Comprises Canada and Greenland. 2011 Acquisition of properties Proved Unproved Exploration Development [A] Comprises Canada and Greenland. 2010 Acquisition of properties Proved Unproved Exploration Development [A] Comprises Canada and Greenland. Europe Asia Oceania Africa USA Other[A] America Total North America South $ MILLION 387 16 421 3,080 – 148 867 2,773 – 1,769 352 4,901 – 96 559 1,733 567 2,610 4,898 3,621 1 381 1,109 2,113 – 152 479 354 955 5,172 8,685 18,575 Europe Asia Oceania Africa USA Other[A] America Total North America South $ MILLION 32 1 321 1,152 1 1,181 510 3,089 – 73 300 1,196 1 174 404 1,047 – 1,417 3,138 2,697 1 763 663 1,614 – 23 386 340 35 3,632 5,722 11,135 Europe Asia Oceania Africa USA Other[A] America Total North America South $ MILLION 302 304 380 4 110 414 2,590 2,800 – – 410 437 313 330 508 1,569 38 5,776 1,939 2,072 – 86 443 3,239 – – 277 307 657 6,606 4,371 13,014 F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 152 Shell Annual Report and Form 20-F 2012 reports.shell.com Supplementary information – oil and gas (unaudited) > Oil and gas exploration and production activities costs incurred Shell share of equity-accounted investments 2012 Acquisition of properties Proved Unproved Exploration Development 2011 Acquisition of properties Proved Unproved Exploration Development 2010 Acquisition of properties Proved Unproved Exploration Development Europe Asia Oceania Africa USA Other America Total North America South $ MILLION – – 38 209 – – 323 2,217 – – 103 549 – – – – – – 10 405 – – – – – – – 34 – – 474 3,414 Europe Asia Oceania Africa USA Other America Total North America South $ MILLION – – 26 280 – – 250 2,103 – 279 160 1,023 – – – – – – 9 349 – – – – – – – – 279 445 81 3,836 Europe Asia Oceania Africa USA Other America Total North America South $ MILLION – – 59 306 – – 276 2,083 – – 127 849 – – – – – – 4 302 – – – – – – – 50 – – 466 3,590 reports.shell.com Shell Annual Report and Form 20-F 2012 Supplementary information – oil and gas (unaudited) > Oil and gas exploration and production activities earnings 153 OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES EARNINGS Shell subsidiaries 2012 Revenue Third parties Sales between businesses Total Production costs excluding taxes Taxes other than income tax [B] Exploration Depreciation, depletion and amortisation Other (costs)/income Earnings before taxation Taxation charge/(credit) Earnings after taxation Europe Asia Oceania Africa USA Other[A] America Total North America South $ MILLION 4,705 10,275 14,980 2,516 350 347 1,531 (1,331) 8,905 6,327 2,578 3,981 16,450 20,431 1,582 410 461 1,222 (3,157) 13,599 10,742 2,857 1,941 1,129 3,070 395 322 175 304 1,769 3,643 1,104 2,539 2,807 10,364 13,171 1,540 1,248 699 1,261 322 8,745 5,358 3,387 3,573 3,906 7,479 2,486 39 801 207 6,443 6,650 2,986 – 423 3,837 2,037 23 1,431 1,454 255 145 198 315 17,237 49,998 67,235 11,760 2,514 3,104 10,507 (563) (2,175) (63) (5,198) (247) (127) (120) (971) (428) (543) 478 137 341 34,152 23,113 11,039 [A] Comprises Canada and Greenland. [B] Includes cash paid royalties to governments outside North America. 2011 Revenue Third parties Sales between businesses Total Production costs excluding taxes Taxes other than income tax [B] Exploration Depreciation, depletion and amortisation Other (costs)/income Earnings before taxation Taxation charge/(credit) Earnings after taxation Europe Asia Oceania Africa USA Other[A] America Total North America South $ MILLION 5,038 10,379 15,417 2,243 390 288 1,473 (1,670) 9,353 6,048 3,305 4,227 14,495 18,722 1,301 588 326 1,008 (3,242) 12,257 9,748 2,509 1,823 1,160 2,983 386 300 178 351 (331) 3,143 10,986 14,129 1,453 1,499 493 1,181 1,071 1,437 10,574 (15) 1,452 6,511 4,063 3,369 4,016 7,385 2,005 59 745 342 6,710 7,052 2,979 – 110 2,427 1,575 797 (2,080) 2,946 714 2,232 308 165 143 96 1,570 1,666 250 180 126 352 504 1,262 471 791 18,038 49,316 67,354 10,617 3,016 2,266 8,367 (4,951) 38,137 23,642 14,495 [A] Comprises Canada and Greenland. [B] Includes cash paid royalties to governments outside North America. 2010 Revenue Third parties Sales between businesses Total Production costs excluding taxes Taxes other than income tax [B] Exploration Depreciation, depletion and amortisation Other (costs)/income Earnings before taxation Taxation charge/(credit) Earnings after taxation Europe Asia Oceania Africa USA Other[A] America Total North America South $ MILLION 4,100 8,572 12,672 2,186 303 335 2,690 (1,144) 6,014 2,915 3,099 2,755 10,672 13,427 1,106 333 275 748 (2,748) 8,217 6,752 1,465 1,674 980 2,654 287 284 110 436 2,479 4,016 524 3,492 2,215 8,225 10,440 1,244 1,019 294 1,192 497 7,188 4,564 2,624 3,547 3,153 6,700 1,700 100 730 487 4,101 4,588 2,257 – 167 1,858 3,178 (528) (1,324) 1,784 (2,338) 542 (614) 1,242 (1,724) 121 1,356 1,477 209 154 125 636 72 425 132 293 14,899 37,059 51,958 8,989 2,193 2,036 10,738 (2,696) 25,306 14,815 10,491 [A] Comprises Canada and Greenland. [B] Includes cash paid royalties to governments outside North America. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 154 Shell Annual Report and Form 20-F 2012 reports.shell.com Supplementary information – oil and gas (unaudited) > Oil and gas exploration and production activities earnings Shell share of equity-accounted investments 2012 Third party revenue Total Production costs excluding taxes Taxes other than income tax [B] Exploration Depreciation, depletion and amortisation Other income/(costs) Earnings before taxation Taxation Earnings after taxation Europe 6,448 6,448 411 3,574 17 209 390 2,627 969 1,658 Asia Oceania[A] Africa 12,592 12,592 1,441 1,441 952 4,861 391 1,310 (128) 4,950 1,971 2,979 372 111 155 335 80 548 136 412 – – – – – – – – – – North America South $ MILLION USA 2,715 2,715 453 157 10 269 (13) 1,813 658 1,155 Other America – – – – – – – – – – 341 341 41 118 – 41 (252) (111) 26 (137) Total 23,537 23,537 2,229 8,821 573 2,164 77 9,827 3,760 6,067 [A] Includes Shell’s ownership of 23% of Woodside Petroleum Ltd as from April 2012 (previously: 24%), a publicly listed company on the Australian Securities Exchange. We have limited access to data; accordingly, the numbers are estimated. [B] Includes cash paid royalties to governments outside North America. 2011 Third party revenue Total Production costs excluding taxes Taxes other than income tax [B] Exploration Depreciation, depletion and amortisation Other income/(costs) Earnings before taxation Taxation Earnings after taxation Europe 5,688 5,688 353 2,990 13 237 349 2,444 940 1,504 Asia 11,021 11,021 932 4,358 60 1,250 (30) 4,391 1,983 2,408 Oceania[A] 1,271 Africa – 1,271 247 74 89 246 (141) 474 174 300 – – – – – – – – – North America USA 2,807 2,807 457 127 8 211 103 2,107 765 1,342 Other – – – – – – – – – – South America 318 318 41 89 – 35 (108) 45 45 – $ MILLION Total 21,105 21,105 2,030 7,638 170 1,979 173 9,461 3,907 5,554 [A] Includes Shell’s ownership of 24% of Woodside Petroleum Ltd, a publicly listed company on the Australian Securities Exchange. We have limited access to data; accordingly, the numbers are estimated. [B] Includes cash paid royalties to governments outside North America. 2010 Third party revenue Total Production costs excluding taxes Taxes other than income tax [B] Exploration Depreciation, depletion and amortisation Other income/(costs) Earnings before taxation Taxation Earnings after taxation Europe 5,027 5,027 355 2,471 19 247 337 2,272 878 1,394 Asia Oceania[A] Africa 6,895 6,895 815 2,416 8 1,177 (56) 2,423 1,338 1,085 1,471 1,471 196 139 111 303 3 725 207 518 – – – – – – – – – – North America South $ MILLION USA 2,023 2,023 449 35 4 270 18 1,283 465 818 Other America – – – – – – – – – – 196 196 64 9 – 30 43 136 136 – Total 15,612 15,612 1,879 5,070 142 2,027 345 6,839 3,024 3,815 [A] Includes Shell’s ownership of 24% of Woodside Petroleum Ltd as from November 2010 (previously: 34%), a publicly listed company on the Australian Securities Exchange. We have limited access to data; accordingly, the numbers are estimated. [B] Includes cash paid royalties to governments outside North America. reports.shell.com Shell Annual Report and Form 20-F 2012 Supplementary information – oil and gas (unaudited) > Acreage and wells 155 ACREAGE AND WELLS The tables below reflect Shell subsidiaries and equity-accounted investments acreage and wells. The term “gross” refers to the total activity in which Shell subsidiaries and equity-accounted investments have an interest. The term “net” refers to the sum of the fractional interests owned by Shell subsidiaries plus the Shell share of equity-accounted investments’ fractional interests. OIL AND GAS ACREAGE (AT DECEMBER 31) 2012 2011 THOUSAND ACRES 2010 Europe Asia Oceania Africa North America – USA North America – Other [A] South America Total Developed Undeveloped Developed Undeveloped Developed Undeveloped Gross 9,091 26,989 1,703 5,428 1,837 1,181 162 Net 2,659 9,400 Gross 5,844 Net 1,964 Gross 9,016 53,460 26,604 27,268 Net 2,586 9,810 Gross 6,688 Net 2,376 Gross 8,983 48,554 25,779 27,496 467 70,575 26,469 2,299 1,176 30,404 23,460 8,878 6,990 785 36,179 27,349 76 17,242 9,668 1,798 6,060 1,592 1,101 162 500 67,907 26,326 2,465 20,706 15,364 984 757 7,815 6,140 31,573 23,849 76 20,655 8,905 2,274 6,701 1,568 1,002 162 Net 2,550 9,970 Gross 8,165 Net 3,265 41,781 22,800 553 81,748 24,413 2,424 23,327 17,079 952 664 76 7,003 5,834 31,501 21,489 15,878 6,588 46,391 16,862 222,582 122,504 46,997 17,178 203,898 108,739 48,186 17,189 209,403 101,468 [A] Comprises Canada and Greenland. NUMBER OF PRODUCTIVE WELLS (AT DECEMBER 31) [A] Europe Asia Oceania Africa Gross 1,431 7,200 48 837 Oil Net 425 2,316 5 324 North America – USA 15,108 7,630 North America – Canada South America Total 460 73 393 29 2012 Gas Net 398 116 217 62 Gross 1,454 7,361 48 883 Oil Net 427 2,352 5 357 2,808 14,993 7,607 880 2 476 67 406 33 2011 Gas Net 430 162 212 65 Gross 1,464 7,236 39 1,180 Oil Net 412 2,382 4 447 2,222 15,322 7,771 906 2 433 73 370 34 Gross 1,317 289 557 98 3,449 1,115 7 Gross 1,341 298 608 89 3,884 1,007 6 2010 Gas Net 443 164 211 59 2,457 764 1 Gross 1,266 243 574 95 4,618 1,165 7 25,157 11,122 7,968 4,483 25,282 11,187 6,832 3,999 25,747 11,420 7,233 4,099 [A] The number of productive wells with multiple completions (more than one formation producing into the same well bore) was 1,923 gross at December 31, 2012 (net 696); 2011: 1,997 gross (net 739); 2010: 2,011 gross (net 779). NUMBER OF NET PRODUCTIVE WELLS AND DRY HOLES DRILLED Productive 2012 Dry Productive 2011 Dry Productive 2010 Dry Exploratory [A] Europe Asia Oceania Africa North America – USA North America – Canada South America Total Development Europe Asia Oceania Africa North America – USA North America – Canada South America Total 1 3 – 3 124 37 – 168 9 255 7 25 352 49 1 698 1 4 1 7 3 9 1 26 – 4 – – – 2 – 6 1 6 – 3 70 21 1 102 12 196 – 23 347 102 1 681 1 97 2 5 2 4 1 112 1 8 – 2 2 1 – 14 2 8 – 8 75 29 1 123 20 269 3 11 388 34 1 726 4 28 2 5 5 8 1 53 1 4 – – – – – 5 [A] Productive wells are wells with proved reserves allocated. Exploratory wells in the process of drilling are excluded and presented separately on page 156. