(RDS.A) Q4 2018 Earnings Conference Call Transcript

(NYSE:RDS.A)
Q4 2018 Earnings Conference Call
Jan. 31, 2019 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Ben van Beurden

OK. Ladies and gentlemen, it's a real pleasure to welcome you all here today this afternoon. Jessica and I have been really looking forward to this afternoon to present our fourth-quarter results and the full-year results of 2018. Before we get to it, though, let's take another quick look at our disclaimer, with which I'm sure you are intimately familiar.

The reason why Jessica and I have been looking forward to today is that we can now, with the full-year results, declare that 2018 was another year of great delivery against our strategy. And as you know, our strategy is to deliver a world-class investment case, to thrive through the energy transition and to maintain a very strong societal license to operate. And where we have made some promises that aligned with that strategy, we have delivered in 2018. And I believe we have established a track record of delivery now.

In 2018, we had good performance from our businesses, and we continued to transform Shell into a simpler company that can deliver higher returns. Our cash delivery for the full year was strong with cash flow from operations, excluding working capital, almost 50 billion U.S. dollars. We delivered almost $31 billion in organic free cash flow, we paid an all-cash dividend, covered our interest expense, reduced gearing and we have bought back shares.

We completed our $30 billion divestment program, which has also reshaped our company. And then we invested some 25 billion U.S. dollars in a very disciplined manner. So we have shown that we are a company that delivers against the commitments that we make.

And with our recent commitment to set short-term targets to reduce the net carbon footprint of the energy products that we sell in a world that is going through an energy transition, we have also shown leadership as a responsible company, preparing for changing customer and market preferences as this transition unfolds. Now let me talk about some of the 2018 highlights first, after which I will take you through the HSSE performance and provide you with a closer look at our actions related to the energy transition. Then I will talk you through the Shell delivery and our outlook for 2020. And then Jessica will talk in a bit more detail about the fourth-quarter results.

Now as I promised, first, some more detail on '18. It will not have escaped you that '18 was another year of oil price volatility. And in spite of that, we saw all of our businesses deliver. And that translated into a current cost of supply earnings, excluding identified items, of over $21 billion.

We delivered free cash flow of more than $39 billion. And return on average capital employed for the full year was 7.6%. That's two year – two percentage points higher than 2017 and brings us closer again to our outlook for 10% in 2020. Now we also continued to move the gearing down.

The gearing now stands at 20.3% at the end of 2018. We declared dividends of almost $16 billion in 2018. And as you are aware, we paid them in cash. And we bought back some $4.5 billion worth of shares as part of our $25 billion share buyback program.

So I'm proud, and everybody in Shell is proud, of this delivery. But there is, in fact, one thing that is even more important. It is something that comes before anything else at Shell, and that's our health, safety, security and environmental performance. You all know that safety is critical for us to achieve our strategic ambitions.

We must all be safe if Shell is to be a world-class investment case. We must all be safe is -- if Shell is to thrive through the energy transition. And we must all be safe if Shell is to maintain a strong societal license to operate. And if you look at 2018, our HSSE performance, frankly, was mixed, which means that we have more work to do.

Two contractors died in 2018, and no loss of life is ever acceptable. Our sympathy and our condolences are with the families, of course, but we must ensure that such deaths not happen in the future again. Now in 2017, we had our lowest injury rate so I'm quite unhappy that in 2018, our injury rate worsened slightly. The long-term trend still shows improvement with an injury rate reduction of about 50% since 2008, but slipping backwards in 2018 just emphasizes how hard-won these improvements have been.

Next, operational spills. Although we achieved a decline in the number of spills in 2018 that fell by some 8%, the volume of material spills actually went up. We had fewer spills, but on average, they were larger. Now in other areas, our HSSE performance was more encouraging, so we continued to reduce flaring.

For example, this was driven, by a large measure, by our decision to exit Majnoon in Iraq, but we also reduced flaring in Nigeria, in Qatar and in the Permian. And process safety was another area of improvement, and I'm glad to report that in 2018, we achieved our best-ever process safety performance. But clearly, our work is not done. We must achieve Goal Zero, and it means that we must continue to focus and get the performance to that level.

Now just as society expects Shell to operate safely, its expectations of Shell to act in the face of climate change are only growing stronger. Now we have taken a number of steps over the past year to show that we are a responsible corporate citizen to lead the industry and to get ahead of the changing market and customer preferences to deliver commercial opportunities that also will come with the energy transition. So for example, we announced plans to establish short-term targets as part of our long-term ambition to reduce the net carbon footprint of the energy products that we sell. And this will be in step with society's drive to meet the goals of the Paris Agreement, and we will link these targets to executive remuneration.

We developed this approach through extensive collaboration with institutional investors working together on behalf of Climate Action 10 plus. And we recognized that we have an important role to play as part of society's response to its needs for more and cleaner energy. The actions we have taken on a net carbon footprint position us for the future and enable the execution of all three strategic ambitions. I'm also pleased to say that we are making progress in a number of areas in support of our ambitions.

And just to highlight a few examples. In Nigeria, for instance, we have been able to reduce the flaring intensity year on year by some 70%, seven-zero percent, over the last 10 years. And of course, we are also developing our New Energies business that seeks out the commercial opportunities that the energy transition will bring. And last year, we invested $800 million, including investments in areas such as solar and wind, as part of our New Energies business.

And we are looking to scale up this business in a very disciplined manner, spending $1 billion to $2 billion on average per annum on commercial opportunities with competitive returns. OK. Let's talk now about our delivery in more detail. And let's start with a $30 billion divestment program.

So this was a strategy-led program, one of the largest ever, designed to high grade and reshape our portfolio and strengthen our financial framework. Every strategic theme found opportunities to contribute. We started the divestment program back in 2016. You will remember the oil prices below $40 a barrel, and market conditions for executing a program of this scale were challenging, to say the least.

But we managed to execute the deals and to do so using diverse deal constructs. So you saw us announcing traditional asset divestments, packages of assets, IPOs, and we raised cash through our MLP. And the sales of our Woodside and Canadian national resources shares were some of the largest block trades in any sector, and they were pretty well-timed. Geographically, we exited business around the world such as oil sands in Canada, downstream in Argentina, downstream in Japan, upstream in Ireland and in Gabon and Integrated Gas in Thailand and New Zealand, and we simplified our operations in many more countries on top of that.

But even where we exited in a number of places, we have put in place trading arrangements, off-take arrangements and Brent licensing arrangements. And importantly, of course, we delivered all of this with attractive valuations. We generated the cash we needed to strengthen our balance sheet and to improve our credit metrics. And through our transactions, we have sought to also high grade the margins in our portfolio and improve the risk profile by reducing country risks, business operational risks and financial risks.

So for example, we have removed around $5 billion of decommissioning and restoration liabilities from our balance sheet. And crucially, of course, we ended the program with a stronger portfolio, which was the main design. And we will continue to high grade this portfolio with divestments, so expect to do more than $5 billion in each of 2019 and 2020. Now let's look at the future, spend some time talking about new projects.

Key projects have delivered more than $10 billion per annum in cash flow from operations from 2014 to 2018. That's also what we promised. Now as you can see on this slide here, we've made a lot of progress delivering these projects, and there is more to come as not all of these are operating at full capacity yet. So take, for example, a recent FPSO in Brazil that has come on-stream in late 2018 and is expected to be at peak levels toward the end of 2019.

And additionally, we are developing smaller projects. Those that are expected to start up in 2019 should produce more than 150,000 barrels of oil equivalent per day at peak levels, and that's more than offsetting decline in that period. And beyond this, we expect an additional $5 billion in cash flow from operations by the end of 2020. And this, we feel, is very heavily de-risked.

And this incremental cash flow will be realized with continued ramp-up of the projects already on-stream, the delivery of Appomattox and ongoing investments in the Permian. So let's talk about some of these key projects that will help us realize this extra cash flow in a bit more detail. First of all, as you know, chemicals, a growth priority for Shell, part of our strategy to thrive through the energy transition, global population growth, rising living standards are likely to drive petrochemical demand for years to come. Now early in 2018, we started up a new ethylene cracker in Nanhai in China.