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 156 Shell Annual Report and Form 20-F 2012 reports.shell.com Supplementary information – oil and gas (unaudited) > Acreage and wells NUMBER OF WELLS IN THE PROCESS OF EXPLORATORY DRILLING [A] 2012 Wells in the process of Wells in the process of drilling at January 1 and drilling at January 1 and proved reserves allocated determined as dry New wells in the process At January 1 during the year during the year of drilling at December 31 At December 31 Gross Net Gross Net Gross Europe Asia Oceania Africa North America – USA North America – Canada South America Total Gross 24 101 333 39 235 145 11 888 Net 6 47 94 24 167 142 5 485 (8) (19) – (4) (153) (48) – (232) (2) (8) – (2) (98) (46) – (156) (7) (10) (10) (11) (2) (18) (4) (62) (2) (4) (5) (8) (1) (18) (2) (40) [A] Wells in the process of drilling includes exploratory wells temporarily suspended. NUMBER OF WELLS IN THE PROCESS OF DEVELOPMENT DRILLING [A] Europe Asia Oceania Africa North America – USA North America – Canada South America Total [A] In addition to the present activities mentioned above, Shell has ongoing activities related to the installation of waterflood projects in Europe, Asia, Africa and North America. Activities related to steam floods are in progress in Europe, Asia and North America, and gas compression is being installed in Europe and Asia. Net 3 22 67 10 146 58 2 308 Gross 14 105 465 40 242 146 10 1,022 Net 5 57 156 24 214 136 5 597 At January 1 At December 31 2012 Net 3 20 1 4 105 13 – 146 Gross 13 50 24 7 211 58 7 370 Net 3 16 6 2 127 50 4 208 5 33 142 16 162 67 3 428 Gross 14 69 3 8 191 16 1 302 reports.shell.com Shell Annual Report and Form 20-F 2012 Independent Auditors’ Report to the Members of Royal Dutch Shell plc 157 SE PA RAT E O PI NI ON IN RE L AT I O N TO IFR Ss AS ISSUE D B Y THE I A S B As explained in Note 1 to the Parent Company Financial Statements, the Company in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the Parent Company Financial Statements comply with IFRSs as issued by the IASB. OPIN ION ON OTHE R MA TTE RS PRE SCRIBE D BY THE C OMPA N IE S ACT 2006 In our opinion: ▪ the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and ▪ the information given in the Report of the Directors for the financial year for which the Parent Company Financial Statements are prepared is consistent with the Parent Company Financial Statements. MA TTE RS ON WHICH WE A RE RE QUIRE D TO RE PORT BY E X C E P TI ON We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: ▪ adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or ▪ the Parent Company Financial Statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or ▪ certain disclosures of Directors’ remuneration specified by law are not made; or ▪ we have not received all the information and explanations we require for our audit. OTHE R M A TTE R We have reported separately on the Consolidated Financial Statements of Royal Dutch Shell plc for the year ended December 31, 2012. Stephen Johnson (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London March 13, 2013 Note: ▪ The maintenance and integrity of the Royal Dutch Shell plc website (www.shell.com) are the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Parent Company Financial Statements since they were initially presented on the website. ▪ Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ROYAL DUTCH SHELL PLC We have audited the Parent Company Financial Statements of Royal Dutch Shell plc (the Company) for the year ended December 31, 2012, which comprise the Statement of Income, the Statement of Comprehensive Income, the Balance Sheet, the Statement of Changes in Equity, the Statement of Cash Flows and the related Notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. RE SPE C TIVE RE SPON SIBILITIE S OF DIRE CTORS A N D A UDITORS As explained more fully in the statement of the Directors’ responsibilities in respect of the preparation of the financial statements set out on page 57, the Directors are responsible for the preparation of the Parent Company Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Parent Company Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. S C OP E OF THE A U D I T OF THE FIN A N C I A L STA TE M E N TS An audit involves obtaining evidence about the amounts and disclosures in the Parent Company Financial Statements sufficient to give reasonable assurance that the Parent Company Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the Parent Company Financial Statements. In addition, we read all the financial and non- financial information in the Royal Dutch Shell plc Annual Report and Form 20-F for 2012 to identify material inconsistencies with the audited Parent Company Financial Statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. OP I N I ON ON FI N A N C I A L STA TE M E N TS In our opinion the Parent Company Financial Statements: ▪ give a true and fair view of the state of the Company’s affairs as at December 31, 2012, and of its income and cash flows for the year then ended; ▪ have been properly prepared in accordance with IFRSs as adopted by the European Union; and ▪ have been prepared in accordance with the requirements of the Companies Act 2006. 158 Shell Annual Report and Form 20-F 2012 reports.shell.com Parent Company Financial Statements INDEX TO THE PARENT COMPANY FINANCIAL STATEMENTS The Parent Company Financial Statements have not been audited in accordance with the standards of the Public Company Accounting Oversight Board (United States). 159 159 159 160 160 161 161 161 162 162 162 162 163 163 163 164 164 165 166 166 167 167 Statement of Income Statement of Comprehensive Income Balance Sheet Statement of Changes in Equity Statement of Cash Flows Notes to the Parent Company Financial Statements Note 1 Basis of preparation Note 2 Accounting policies Note 3 Finance income/(expense) Note 4 Remuneration of Directors and Senior Management Note 5 Investments in subsidiaries Note 6 Taxation Note 7 Accounts receivable Note 8 Cash and cash equivalents Note 9 Financial instruments and other derivative contracts Note 10 Accounts payable and accrued liabilities Note 11 Share capital Note 12 Other reserves Note 13 Dividends Note 14 Related parties Note 15 Legal proceedings and other contingencies Note 16 Auditors’ remuneration STATEMENT OF INCOME Dividend income Finance income Administrative expenses Finance expense Income before taxation Taxation Income for the period All results are from continuing activities. STATEMENT OF COMPREHENSIVE INCOME Income for the period Comprehensive income for the period BALANCE SHEET Assets Non-current assets Investments in subsidiaries Deferred tax Current assets Accounts receivable Cash and cash equivalents Total assets Liabilities Current liabilities Accounts payable and accrued liabilities Total liabilities Equity Share capital Other reserves Retained earnings Total equity Total liabilities and equity Signed on behalf of the Board /s/ Simon Henry Simon Henry Chief Financial Officer March 13, 2013 reports.shell.com Shell Annual Report and Form 20-F 2012 Parent Company Financial Statements 159 NOTES 3 3 6 2012 3,807 320 (70) (24) 4,033 53 4,086 2012 4,086 4,086 $ MILLION 2011 13,438 79 (103) (225) 13,189 6 13,195 $ MILLION 2011 13,195 13,195 $ MILLION NOTES Dec 31, 2012 Dec 31, 2011 5 6 7 8 10 11 12 202,490 351 202,841 12,902 120 13,022 215,863 1,015 1,015 1,015 542 202,052 12,254 214,848 215,863 202,291 350 202,641 17,433 121 17,554 220,195 1,110 1,110 1,110 536 201,606 16,943 219,085 220,195 F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S The Notes on pages 161 to 167 form an integral part of these Parent Company Financial Statements. 160 Shell Annual Report and Form 20-F 2012 reports.shell.com Parent Company Financial Statements STATEMENT OF CHANGES IN EQUITY At January 1, 2012 Comprehensive income for the period Dividends paid Scrip dividends Repurchases of shares Share-based compensation At December 31, 2012 At January 1, 2011 Comprehensive income for the period Dividends paid Scrip dividends Repurchases of shares Share-based compensation At December 31, 2011 STATEMENT OF CASH FLOWS Cash flow from operating activities Income for the period Adjustment for: Dividend income Taxation Unrealised foreign exchange (gains)/losses Interest income Interest expense Share-based compensation Decrease/(increase) in working capital Net cash from/(used in) operating activities (pre-tax) Taxation refunded Net cash from/(used in) operating activities Cash flow from investing activities Dividends received Interest received Net cash from investing activities Cash flow from financing activities Cash dividends paid Repurchases of shares Interest paid Net cash used in financing activities Decrease in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 NOTES Share capital 536 Other reserves 201,606 13 13 12 12 13 13 12 12 – – 9 (3) – 542 529 – – 10 (3) – – – (9) 3 452 202,052 201,542 – – (10) 3 71 536 201,606 Retained earnings 16,943 4,086 (10,955) 3,565 (1,728) 343 12,254 11,142 13,195 (10,457) 3,580 (1,106) 589 16,943 NOTES 2012 $ MILLION Total equity 219,085 4,086 (10,955) 3,565 (1,728) 795 214,848 213,213 13,195 (10,457) 3,580 (1,106) 660 219,085 $ MILLION 2011 4,086 13,195 (3,807) (13,438) (53) (293) (26) 24 51 5,090 5,072 – 5,072 3,807 26 3,833 (7,390) (1,492) (24) (8,906) (1) 121 120 (6) 