And then in December, we started up the fourth alpha olefins unit at our Geismar facility in the U.S. Gulf Coast. And this investment increased capacity at the site to some 1.3 million tonnes of alpha olefins per year, making it the largest alpha olefins site in the world. Alpha olefins, you may not have come across them every day, but in fact, you do because they are needed in everyday products like salt, synthetic lubricants, low temperature detergent, all projects -- products that save energy and reduce CO2 emissions.

And we've made in this investment in order to meet increasing customer demand for these products, of course. Demand for alpha olefins grows with or faster than GDP. And our site in Geismar benefits from advantaged feedstock, as you can imagine; synergies on sites; integration with our U.S. Gulf Coast positions; and proximity to local demand and local customers.

And also here, we expect to ramp up the production at the coming months and be near peak production levels in the second half of 2019. And then we have Australia, where we opened four of the seven wells at Prelude. We are now progressing, where the commissioning has started of the rest of the Prelude facilities. And at the same time, we are producing condensates, preparing for the first condensate cargo and later, the first LNG cargo.

And once fully operational, Prelude will produce 3.6 million tonnes of LNG and 1.7 million tonnes of natural gas liquids per year. Let me show what we are working on in 2019 and 2020. Appomattox will be a key asset in the Gulf of Mexico. We expect some 175,000 barrels of oil equivalent per day from the north-left play when operating at peak production levels.

This will bring a step change to our cash flows with high-margin barrels, delivering cash for Shell for years to come. The teams are now working to commission and safely bring Appomattox on-stream later this year. And since we made the investment decision in Appomattox, we have reduced costs of that project with 40%, further improving the competitiveness of that project. This was done through more efficient execution, working with our contractors, reducing non-productive time.

And we are not yet done here because we are looking at options to increase capacity to support more volumes in the fields already discovered and future exploration successes in that area that we are currently looking at. And with the Permian acreage, which produces some 145,000 barrels of oil equivalent per day, you have seen a 200% increase since January 2017. And we continue to dedicate around 50% or more of our Shell's capital to the Permian. We've also matured an inventory of resources in excess of one billion barrels of oil equivalent in the Permian, with forward-looking breakeven prices of less than $40 per barrel.

So we expect to deliver continued growth through 2020. But our delivery doesn't stop there. As you would expect, we are developing options in our portfolio that will start generating cash in the 2020s. When we announced the Whale discovery last year, I said were looking to accelerate the development cycle and bring the project on-stream faster.

So I'm pleased to announce that we're already assessing the results of the exploration and appraisal wells that we have drilled at Whale. In Prelude, we are assessing development options. And at the heart of these discussions is standardization, replication and incorporating the learnings from Vito. And this should allow us to accelerate time lines.

And depending on the outcomes, of course, we could take a final investment decision as early as next year. Let's just stay with our growth priorities, but now looking at our downstream business in the U.S. So our Pennsylvania petrochemicals complex is under construction at the moment and is expected to deliver commercial production early in the next decade. Pennsylvania will produce 1.6 million tonnes of polyethylene per annum.

Polyethylene is a petrochemical product used to make many finished products from automotive components, sports equipment, household furniture and consumer electronics. So these are just two examples, but our project funnel is strong, and we have options across all of our strategic themes to support the company's cash generation far into the future. So we set out our 2020 ambition following the BG acquisition, and the numbers clearly show that our strategy is working. In 2017, we generated some $15 billion.

And now in 2018, we delivered $31 billion in organic free cash flow. As you can see, across all our strategic themes, we are closing in on our targets. Now I started this presentation talking about delivery, and I think we are delivering against some pretty big promises that we made to our shareholders. We committed to cancel the scrip dividend and start buying back shares.

And in 2018, we paid an all-cash dividend and bought back shares. We said we would be disciplined with our capital and keep it within our range, and we have done exactly that. We promised to complete $30 billion in divestment to high grade and reshape our portfolio. That's complete now.

And it's the same with cash flow. We told you we would deliver some additional $10 billion a year in cash flow from operations by bringing new projects on-stream, and you can see the cash flow in our figures. And also on cost. Our underlying operating costs are 12% lower than the Shell stand-alone cost in 2014, meaning that we have fully absorbed the operating costs of BG and then delivered some more.