205 (79) 17 69 (17,097) (17,134) 11 (17,123) 13,438 79 13,517 (6,877) (1,106) (17) (8,000) (11,606) 11,727 121 13 8 The Notes on pages 161 to 167 form an integral part of these Parent Company Financial Statements. reports.shell.com Shell Annual Report and Form 20-F 2012 Parent Company Financial Statements > Notes to the Parent Company Financial Statements 161 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 1 BASIS OF PREPARATION The Financial Statements of Royal Dutch Shell plc (the Company) have been prepared in accordance with the provisions of the Companies Act 2006 and with International Financial Reporting Standards (IFRS) as adopted by the European Union. As applied to the Company, there are no material differences with IFRS as issued by the International Accounting Standards Board (IASB); therefore, the Financial Statements have been prepared in accordance with IFRS as issued by the IASB. As described in the accounting policies in Note 2, the Financial Statements have been prepared under the historical cost convention except for certain items measured at fair value. Those accounting policies have been applied consistently in all periods presented and there were no material changes during 2012. The Financial Statements were approved and authorised for issue by the Board of Directors on March 13, 2013. The preparation of financial statements in conformity with IFRS requires the use of certain accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. Actual results may differ from those estimates. The financial results of the Company are included in the Consolidated Financial Statements on pages 99-137. The financial results of the Company incorporate the results of the Dividend Access Trust (the Trust), the financial statements for which are presented on pages 171-174. The Company’s principal activity is being the parent company for Shell, as described in Note 1 to the Consolidated Financial Statements. It conducts itself wholly within the Corporate business segment (see Note 4 to the Consolidated Financial Statements). 2 ACCOUNTING POLICIES The Company’s accounting policies follow those of Shell as set out in Note 2 to the Consolidated Financial Statements. Key accounting estimates and judgements affecting the assessment and measurement of impairment follow those set out in Note 3 to the Consolidated Financial Statements. The following are the principal accounting policies that specifically relate to the Company: Presentation currency The Company’s presentation and functional currency is US dollars (dollars). Taxation The Company is tax-resident in the Netherlands. For the assessment of corporate income tax in the Netherlands, the Company and certain of its subsidiaries form a fiscal unit, in respect of which the Company recognises in its financial statements any current tax payable or receivable for the fiscal unit as a whole. The Company’s tax charge or credit recognised in income is calculated at the statutory tax rate prevailing in the Netherlands. Investments Investments in subsidiaries are stated at cost, net of any impairment. The original cost of the Company’s investment in Royal Dutch Petroleum Company (Royal Dutch) was based on the fair value of the shares transferred to the Company by the former shareholders of Royal Dutch in exchange for A shares in the Company during the public exchange offer in 2005. The original cost of the Company’s investment in The “Shell” Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited (Shell Transport), was the fair value of the shares held by the former shareholders of The “Shell” Transport and Trading Company, p.l.c. transferred in consideration for the issuance of B shares as part of the Scheme of Arrangement in 2005. The Company’s investments in Royal Dutch and Shell Transport now represent an investment in Shell Petroleum N.V. (Shell Petroleum); this change had no impact on the cost of investments in subsidiaries. Share-based compensation plans The fair value of share-based compensation for equity-settled plans granted to subsidiary employees under the Company’s schemes is recognised as an investment in subsidiaries from the date of grant over the vesting period with a corresponding increase in equity. In the year of vesting of a plan, the costs for the actual deliveries are recharged to the relevant employing subsidiaries. This is recognised as a repayment of the investment originally booked. If the actual vesting costs are higher than the cumulatively recognised share-based compensation charge, the difference is recognised in income. Information on the principal plans, including vesting conditions and shares granted, vested and expired or forfeited during the year, is set out in Note 22 to the Consolidated Financial Statements. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 162 Shell Annual Report and Form 20-F 2012 reports.shell.com Parent Company Financial Statements > Notes to the Parent Company Financial Statements [Note 2 continued] Dividend income Interim dividends are recognised on a paid basis unless the dividend has been confirmed by a general meeting of Shell Transport or of Shell Petroleum, in which case income is recognised on declaration date. 3 FINANCE INCOME/(EXPENSE) Finance income Interest income Foreign exchange gains Total Finance expense Interest expense Foreign exchange losses Total 2012 26 294 320 (24) – (24) $ MILLION 2011 79 – 79 (17) (208) (225) 4 REMUNERATION OF DIRECTORS AND SENIOR MANAGEMENT Remuneration of Directors and Senior Management, consisting of short-term benefits, retirement benefits, share-based compensation and gains realised on the exercise of share options, is set out in Note 5 to the Consolidated Financial Statements. Of these amounts, $49 million (2011: $38 million) is borne by the Company and is presented within administrative expenses. 5 INVESTMENTS IN SUBSIDIARIES At January 1 Share-based compensation Recharge of vested share-based compensation Other At December 31 6 TAXATION A – Taxation credit Current taxation Credit in respect of current period Total Deferred taxation Relating to the origination and reversal of temporary differences Total Total taxation credit 2012 202,291 867 (731) 63 $ MILLION 2011 202,160 644 (657) 144 202,490 202,291 2012 $ MILLION 2011 (44) (44) (9) (9) (53) (12) (12) 6 6 (6) reports.shell.com Shell Annual Report and Form 20-F 2012 Parent Company Financial Statements > Notes to the Parent Company Financial Statements 163 [Note 6 continued] The applicable tax charge at the statutory tax rate reconciles to the actual taxation credit as follows: Income before taxation Applicable tax charge at the statutory tax rate of 25.0% (2011: 25.0%) Income not subject to tax Expenses not deductible for tax purposes Other reconciling items Taxation credit B – Taxes payable Taxes payable are reported within accounts payable and accrued liabilities (see Note 10). C – Deferred tax assets At January 1 Recognised in income Other movements At December 31 2012 4,033 1,008 (1,026) 12 (47) (53) $ MILLION 2011 13,189 3,297 (3,361) 52 6 (6) 2012 350 9 (8) 351 $ MILLION 2011 252 (6) 104 350 Deferred tax assets are recognised in respect of tax losses, which are available for relief against future taxable profits for up to nine years from the year in which the loss was incurred. 7 ACCOUNTS RECEIVABLE Amounts due from subsidiaries (see Note 14) Other receivables Total 8 CASH AND CASH EQUIVALENTS Dec 31, 2012 Dec 31, 2011 $ MILLION 12,901 1 12,902 17,433 – 17,433 Cash and cash equivalents comprised call deposits in euros, sterling and dollars with Shell Treasury Centre Limited, a subsidiary. The Company earned interest on these balances of $nil in 2012 (2011: $3 million). Interest on euro balances is calculated at EONIA less 0.125% (2011: EONIA less 0.15%), on sterling balances at LIBOR (2011: LIBOR) and on dollar balances at US LIBOR less 0.125% (2011: US LIBID). 9 FINANCIAL INSTRUMENTS AND OTHER DERIVATIVE CONTRACTS Financial assets and liabilities in the Company’s Balance Sheet comprise cash and cash equivalents (see Note 8), accounts receivable (see Note 7) and certain amounts reported within accounts payable and accrued liabilities (see Note 10). Foreign exchange derivatives are used by the Company to manage foreign exchange risk. Foreign exchange risk arises when certain transactions are denominated in a currency that is not the Company’s functional currency. There are no derivative financial instruments held at December 31, 2012 or 2011. The fair value of financial assets and liabilities at December 31, 2012 and 2011, all of which fall due within 12 months, approximates their carrying amount. Information on financial risk management is presented in Note 21 to the Consolidated Financial Statements. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 164 Shell Annual Report and Form 20-F 2012 reports.shell.com Parent Company Financial Statements > Notes to the Parent Company Financial Statements 10 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Amounts owed to subsidiaries (see Note 14) Withholding tax payable Accruals and other liabilities Unclaimed dividends Total 11 SHARE CAPITAL ISSUED AND FULLY PAID At January 1, 2012 Scrip dividends Repurchases of shares At December 31, 2012 At January 1, 2011 Scrip dividends Repurchases of shares At December 31, 2011 NOMINAL VALUE At January 1, 2012 Scrip dividends Repurchases of shares At December 31, 2012 At January 1, 2011 Scrip dividends Repurchases of shares At December 31, 2011 Dec 31, 2012 Dec 31, 2011 $ MILLION 654 117 242 2 965 135 8 2 1,015 1,110 Ordinary shares of €0.07 each B A 3,668,550,437 2,661,403,172 103,838,250 – – (43,687,983) 3,772,388,687 3,563,952,539 104,597,898 – 2,617,715,189 2,695,808,103 – (34,404,931) NUMBER OF SHARES Sterling deferred shares of £1 each 50,000 – – 50,000 50,000 – – 3,668,550,437 2,661,403,172 50,000 Ordinary shares of €0.07 each B A 312 9 – 321 302 10 – 312 224 – (3) 221 227 – (3) 224 $ MILLION Total 536 9 (3) 542 529 10 (3) 536 The total nominal value of sterling deferred shares is less than $1 million. The B shares repurchased in 2012 and 2011 under the Company’s share buyback programme were all cancelled. At the Company’s Annual General Meeting on May 22, 2012, the Board was authorised to allot ordinary shares in the Company, and to grant rights to subscribe for or to convert any security into ordinary shares in the Company, up to an aggregate nominal amount of €147 million (representing 2,100 million ordinary shares of €0.07 each), and to list such shares or rights on any stock exchange. This authority expires at the earlier of the close of business on August 22, 2013, and the end of the Annual General Meeting to be held in 2013, unless previously renewed, revoked or varied by the Company in a general meeting. The B shares rank pari passu in all respects with the A shares except for the dividend access mechanism described below. The Company and Shell Transport can procure the termination of the dividend access mechanism at any time. Upon such termination, the B shares will form one class with the A shares ranking pari passu in all respects and the A and B shares will be known as ordinary shares without further distinction. The sterling deferred shares are redeemable only at the discretion of the Company for £1 each and carry no voting rights. There are no further rights to participate in profits or assets, including the right to receive dividends. Upon winding up or liquidation, the shares carry a right to repayment of paid-up nominal value, ranking ahead of the A and B shares. For information on the number of shares in the Company held by Shell employee share ownership trusts and in connection with share-based compensation plans, refer to Note 22 to the Consolidated Financial Statements. Dividend access mechanism for B shares GE N E RA L Dividends paid on A shares have a Dutch source for tax purposes and are subject to Dutch withholding tax. reports.shell.com Shell Annual Report and Form 20-F 2012 Parent Company Financial Statements > Notes to the Parent Company Financial Statements 165 [Note 11 continued] It is the expectation and the intention, although there can be no certainty, that holders of B shares will receive dividends via the dividend access mechanism. Any dividends paid on the dividend access share will have a UK source for Dutch and UK tax purposes; there will be no UK or Dutch withholding tax on such dividends and certain holders (not including US holders) of B shares or B American Depositary Shares (ADSs) will be entitled to a UK tax credit in respect of their proportional share of such dividends. D E S C R I P T I O N OF D I V I D E N D A C C E S S M E C H A N I S M A dividend access share has been issued by Shell Transport to Computershare Trustees (Jersey) Limited (formerly EES Trustees International Limited) as dividend access trustee (the Trustee). EES Trustees International Limited replaced Lloyds TSB Offshore Trust Company Limited as Trustee on January 26, 2012. Pursuant to a declaration of trust, the Trustee will hold any dividends paid in respect of the dividend access share on trust for the holders of B shares from time to time and will arrange for prompt disbursement of such dividends to holders of B shares. Interest and other income earned on unclaimed dividends will be for the account of Shell Transport and any dividends that are unclaimed after 12 years will revert to Shell Transport. Holders of B shares will not have any interest in the dividend access share and will not have any rights against Shell Transport as issuer of the dividend access share. The only assets held on trust for the benefit of the holders of B shares will be dividends paid to the Trustee in respect of the dividend access share. The declaration and payment of dividends on the dividend access share will require Board action by Shell Transport and will be subject to any applicable legal or articles limitations in effect from time to time. In no event will the aggregate amount of the dividend paid by Shell Transport under the dividend access mechanism for a particular period exceed the aggregate amount of the dividend declared by the Company’s Board on the B shares in respect of the same period. OP E RA TI ON OF THE D I V I D E N D A C C E S S M E C HA N I S M If, in connection with the declaration of a dividend by the Company on the B shares, the Board of Shell Transport elects to declare and pay a dividend on the dividend access share to the Trustee, the holders of the B shares will be beneficially entitled to receive their share of that dividend pursuant to the declaration of trust (and arrangements will be made to ensure that the dividend is paid in the same currency in which they would have received a dividend from the Company). If any amount is paid by Shell Transport by way of a dividend on the dividend access share and paid by the Trustee to any holder of B shares, the dividend which the Company would otherwise pay on the B shares will be reduced by an amount equal to the amount paid to such holders of B shares by the Trustee. The Company will have a full and unconditional obligation, in the event that the Trustee does not pay an amount to holders of B shares on a cash dividend payment date (even if that amount has been paid to the Trustee), to pay immediately the dividend declared on the B shares. The right of holders of B shares to receive distributions from the Trustee will be reduced by an amount equal to the amount of any payment actually made by the Company on account of any dividend on B shares. The dividend access mechanism may be suspended or terminated at any time by the Company’s Directors or the Directors of Shell Transport, for any reason and without financial recompense. This might, for instance, occur in response to changes in relevant tax legislation. 12 OTHER RESERVES At January 1, 2012 Scrip dividends Repurchases of shares Share-based compensation At December 31, 2012 At January 1, 2011 Scrip dividends Repurchases of shares Share-based compensation At December 31, 2011 Share premium Capital redemption reserve 154 – – – 154 154 – – – 154 reserve 60 – 3 – 63 57 – 3 – 60 Share plan reserve 1,027 – – 452 1,479 956 – – 71 Other reserve 200,365 (9) – – 200,356 200,375 (10) – – F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S $ MILLION Total 201,606 (9) 3 452 202,052 201,542 (10) 3 71 1,027 200,365 201,606 On January 6, 2006, loan notes were converted into 4,827,974 A shares. The difference between the value of the loan notes and the value of the new shares issued was credited to the share premium reserve. The capital redemption reserve was established in connection with repurchases of shares of the Company. 166 Shell Annual Report and Form 20-F 2012 reports.shell.com Parent Company Financial Statements > Notes to the Parent Company Financial Statements [Note 12 continued] The share plan reserve represents the fair value of share-based compensation granted to employees of subsidiaries under the Company’s equity- settled schemes. The other reserve was established as a consequence of the Company becoming the single parent company of Royal Dutch and Shell Transport and represented the difference between the cost of the investment in those companies and the nominal value of shares issued in exchange for those investments as required by the prevailing legislation at that time, section 131 of the Companies Act 1985. 13 DIVIDENDS Interim March 22, 2012 March 22, 2012 Interim June 21, 2012 June 21, 2012 Interim September 20, 2012 September 20, 2012 Interim December 20, 2012 December 20, 2012 Total Interim March 25, 2011 March 25, 2011 Interim June 27, 2011 June 27, 2011 Interim September 19, 2011 September 19, 2011 Interim December 16, 2011 December 16, 2011 Total $0.42 per A share $0.42 per B share $0.43 per A share $0.43 per B share $0.43 per A share $0.43 per B share $0.43 per A share $0.43 per B share $0.42 per A share $0.42 per B share $0.42 per A share $0.42 per B share $0.42 per A share $0.42 per B share $0.42 per A share $0.42 per B share Cash Scrip Total $ MILLION 816 855 1,008 1,104 937 1,036 822 812 728 271 597 51 680 111 798 329 1,544 1,126 1,605 1,155 1,617 1,147 1,620 1,141 7,390 3,565 10,955 820 738 890 878 912 954 818 867 681 387 601 236 571 148 703 253 1,501 1,125 1,491 1,114 1,483 1,102 1,521 1,120 6,877 3,580 10,457 In addition, on January 31, 2013, the Directors announced a further interim dividend in respect of 2012 of $0.43 per A share and $0.43 per B share. The total dividend is estimated to be $2,748 million and is payable on March 28, 2013. Under the Scrip Dividend Programme, shareholders can elect to receive dividends in the form of A shares. The cash dividends on the B shares are paid via the Trust (see Note 11). Dividends on A shares are by default paid in euros, although holders may elect to receive dividends in sterling. Dividends on B shares are by default paid in sterling, although holders may elect to receive dividends in euros. Dividends on ADSs are paid in dollars. 14 RELATED PARTIES Significant subsidiaries at December 31, 2012, and Shell’s percentage interest therein, are set out in Exhibit 8. The Company has no direct interest in jointly controlled entities and associates. Shell’s major investments in jointly controlled entities and associates at December 31, 2012, are set out in Note 10 to the Consolidated Financial Statements. A complete list of investments in subsidiaries, jointly controlled entities and associates will be attached to the Company’s annual return made to the Registrar of Companies. Shell Petroleum Shell Treasury Luxembourg Sarl Total $ MILLION Amounts due from subsidiaries Amounts owed to subsidiaries (see Note 7) (see Note 10) Dec 31, 2012 Dec 31, 2011 Dec 31, 2012 Dec 31, 2011 12,901 17,433 – – 12,901 17,433 285 369 654 307 658 965 reports.shell.com Shell Annual Report and Form 20-F 2012 Parent Company Financial Statements > Notes to the Parent Company Financial Statements 167 [Note 14 continued] The amount due from Shell Petroleum, which is denominated in dollars, is repayable on demand. Interest is calculated at US LIBOR less 0.125% (2011: US LIBOR less 0.1%) and interest income in 2012 was $8 million (2011: $1 million). The net amount due to Shell Treasury Luxembourg Sarl at December 31, 2012, comprises an interest-bearing receivable of €9,545 million (2011: €12,988 million) and an interest-bearing payable of $12,964 million (2011: $17,444 million). Interest on euro balances is calculated at EONIA less 0.125% (2011: EONIA less 0.15%) and on dollar balances at US LIBOR (2011: US LIBOR). Net interest expense on these balances in 2012 was $7 million (2011: $57 million net interest income). Other transactions and balances The Company enters into forward and spot foreign exchange contracts with Treasury companies, which are subsidiaries. At December 31, 2012, there were no open contracts with these companies in respect of foreign exchange contracts. The Company settles general and administrative expenses of the Trust including the auditors’ remuneration. The Company has guaranteed contractual payments totalling $29,477 million at December 31, 2012 (2011: $28,777 million) and related interest in respect of listed debt issued by Shell International Finance B.V. 15 LEGAL PROCEEDINGS AND OTHER CONTINGENCIES Refer to Note 25 to the Consolidated Financial Statements. 16 AUDITORS’ REMUNERATION Auditors’ remuneration for 2012 audit services was $153,800 (2011: $152,700). F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 168 Shell Annual Report and Form 20-F 2012 reports.shell.com Independent Auditors’ Report to Computershare Trustees (Jersey) Limited as Trustee of the Royal Dutch Shell Dividend Access Trust INDEPENDENT AUDITORS’ REPORT TO COMPUTERSHARE TRUSTEES (JERSEY) LIMITED (FORMERLY EES TRUSTEES INTERNATIONAL LIMITED) AS TRUSTEE OF THE ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST We have audited the Financial Statements of Royal Dutch Shell Dividend Access Trust (the Trust) for the year ended December 31, 2012, which comprise the Statement of Income, the Statement of Comprehensive Income, the Balance Sheet, the Statement of Changes in Equity, the Statement of Cash Flows and the related Notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. RESPECTIVE RESPONSIBILITIES OF TRUSTEE AND AUDITORS The Trustee is responsible for the preparation of the Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Trustee and the Royal Dutch Shell plc B shareholders as a body and for no other purposes. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufficient to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Trust’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Trustee; and the overall presentation of the Financial Statements. In addition, we read all the financial and non- financial information in the Royal Dutch Shell plc Annual Report and Form 20-F for 2012 to identify material inconsistencies with the audited Consolidated Financial Statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. OPINION ON FINANCIAL STATEMENTS In our opinion the Financial Statements: ▪ give a true and fair view of the state of the Trust’s affairs as at December 31, 2012, and of its income and cash flows for the year then ended; and ▪ have been properly prepared in accordance with IFRSs as adopted by the European Union. SEPARATE OPINION IN RELATION TO IFRSs AS ISSUED BY THE IASB As explained in Note 2 to the Financial Statements, the Trust in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the Financial Statements comply with IFRSs as issued by the IASB. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION We have nothing to report in respect of the following matters where we would report to you if, in our opinion: ▪ proper accounting records have not been kept by the Trust; or ▪ the Financial Statements are not in agreement with the accounting records; or ▪ we have not received all the information and explanations we require for our audit. PricewaterhouseCoopers CI LLP Chartered Accountants Jersey, Channel Islands March 13, 2013 Note: ▪ The report set out above is included for the purposes of Royal Dutch Shell plc’s Annual Report and Accounts for 2012 only and does not form part of Royal Dutch Shell plc’s Annual Report on Form 20-F for 2012. ▪ The maintenance and integrity of the Royal Dutch Shell plc website (www.shell.com) are the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Consolidated Financial Statements since they were initially presented on the website. ▪ Legislation in the Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. reports.shell.com Shell Annual Report and Form 20-F 2012 Report of Independent Registered Public Accounting Firm 169 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To Computershare Trustees (Jersey) Limited (formerly EES Trustees International Limited) as Trustee of the Royal Dutch Shell Dividend Access Trust and the Board of Directors and Shareholders of Royal Dutch Shell plc. In our opinion, the accompanying Statement of Income, the Statement of Comprehensive Income, the Balance Sheet, the Statement of Changes in Equity, the Statement of Cash Flows and the related Notes to the Financial Statements present fairly, in all material respects, the financial position of the Royal Dutch Shell Dividend Access Trust (the Trust) at December 31, 2012, and December 31, 2011, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2012, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union. Also in our opinion, the Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Trustee and the management of Royal Dutch Shell plc are responsible for these Financial Statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Trustee’s and Management’s Report on Internal Control over Financial Reporting of the Royal Dutch Shell Dividend Access Trust set out on page 84. Our responsibility is to express opinions on these Financial Statements and on the Trust’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the Financial Statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the Financial Statements included examining, on a test basis, evidence supporting the amounts and disclosures in the Financial Statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers CI LLP Jersey, Channel Islands March 13, 2013 Note that the report set out above is included for the purposes of Royal Dutch Shell plc’s Annual Report on Form 20-F for 2012 only and does not form part of Royal Dutch Shell plc’s Annual Report and Accounts for 2012. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 170 Shell Annual Report and Form 20-F 2012 reports.shell.com Royal Dutch Shell Dividend Access Trust Financial Statements INDEX TO THE ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST FINANCIAL STATEMENTS 171 171 171 172 172 173 173 173 173 174 174 174 174 174 174 Statement of Income Statement of Comprehensive Income Balance Sheet Statement of Changes in Equity Statement of Cash Flows Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements Note 1 The Trust Note 2 Basis of preparation Note 3 Accounting policies Note 4 Other liabilities Note 5 Capital account Note 6 Distributions made Note 7 Auditors’ remuneration Note 8 Financial instruments Note 9 Related party transactions STATEMENT OF INCOME Dividend income Income before and after taxation and for the period All results are from continuing activities. STATEMENT OF COMPREHENSIVE INCOME Income for the period Comprehensive income for the period BALANCE SHEET Assets Current assets Cash and cash equivalents Total assets Liabilities Current liabilities Other liabilities Total liabilities Equity Capital account Revenue account Total equity Total liabilities and equity reports.shell.com Shell Annual Report and Form 20-F 2012 Royal Dutch Shell Dividend Access Trust Financial Statements 171 2012 2,383 2,383 2012 2,383 2,383 2011 2,175 2,175 £ MILLION 2010 2,863 2,863 2011 2,175 2,175 £ MILLION 2010 2,863 2,863 NOTES Dec 31, 2012 Dec 31, 2011 £ MILLION 4 5 1 1 1 1 – – – 1 1 1 1 1 – – – 1 Signed on behalf of Computershare Trustees (Jersey) Limited as Trustee of the Royal Dutch Shell Dividend Access Trust. /s/ Lisa Knowles Lisa Knowles March 13, 2013 /s/ Karen Kurys Karen Kurys F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S The Notes on pages 173 to 174 form an integral part of these Royal Dutch Shell Dividend Access Trust Financial Statements. 172 Shell Annual Report and Form 20-F 2012 reports.shell.com Royal Dutch Shell Dividend Access Trust Financial Statements STATEMENT OF CHANGES IN EQUITY At January 1, 2012 Comprehensive income for the period Distributions made At December 31, 2012 At January 1, 2011 Comprehensive income for the period Distributions made At December 31, 2011 At January 1, 2010 Comprehensive income for the period Distributions made At December 31, 2010 STATEMENT OF CASH FLOWS Cash flow from operating activities Income for the period Adjustment for: Dividends received Net cash from operating activities Cash flow from investing activities Dividends received Net cash from investing activities Cash flow from financing activities Distributions made Net cash used in financing activities Change in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 NOTES Capital account 6 6 6 – – – – – – – – – – – – Revenue account – 2,383 (2,383) – – £ MILLION Total equity – 2,383 (2,383) – – 2,175 (2,175) 2,175 (2,175) – – 2,863 (2,863) – – – 2,863 (2,863) – 2012 2011 2010 £ MILLION 2,383 2,175 2,863 (2,383) – 2,383 2,383 (2,383) (2,383) – 1 1 (2,175) – 2,175 2,175 (2,175) (2,175) – 1 1 (2,863) – 2,863 2,863 (2,863) (2,863) – 1 1 The Notes on pages 173 to 174 form an integral part of these Royal Dutch Shell Dividend Access Trust Financial Statements. reports.shell.com Shell Annual Report and Form 20-F 2012 Royal Dutch Shell Dividend Access Trust Financial Statements > Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements 173 NOTES TO THE ROYAL DUTCH SHELL DIVIDEND ACCESS TRUST FINANCIAL STATEMENTS 1 THE TRUST The Royal Dutch Shell Dividend Access Trust (the Trust) was established on May 19, 2005, by The “Shell” Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited (Shell Transport), and Royal Dutch Shell plc (the Company). The Trust is governed by the applicable laws of England and Wales and is resident in Jersey. The Trustee of the Trust is Computershare Trustees (Jersey) Limited, following a change of name from EES Trustees International Limited on September 10, 2012, registration number 92182 (the Trustee), Queensway House, Hilgrove Street, St Helier, Jersey, JE1 1ES, replacing Lloyds TSB Offshore Trust Company Limited following a Deed of Novation and Deed of Retirement and Appointment dated January 26, 2012. The Trust was established as part of a dividend access mechanism. A dividend access share has been issued by Shell Transport to the Trustee. Following the announcement of a dividend by the Company on the B shares, Shell Transport may declare a dividend on the dividend access share. The primary purposes of the Trust are to receive, on behalf of the B shareholders of the Company and in accordance with their respective holdings of B shares in the Company, any amounts paid by way of dividend on the dividend access share and to pay such amounts to the B shareholders on the same pro rata basis. The Trust shall not endure for a period in excess of 80 years from May 19, 2005, being the date on which the Trust Deed was executed. 