So I can confidently say we will continue to focus on delivery: delivery on our free cash flow target, delivery on the remainder of the buyback program while continuing to invest in a very disciplined manner. So I think our strategy is set, and our strategy is on track. And with that, let me hand you over to Jessica to talk you in a bit more detail through the quarter.

Jessica Uhl -- Chief Financial Officer

Thanks, Ben, and good afternoon, everyone. Thank you for joining us today in this session. Let me start with the Q4 financial highlights. For Shell to deliver a world-class investment case, we need to generate strong and growing cash flow and returns and be disciplined with our capital and cash allocation.

Discipline means reducing debt, effective capital stewardship and growing shareholder distributions. In Q4 2018, we delivered against each of these priorities. We had another strong quarter. Cash flow from operations, excluding working capital movements, was $12.9 billion.

This is at an average Brent price of $69 per barrel. Organic free cash flow for the quarter was $14.3 billion. Organic free cash flow covered the full cash dividend and interest expense, reduced gearing and funded our buyback program for all of 2018. At the end of Q4 2018, earnings on a CCS basis, excluding identified items, amounted to more than $5.7 billion.

ROACE reached 7.6%, two percentage points higher than in the same quarter last year. We are demonstrating progress toward 10% ROACE by the end of 2020. As Ben mentioned earlier, our gearing continues to decrease and is now 20.3%. Divestment proceeds, along with growing CFFO, have played a key role in bringing this down.

Net debt decreased almost $26 billion since 2016 and around $9 billion since the last quarter. The net debt reduction in Q4 is supported by a large release of working capital linked to the drop in oil prices, as well as reduced inventory levels. The impact to working capital from inventory movements alone, with the combination of lower prices and inventory levels, contributed to a release of $7 billion. While this may partly reverse based on recent positive oil price movement, the underlying trend on gearing is moving in the right direction, and we are progressing toward our 20% target.

Our capital investment this quarter was $8 billion. This brings our full-year capital spend to $25 billion, in line with our guidance. We are pleased with the improvements we're seeing in capital efficiency, driven in large part by lower unit development costs. We're continuing to do more with less.

For 2019, we will maintain our $25 billion to $30 billion capital investment guidance on a pre-IFRS 16 basis. We are confident that this level of investment funds cash flow growth for the future. Our share buyback program is progressing with some $4.5 billion of shares purchased so far, and the next tranche of up to $2.5 billion begins today. We believe in our ability to complete the $25 billion in share buybacks by the end of 2020, subject to debt reduction and the macro environment.

Now let me run through some of the portfolio highlights of the quarter. In addition to the projects Ben spoke about earlier, we have the start-up of Clair phase two in the North Sea, which will produce up to 120,000 barrels per day. And we continue to invest in our portfolio to support cash generation beyond 2020. We've announced that we'll be maturing, moving from exploration and appraisal to development three blocks in the Vaca Muerta in Argentina, providing growth into the mid-2020s.

With our experience and capability from North America, we are de-risking our Argentina position. Drilling costs are down 50% since 2016, with forward-looking breakeven prices of less than $40 per barrel. In December, we announced our final investment decision on Assa North in Nigeria, a gas development to support domestic needs. And I also want to mention that as part of our power portfolio in the New Energies business, we acquired offshore wind leases off the northeast coast of the U.S.

These have the potential, if developed, to provide peak power generation capacity of 4.1 gigawatts, enough power to supply some 1.7 million homes. Shell is well-placed to develop these opportunities, combining our offshore capabilities from our upstream business and our wind experience, along with the experience of our partners. And as Ben mentioned, we completed our $30 billion divestment program, enabling further deleveraging,as well as a simpler, more competitive portfolio. Let us now have a look at the earnings this quarter.

Our Q4 2018 CCS earnings, excluding identified items, amounted to $5.7 billion, which is almost $1.4 billion or 32% higher than in Q4 2017. In our integrated gas business, earnings, excluding identified items, were $2.4 billion or 44% higher than in the same quarter last year. Integrated Gas benefited from higher realized oil, gas and LNG prices, as well as higher contributions from LNG trading. These were partly offset by movements in deferred tax positions.

Total production volumes were largely unchanged compared with the fourth-quarter 2017, while LNG liquefaction was some 3% higher, mainly due to lower maintenance and increased feed gas availability, partly offset by divestments. Earnings, excluding identified items, in Upstream were approximately $1.9 billion or some $200 million higher than in Q4 2017. This was driven by higher realized oil and gas prices, as well as lower well write-offs. This was partly offset by movements in deferred tax positions being less favorable.

Upstream production was up 1% compared with the same quarter a year ago, partly offset by divestments. Excluding portfolio impacts, production was up 5% over the same period. In Downstream, CCS earnings, excluding identified items, were $2.1 billion or 53% higher than Q4 2017. Downstream benefited from increased contributions from crude oil trading and stronger refining and marketing margins, but these were partly offset by higher operating expenses and lower base chemicals and intermediate margins.

In corporate, compared with the fourth quarter of 2017, earnings, excluding identified items, mainly reflect lower tax credits related to the change in the U.S. tax law. Now let us review cash flow in further detail. Our Q4 2018 cash flow from operations, excluding working capital movements, amounted to $12.9 billion, which is $3.8 billion higher than in Q4 2017, largely driven by higher prices and increased volumes.

Higher taxes are driven by increased profitability. Additionally, this quarter, we paid some $200 million in taxes related to our Oman business with a further $500 million to be paid in Q1 2019. These payments will offset future tax payments from 2020 onwards. Margining on derivatives in Q4 has represented a source of cash unlike prior quarters.

Relative to Q4 2017, we received $1.9 billion in cash from margining. With a sharp downward move in Brent forwards, we realized a $1.7 billion cash flow inflow in Integrated Gas margining, which, on a full-year basis, more than offset the negative impact from prior quarters. And in Upstream, derivatives related to our Denmark divestment saw a similar health from the recent decline in oil prices and generated a $350 million cash inflow. These derivatives may have an impact on our cash flow until deal completion, which is expected in 2019.

Both of these were then partially offset by smaller movements on foreign exchange derivatives. We have included additional details on the movements of cash, derivative margining and working capital in the appendix. As an example of how we are reshaping Shell, a step-up -- as an example of how we are reshaping Shell, let's focus on the Gulf of Mexico, where we saw a step-up in the cash delivery from our existing operations over the last few years and in the second half of 2018 specifically. Our Gulf of Mexico teams have improved the profitability and competitiveness of our assets by maximizing production from existing producers and keeping our hubs full.

For example, in the Mars corridor, volumes are up almost 50% since 2016. This was done with infill drilling, well reservoir and facilities management and near-field development. Our unit development and operating costs have been steadily decreasing year on year and are now below $10 per barrel in our deep water operations. We're getting better at our turnarounds, including using robotic, nonintrusive inspections.

Through better planning and integration, we have reduced logistics spend. And new wells are being delivered faster and at lower cost. Last summer, the teams brought 14 wells online over a 14-week period. All of these factors are improving the performance and production of high cash margin barrels from the Gulf of Mexico.

On this slide, you'll see that all key financial trends are moving in the right direction. From 2016 onwards, we are delivering strong earnings from growth year on year and improved ROACE. The same trend is true with cash flow, as CFFO has more than doubled between 2016 and 2018. A number of initiatives across the company support these trends.

For instance, the steps we've taken to simplify our IT systems, such as the enterprisewide deployment of SAP Ariba for contracts and procurement, allowing automation, data analytics and better business outcomes. We continue to build out our business operations in places like Chennai and Bangalore, which reduces costs and importantly, enables innovation. These steps are helping to transform Shell into a simpler company that delivers higher returns. Our gearing levels continue to decrease from nearly 29% in 2016, following the BG acquisition, to 20.3% at the end of 2018.

We are looking to maintain gearing at 20% or below through the cycle as this is a good indicator of both balance sheet strength and in line with the AA credit rating. Gearing will be impacted by the implementation of IFRS 16. We will provide further details on the impact this accounting change has on our key metrics in March. Turning to reserves, our SEC proved reserves at the end of 2018 were 11.6 billion barrels of oil equivalent, which is a decrease of around 600 million barrels from the end of 2017.