2 BASIS OF PREPARATION The Financial Statements of the Trust have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. As applied to the Trust, there are no material differences with IFRS as issued by the International Accounting Standards Board (IASB); therefore, the Financial Statements have been prepared in accordance with IFRS as issued by the IASB. As described in the accounting policies in Note 3, the Financial Statements have been prepared under the historical cost convention. Those accounting policies have been applied consistently in all periods presented and there were no material changes during 2012. The Financial Statements were approved and authorised for issue by the Trustee on March 13, 2013. The preparation of financial statements in conformity with IFRS requires the use of certain accounting estimates. It also requires management to exercise its judgement in the process of applying the Trust’s accounting policies. Actual results may differ from these estimates. The financial results of the Trust are included in the Consolidated and Parent Company Financial Statements on pages 99-137 and pages 159-167 respectively. 3 ACCOUNTING POLICIES The Trust’s accounting policies follow those of Shell as set out in Note 2 to the Consolidated Financial Statements. The following are the principal accounting policies that specifically relate to the Trust: Presentation currency The Trust’s presentation and functional currency is sterling. The Trust’s dividend income and dividends paid are principally in sterling. Taxation The Trust is not subject to taxation. Dividend income Interim dividends on the dividend access share are recognised on a paid basis unless the dividend has been confirmed by a general meeting of Shell Transport, in which case income is recognised based on the record date of the dividend by the Company on its B shares. F I N A N C A L I S T A T E M E N T S A N D S U P P L E M E N T S 174 Shell Annual Report and Form 20-F 2012 reports.shell.com Royal Dutch Shell Dividend Access Trust Financial Statements > Notes to the Royal Dutch Shell Dividend Access Trust Financial Statements 4 OTHER LIABILITIES Other liabilities consist of £1,202,271 (2011: £997,987) relating to unclaimed dividends, including any dividend cheque payments that have expired or have been returned unpresented. 5 CAPITAL ACCOUNT The capital account is represented by the dividend access share of 25 pence settled in the Trust by Shell Transport, which also represents an asset in the Trust. This is classified as equity in the balance sheet. 6 DISTRIBUTIONS MADE Distributions are made to the B shareholders of the Company in accordance with the Trust Deed. Refer to Note 13 to the Parent Company Financial Statements for information about dividends per share. Cumulative unclaimed dividends as at December 31, 2012, amounted to £1,202,271 (2011: £997,987). Amounts are recorded as distributed once a wire transfer or cheque is issued. All cheques are valid for one year from the date of issue. Any wire transfers that are not completed are replaced by cheques. To the extent that cheques expire or are returned unpresented, the Trust records a liability for unclaimed dividends and a corresponding amount of cash. 7 AUDITORS’ REMUNERATION Auditors’ remuneration for 2012 audit services was £33,750 (2011: £33,750; 2010: £33,750). 8 FINANCIAL INSTRUMENTS Financial risk management is carried out by the Trustee and the Company to ensure that relevant policies and procedures are in place to minimise risk. The Trust, in its normal course of business, is not subject to market risk, credit risk or liquidity risk. The Trustee does not consider that any foreign exchange exposures will materially affect the operations of the Trust. The fair value of financial assets and liabilities at December 31, 2012 and 2011, approximates their carrying amount. All financial assets and liabilities fall due within 12 months. 9 RELATED PARTY TRANSACTIONS The Trust received dividend income of £2,383 million (2011: £2,175 million; 2010: £2,863 million) in respect of the dividend access share. The Trust made distributions of £2,383 million (2011: £2,175 million; 2010: £2,863 million) to the B shareholders of the Company. The Company pays the general and administrative expenses of the Trust including the auditors’ remuneration. reports.shell.com Shell Annual Report and Form 20-F 2012 Cross reference to Form 20-F 175 CROSS REFERENCE TO FORM 20-F PART I Item 1. Identity of Directors, Senior Management and Advisers Item 2. Offer Statistics and Expected Timetable Item 3. Key Information A. Selected financial data B. Capitalisation and indebtedness C. Reasons for the offer and use of proceeds D. Risk factors Item 4. Information on the Company A. History and development of the company B. Business overview C. Organisational structure D. Property, plant and equipment Item 4A. Unresolved Staff Comments Item 5. Operating and Financial Review and Prospects A. Operating results B. Liquidity and capital resources C. Research and development, patents and licences, etc. D. Trend information E. Off-balance sheet arrangements F. Tabular disclosure of contractual obligations G. Safe harbour Item 6. Directors, Senior Management and Employees A. Directors and senior management B. Compensation C. Board practices D. Employees E. Share ownership Item 7. Major Shareholders and Related Party Transactions A. Major shareholders B. Related party transactions C. Interests of experts and counsel Item 8. Financial Information PAGES N/A N/A 10, 91 44-45 N/A 13-15 11, 16-27, 29, 35-37, 89 8-9,11-12, 14-41, 46-51, 138-146 11, E2-E5 16-40, 47-50, 155-156 N/A 8-10, 12, 14-41, 130-132 16-21, 29, 35-36, 42-45, 83-84, 106-107, 119-122, 128-132, 163, 174 18-19, 56, 108 8-9, 11-12, 16-23, 35-40 45 45 45 52-55, 78-79 61-76 52-54, 56-59, 66-67, 77-88 46, 112 46, 58, 63-76, 89, 106, 132-134 58, 105, 116-117, 166-167, 174 88-90 N/A A. Consolidated Statements and Other Financial Information 38, 42-45, 96-137, 157-174 B. Significant Changes Item 9. The Offer and Listing A. Offer and listing details B. Plan of distribution C. Markets D. Selling shareholders E. Dilution F. Expenses of the issue Item 10. Additional Information A. Share capital B. Memorandum and articles of association C. Material contracts D. Exchange controls E. Taxation F. Dividends and paying agents G. Statement by experts H. Documents on display I. Subsidiary information 56 92 N/A 89 N/A N/A N/A 44, 46, 58, 74, 89-90, 101, 128, 132-134, 160, 164 85-88 58 94 94-95 56, 85-86, 89, 93, 95 N/A 3 N/A R E F E R E N C E S A N D O T H E R Item 11. Quantitative and Qualitative Disclosures About Market Risk Item 12. Description of Securities Other than Equity Securities 83-84, 103-110, 118, 128-132, 163, 174 89, 93-94 176 Shell Annual Report and Form 20-F 2012 reports.shell.com Cross reference to Form 20-F PART II Item 13. Item 14. Item 15. Item 16. Defaults, Dividend Arrearages and Delinquencies Material Modifications to the Rights of Security Holders and Use of Proceeds Controls and Procedures [Reserved] Item 16A. Audit committee financial expert Item 16B. Code of Ethics Item 16C. Principal Accountant Fees and Services Item 16D. Exemptions from the Listing Standards for Audit Committees Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers Item 16F. Change in Registrant’s Certifying Accountant Item 16G. Corporate Governance Item 16H. Mine Safety Disclosure PART III Item 17. Item 18. Item 19. Financial Statements Financial Statements Exhibits PAGES N/A N/A 83-84, 97, E6-E7 77, 80 78 81, 136, 167, 174 77-78 44 N/A 77-78 N/A PAGES N/A 96-137, 157-174 177, E1-E10 reports.shell.com Shell Annual Report and Form 20-F 2012 Exhibits 177 INDEX TO THE EXHIBITS Exhibit No. Description PAGE 1.1 Memorandum of Association of Royal Dutch Shell plc, together with a special resolution of Royal Dutch Shell plc dated May 18, 2010, (incorporated by reference to Exhibit 4.12 to the Registration Statement on Form F-3 (No. 333-177588) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on October 28, 2011). 1.2 Articles of Association of Royal Dutch Shell plc, together with a special resolution of Royal Dutch Shell plc dated May 18, 2010, (incorporated by reference to Exhibit 4.11 to the Registration Statement on Form F-3 (No. 333-177588) of Royal Dutch Shell plc filed with the 2 4.2 4.3 4.4 4.5 Securities and Exchange Commission on October 28, 2011). Dividend Access Trust Deed (incorporated by reference to Exhibit 2 to the Annual Report for fiscal year ended December 31, 2006, on Form 20-F (File No. 001-32575) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on March 13, 2007). Shell Provident Fund Regulations and Trust Agreement (incorporated by reference to Exhibit 4.7 to the Post-Effective Amendment to Registration Statement on Form S-8 (No. 333-126715) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on June 18, 2007). Form of Director Indemnity Agreement (incorporated by reference to Exhibit 4.3 to the Annual Report for the fiscal year ended December 31, 2005, on Form 20-F (File No. 001-32575) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on March 13, 2006). Senior Debt Securities Indenture dated June 27, 2006, among Shell International Finance B.V., as issuer, Royal Dutch Shell plc, as guarantor, and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form F-3 (No. 333-126726) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on July 20, 2005, amended from then to be dated as of June 27, 2006, and with the parties signatures). Form of Directors Letter of appointments (incorporated by reference to Exhibits 4.5 - 4.11 to the Annual Report for fiscal year ended December 31, 2006, on Form 20-F (File No. 001-32575) of Royal Dutch Shell plc filed with the Securities and Exchange Commission on March 13, 2007). 4.6 Compromise Agreement with Malcolm Brinded (February 21, 2012) (incorporated by reference to Exhibit 4.6 to the Annual Report for fiscal year ended December 31, 2011, on Form 20-F (File No. 001-32575) of Royal Dutch Shell plc filed with the Securities and Exchange 7.1 7.2 7.3 8 12.1 12.2 13.1 99.1 99.2 Commission on March 15, 2012). Calculation of Ratio of Earnings to Fixed Charges. Calculation of Return on Average Capital Employed (ROACE) (incorporated by reference to page 45 herein). Calculation of gearing (incorporated by reference to page 9 and Note 15 to the Consolidated Financial Statements on page 119 herein). Significant Shell subsidiaries as at December 31, 2012. Section 302 Certification of Royal Dutch Shell plc. Section 302 Certification of Royal Dutch Shell plc. Section 906 Certification of Royal Dutch Shell plc. Consent of PricewaterhouseCoopers LLP, London. Consent of PricewaterhouseCoopers CI LLP, Jersey, Channel Islands, relating to the Royal Dutch Shell Dividend Access Trust. E1 E2 E6 E7 E8 E9 E10 R E F E R E N C E S A N D O T H E R 178 Shell Annual Report and Form 20-F 2012 reports.shell.com Signatures SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorised the undersigned to sign the Annual Report on Form 20-F on its behalf. Royal Dutch Shell plc /s/ Peter Voser Peter Voser Chief Executive Officer March 13, 2013 reports.shell.com Shell Annual Report and Form 20-F 2012 Exhibits E1 EXHIBIT 7.1 CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES Pre-tax income from continuing operations before income from equity investees Total fixed charges Distributed income from equity investees Less: interest capitalised Total earnings Interest expensed and capitalised Interest within rental expense Total fixed charges Ratio of earnings to fixed charges 2012 41,341 1,712 10,573 567 53,059 1,461 251 1,712 30.99 2011 46,923 1,608 9,681 674 57,538 1,209 399 1,608 35.78 2010 29,391 1,684 6,519 969 36,625 1,218 466 1,684 21.75 2009 16,044 1,669 4,903 1,088 21,528 902 767 1,669 12.90 $ MILLION 2008 43,374 2,009 9,325 870 53,838 1,371 638 2,009 26.80 R E F E R E N C E S A N D O T H E R E2 Shell Annual Report and Form 20-F 2012 reports.shell.com Exhibits EXHIBIT 8 Significant subsidiaries Significant subsidiaries at December 31, 2012, and Shell’s percentage of share capital (to the nearest whole number) are set out below. All of these subsidiaries have been included in the “Consolidated Financial Statements” of Shell on pages 99-137. Those held directly by the Company are marked with an asterisk (*). A complete list of investments in subsidiaries, jointly controlled entities and associates will be attached to the Company’s annual return made to the Registrar of Companies. Company name Shell Development (Australia) Proprietary Limited Shell Energy Holdings Australia Limited Qatar Shell GTL Limited Shell Deepwater Borneo Limited Shell International Trading Middle East Limited Shell Brasil Petroleo Ltda Shell Canada Energy Shell Canada Exploration Shell Canada Resources Schiehallion Oil and Gas Limited Shell EP Holdingselskab Danmark ApS Shell Gabon Shell Upstream Gabon SA Ferngasbeteiligungsgesellschaft mbH Shell Erdgas Marketing GmbH & Co. KG Shell Erdgas Beteiligungsgesellschaft mbH Shell Exploration and Production Libya GmbH Shell Verwaltungsgesellschaft Fur Erdgasbeteiligungen mbH Shell E&P Ireland Limited Shell Italia E&P Spa Sarawak Shell Berhad Shell MDS (Malaysia) Sendirian Berhad Shell Abu Dhabi B.V. Jordon Oil Shale Company B.V. Shell Azerbaijan Exploration and Production B.V. Shell Caspian B.V. Shell Deepwater Tanzania B.V. Shell E and P Offshore Services B.V. Shell Egypt N.V. Shell Egypt Deepwater B.V. Shell Egypt Shallow Water B.V. Shell EP Middle East Holdings B.V. Shell Exploration and Production Investments B.V. Shell Generating (Holding) B.V. Shell Global Solutions International B.V. Shell International Exploration and Production B.V. Shell Kazakhstan Development B.V. Shell Olie – OG Gasudvinding Danmark B.V. Shell Sakhalin Holdings B.V. Shell Salym Development B.V. Shell Western LNG B.V. Energy Holdings Offshore Limited Energy Petroleum Holdings Limited Energy Petroleum Taranaki Limited Shell Energy Asia Limited Shell Investments NZ Limited Shell New Zealand (2011) Limited Shell Nigeria Exploration and Production Company Limited The Shell Petroleum Development Company of Nigeria Limited A/S Norske Shell % Country of incorporation Principal activities Class of shares held 100 Australia 100 Australia 100 Bermuda 100 Bermuda 100 Bermuda 100 Brazil 100 Canada 100 Canada 100 Canada 100 Cayman Islands 100 Denmark 75 Gabon 100 Gabon 100 Germany 50 Germany 100 Germany 100 Germany 100 Germany 100 Ireland 100 Italy 100 Malaysia 72 Malaysia 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 New Zealand 100 New Zealand 100 New Zealand 100 New Zealand 100 New Zealand 100 New Zealand 100 Nigeria 100 Nigeria 100 Norway Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Membership Interest Membership Interest Ordinary Ordinary Ordinary Ordinary Ordinary Equity Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Redeemable, non-redeemable Ordinary Ordinary Redeemable, non-redeemable Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary reports.shell.com Shell Annual Report and Form 20-F 2012 Exhibits E3 Company name Enterprise Oil Norge AS Shell Tankers (Singapore) Private Limited Shell Espana SA Enterprise Oil Limited Shell Benin Upstream Limited Shell China Exploration and Production Company Limited Shell Energy Europe Limited Shell EP Offshore Ventures Limited Shell Exploration and Production Oman Limited Shell Gas Holdings (Malaysia) Limited Shell U.K. Limited SCCP Oil & Gas, LLC Shell Energy North America (US), L.P. Shell Exploration & Production Company Shell Frontier Oil & Gas Inc. Shell Gulf of Mexico Inc. Shell Offshore Inc. % Country of incorporation Principal activities Class of shares held 100 Norway 100 Singapore 100 Spain 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 98 United States of America Upstream 100 United States of America Upstream 100 United States of America Upstream 100 United States of America Upstream 100 United States of America Upstream 100 United States of America Upstream Membership Interest Partnership Capital Ordinary Ordinary Ordinary Ordinary Shell Offshore Response Company LLC 100 United States of America Upstream Membership Interest Shell Onshore Ventures Inc. Shell US E&P Investments LLC SWEPI LP 100 United States of America Upstream 100 United States of America Upstream Ordinary Equity (Voting) 100 United States of America Upstream Partnership Capital Shell Compania Argentina De Petroleo S.A. Shell Australia Limited Shell Refining (Australia) Proprietary Limited The Shell Company of Australia Limited Shell Austria Gesellschaft mbH Shell Western Supply & Trading Limited Belgian Shell S.A. Shell Saudi Arabia (Refining) Limited Pennzoil-Quaker State Canada Incorporated Shell Canada Limited Shell Chemicals Canada Limited Shell (China) Limited Shell Tongyi (Beijing) Petroleum Chemical Co. Limited [A] 100 Argentina 100 Australia 100 Australia 100 Australia 100 Austria 100 Barbados 100 Belgium 100 Bermuda 100 Canada 100 Canada 100 Canada 100 China 75 China Shell Czech Republic Akciova Spolecnost 100 Czech Republic A/S Dansk Shell Butagaz Sas Ste Des Petroles Shell Sas Deutsche Shell GmbH Deutsche Shell Holding GmbH Shell Deutschland Oil GmbH Shell Hong Kong Limited Shell Hungary Kereskedelmi zRt Shell India Markets Private Limited Aico Uno S.r.l. Shell Italia Holding SpA Shell Italia SpA Shell Malaysia Trading Sendirian Berhad Shell Refining Company (Federation Of Malaya) Berhad Shell Chemicals Europe B.V. Shell Chemicals Ventures B.V. Shell China Holdings B.V. Shell Gas (LPG) Holdings B.V. Shell MSPO2 Holding B.V. Shell Nanhai B.V. Shell Nederland Chemie B.V. Shell Nederland Raffinaderij B.V. Shell Trademark Management B.V. [A] Shell voting rights are 80%. 100 Denmark 100 France 100 France 100 Germany 100 Germany 100 Germany 100 Hong Kong 100 Hungary 100 India 100 Italy 100 Italy 100 Italy 100 Malaysia 51 Malaysia 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Nominative Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Equity Quotas Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary R E F E R E N C E S A N D O T H E R E4 Shell Annual Report and Form 20-F 2012 reports.shell.com Exhibits Company name Shell Trading Rotterdam B.V. Shell Trading Russia B.V. Gasnor AS Pilipinas Shell Petroleum Corporation Shell Polska Sp. Z O.O. OOO “Shell Neft” Shell Chemicals Seraya (Pte) Limited Shell Eastern Petroleum (Pte) Limited Shell Eastern Trading (Pte) Limited Shell Seraya Pioneer (Pte) Limited Shell South Africa Holdings (Pty) Limited Shell South Africa Marketing (Pty) Limited Shell Brands International AG Shell & Turcas Petrol A.S. Shell Additives U.K. Limited Shell Caribbean Investments Limited Shell Chemicals U.K. Limited Shell International Petroleum Company Limited Shell International Trading and Shipping Company Limited Shell Trading International Limited The Shell Company of Thailand Limited The Shell Company of Turkey Limited The Shell Company (W.I.) Limited Criterion Catalysts & Technologies L.P. Equilon Enterprises LLC Pennzoil-Quaker State Company Quaker State Investment Corporation San Pablo Bay Pipeline Company LLC SCOGI, G.P. Shell Chemical LP Shell Chemicals Arabia LLC Shell Gom Pipeline Company LLC Shell Pipeline Company LP Shell Trading (US) Company Shell Transportation Holdings LLC SOPC Holdings East LLC SOPC Holdings West LLC TMR Company Shell Bermuda (Overseas) Limited Shell Holdings (Bermuda) Limited Shell Oman Trading Limited Solen Insurance Limited Shell Americas Funding (Canada) Limited Shell Finance Luxembourg Sarl Shell Treasury Luxembourg Sarl B.V. Dordtsche Petroleum Maatschappij Shell Brazil Holding B.V. Shell Finance (Netherlands) B.V. Shell Gas B.V. Shell International Finance B.V. * Shell Nederland B.V. Shell Overseas Investments B.V. Shell Petroleum N.V.* Shell Treasury Centre East (Pte) Limited Shell Finance Switzerland AG Solen Versicherungen AG Shell Energy Investments Limited Shell Holdings (U.K.) Limited Shell International Holdings Limited Shell Overseas Holdings Limited Shell Treasury Centre Limited % Country of incorporation Principal activities Class of shares held 100 The Netherlands 100 The Netherlands 100 Norway 67 Philippines 100 Poland 100 Russia 100 Singapore 100 Singapore 100 Singapore 100 Singapore 100 South Africa 72 South Africa 100 Switzerland 70 Turkey 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Ordinary Ordinary Ordinary Ordinary Ordinary Membership Interest Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Registered (Voting) Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 United States of America Downstream 100 United States of America Downstream 100 United States of America Downstream 100 United States of America Downstream Partnership Capital Membership Interest Ordinary Ordinary 100 United States of America Downstream Membership Interest 100 United States of America Downstream Equity 100 United States of America Downstream Partnership Capital 100 United States of America Downstream Ordinary 100 United States of America Downstream 100 United States of America Downstream Membership Interest Partnership Capital 100 United States of America Downstream Ordinary 100 United States of America Downstream 100 United States of America Downstream 100 United States of America Downstream 100 United States of America Downstream 100 Bermuda 100 Bermuda 100 Bermuda 100 Bermuda 100 Canada 100 Luxembourg 100 Luxembourg 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 The Netherlands 100 Singapore 100 Switzerland 100 Switzerland 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Corporate Membership Interest Membership Interest Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Common Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Registered (Voting) Ordinary Ordinary Ordinary Ordinary Ordinary reports.shell.com Shell Annual Report and Form 20-F 2012 Exhibits E5 Company name Shell Treasury Dollar Company Limited Shell Treasury Euro Company Limited Shell Treasury U.K. Limited The Shell Petroleum Company Limited The Shell Transport and Trading Company Limited Pecten Victoria Company Shell Leasing Company Shell Oil Company Shell Petroleum Inc. Shell Treasury Center (West) Inc. % Country of incorporation Principal activities Class of shares held 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom 100 United Kingdom Corporate Corporate Corporate Corporate Corporate 100 United States of America Corporate 100 United States of America Corporate 100 United States of America Corporate 100 United States of America Corporate 100 United States of America Corporate Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary R E F E R E N C E S A N D O T H E R E6 Shell Annual Report and Form 20-F 2012 reports.shell.com Exhibits EXHIBIT 12.1 I, Peter Voser, certify that: 1. I have reviewed the Annual Report on Form 20-F of Royal Dutch Shell plc (the Company); 2. Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; 3. Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in the report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: ▪ designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the report is being prepared; ▪ designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; ▪ evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and ▪ disclosed in the report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s Board of Directors (or persons performing the equivalent functions): ▪ all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarise and report financial information; and ▪ any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. /s/ Peter Voser Peter Voser Chief Executive Officer March 13, 2013 reports.shell.com Shell Annual Report and Form 20-F 2012 Exhibits E7 EXHIBIT 12.2 I, Simon Henry, certify that: 1. I have reviewed the Annual Report on Form 20-F of Royal Dutch Shell plc (the Company); 2. Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; 3. Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in the report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: ▪ designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the report is being prepared; ▪ designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; ▪ evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and ▪ disclosed in the report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s Board of Directors (or persons performing the equivalent functions): ▪ all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarise and report financial information; and ▪ any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. /s/ Simon Henry Simon Henry Chief Financial Officer March 13, 2013 R E F E R E N C E S A N D O T H E R E8 Shell Annual Report and Form 20-F 2012 reports.shell.com Exhibits EXHIBIT 13.1 In connection with the Annual Report on Form 20-F of Royal Dutch Shell plc (the Company) 2012, a corporation organised under the laws of England and Wales for the period ending December 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned officers of the Company certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to such officer’s knowledge, that: 1. The Report fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Report. The foregoing certification is provided solely for purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act of 2002 and is not intended to be used or relied upon for any other purpose. /s/ Peter Voser Peter Voser Chief Executive Officer /s/ Simon Henry Simon Henry Chief Financial Officer March 13, 2013 reports.shell.com Shell Annual Report and Form 20-F 2012 Exhibits E9 EXHIBIT 99.1 Consent of Independent Registered Public Accounting Firm We hereby consent to the incorporation by reference in the Registration Statements on Form F-3 (No. 333-177588, 333-177588-01) and the Registration Statements on Form S-8 (No. 333-126715, 333-141397 and 333-171206) of Royal Dutch Shell plc of our report dated March 13, 2013, relating to the Consolidated Financial Statements and the effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 20-F. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP London March 13, 2013 R E F E R E N C E S A N D O T H E R E10 Shell Annual Report and Form 20-F 2012 reports.shell.com Exhibits EXHIBIT 99.2 Consent of Independent Registered Public Accounting Firm We hereby consent to the incorporation by reference in the Registration Statements on Form F-3 (No. 333-177588, 333-177588-01) and the Registration Statements on Form S-8 (No. 333-126715, 333-141397 and 333-171206) of the Royal Dutch Shell Dividend Access Trust of our report dated March 13, 2013, relating to the Royal Dutch Shell Dividend Access Trust Financial Statements, and the effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 20-F. /s/ PricewaterhouseCoopers CI LLP PricewaterhouseCoopers CI LLP Jersey, Channel Islands March 13, 2013 OUR bUsiNEssEs builDinG an eneRGy FutuRe Global eneRGy DemanD iS RiSinG anD So aRe conSumeR expectationS – moRe people want eneRGy FRom cleaneR SouRceS. at Shell we woRk with otheRS to unlock new eneRGy SouRceS anD Squeeze moRe FRom what we have. we Do thiS in ReSponSible anD innovative wayS. in builDinG a betteR eneRGy FutuRe we all have a paRt to play. Shell iS DoinG itS paRt. exploring for oil and gas producing oil and gas mining oil sands extracting bitumen Refining oil into fuels and lubricants Developing fields liquefying gas by cooling (lnG) Shipping and trading Shipping and trading producing petrochemicals Supply and distribution converting gas to liquid products (Gtl) producing biofuels Regasifying lnG Retail sales Generating wind power b2b sales chEmicAL PRODUcTs for plastics, coatings, detergents Retail sales b2b sales FUELs AND LUbRicANTs for transport gAs for cooking, heating, electrical power REgisTERED OFFicE Royal Dutch Shell plc Shell centre london Se1 7na united kingdom Registered in england and wales company number 4366849 Registered with the Dutch trade Register under number 34179503 hEADQUARTERs Royal Dutch Shell plc carel van bylandtlaan 30 2596 hR the hague the netherlands shAREhOLDER RELATiONs Royal Dutch Shell plc carel van bylandtlaan 30 2596 hR the hague the netherlands +31 (0)70 377 1365 +31 (0)70 377 4088 +31 (0)70 377 3953 (fax) or Royal Dutch Shell plc Shell centre london Se1 7na united kingdom +44 (0)20 7934 3363 +44 (0)20 7934 7515 (fax) royaldutchshell.shareholders@shell.com www.shell.com/shareholder iNVEsTOR RELATiONs Royal Dutch Shell plc po box 162 2501 an the hague the netherlands +31 (0)70 377 4540 or Shell oil company investor Relations 910 louisiana Street, 4580b houston, tx 77002 uSa +1 713 241 1042 +1 713 241 0176 (fax) ir-europe@shell.com ir-usa@shell.com www.shell.com/investor shARE REgisTRATiON equiniti aspect house Spencer Road lancing west Sussex bn99 6Da united kingdom 0800 169 1679 (uk) +44 (0)121 415 7073 +44 (0)1903 833 113 (fax) For online information about your holding and to change the way you receive your company documents: www.shareview.co.uk AmERicAN DEPOsiTARy shAREs (ADs s) the bank of new york mellon po box 358516 pittsburgh, pa 15252-8516 uSa +1 888 737 2377 (uSa) +1 201 680 6825 (international) shrrelations@bnymellon.com www.bnymellon.com/shareowner REPORT ORDERiNg order@shell.com +31 (0)72 567 1001 annual Report/20-F service for uS residents +1 888 301 0504 Designed by Studio Dumbar printed by tuijtel under iSo 14001 R o y a l D u t c h S h e l l p l c a n n u a l R e p o R t a n D F o R m 2 0 - F F o R t h e y e a R e n D e D D e c e m b e R 3 1 , 2 0 1 2 BUILDING AN ENERGY FUTURE ANNUAL REPORT Royal Dutch Shell plc annual RepoRt anD FoRm 20-F FoR the yeaR enDeD DecembeR 31, 2012 all ouR RepoRtS aRe available at http://RepoRtS.Shell.com  comprehensive financial information on our activities throughout 2012  Detailed operational information including maps  Report on our progress in contributing to sustainable development DownloaD ouR appS at www.Shell.com/mobile_anD_appS  company news  interactive stories about innovation  Service-station locations check ouR lateSt newS  Follow @shell on twitter  www.facebook.com/shell 

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