Our reserves replacement ratio for 2018 is 53%. This is due to divestments and the impact of Groningen, which we've previously disclosed. Reserves replacement, excluding Groningen, this year is estimated at 98%. Our three-year average reserves replacement ratio stands at an estimated 96%.

I do want to stress again that not all barrels are created equally and that we will not chase production volumes on reserves, but we will continue to focus on cash generation and returns. I believe you've seen evidence of this last year when we exited low-value barrels in Majnoon in Iraq, for instance, and grew production in high-value barrels, for example, in North America and Brazil, value before volume. Now let me speak about our cash priorities. Our priorities remain the same, and we remain disciplined with our cash allocation.

Reducing our net debt remains our first priority, and divestment proceeds help achieve this. We want to continue to strengthen our balance sheet with AA equivalent credit metrics. Then with our cash flow from operations, we will fund our capital program, our dividend payments and interest expense. Surplus cash will be used to fund our buyback program and reduce debt further, which is what we've been doing.

These priorities are unchanged, and our actions have fully adhered to this framework, with the reduction in debt, the removal of the scrip, continued investment driving cash flow growth and the start of the share buyback program. Our strategy is working, and we are delivering. The cash flow generation for the company has improved materially. For 2018, we were able to deliver free cash flow of around $39 billion, of which $31 billion was organic.

Again, more organic free cash flow delivery at lower oil prices. This covered our buybacks, cash dividend and interest expense. And based on our outlook, we believe we have the free cash flow to deliver on our strategy to grow cash flow, reduce debt and increase shareholder distributions. Let me end by turning to our competitive position.

Ben and I have spoken about the improved operational and financial results of the company in absolute terms. But for us to be a world-class investment case, it is more than just improvement. We must also deliver industry-leading outcomes. The charts show we've made significant progress on all fronts, and we remain committed to Shell achieving the leading position in each of these metrics.

With continued discipline and strong and consistent operational delivery, we will continue to drive this further. Now let me hand back to Ben.

Ben van Beurden

Thanks, Jessica. So as I said at the start, we are pleased to say that 2018 has been a great year, a year of delivery on a number of fronts. Our relentless focus on value, on operational excellence, on project delivery, competitiveness meant that we were able to deliver strong results and strong cash from an upgraded portfolio. And our focus for 2019 remains completely unchanged.

We will remain focused on delivery with a disciplined approach to capital investment and a focus on growing both our cash flow and our returns. Now with that, let's have some Q&A. We are fortunate to have Maarten with us. As many of you know, Maarten runs our Integrated Gas and New Energies business.

A very important quarter for that business, so we thought it would be good for him to join us. We'll take questions going from left to right. Please, one or two each so we can get everybody to come in.

And as I said, from left or right, so we'll start with you, Chris. 

Questions and Answers:

Chris Kuplent -- Bank of America Merrill Lynch -- Analyst

Thank you very much. Chris Kuplent from Bank of America Merrill Lynch. I'll just kick off with one question. As you laid out, and I think the slide is in the appendix, how close you are to meeting your 2020 targets, it does look very self-explanatory.

I just wanted to ask, whoever feels strongly, how the mood is like, whether you feel this is job done, this was an important phase post-BG or whether this is an event that happened four years ago that is likely to deliver continued effects rather than just how you meet the 2020 guidance. And I'm not trying to get a sneaky preview of your Capital Markets Day in June, but just wanted to sort of understand what the mood is like with these results and how you think about 2020 and beyond.

Ben van Beurden

Well, my sense is that the mood is very positive and very strong. I think with results like this, you can imagine there's a lot of pride and self-belief in the company. That's good to have. There have been moments when we were scratching our heads if you look back a few decades.

But yes, at this point in time, I think there is a lot of self-belief and confidence. But we're never done on these things. Maybe great to say, "Well, we've put an outlook out there which now looks to be well within reach." But as you keep on reminding us, there's also a decade coming after that, and we will have to convince you that the outlook for this company remains extremely strong into 2020s as well. And I have full confidence that we can do that, but I'm not going to tell you what I'm going to tell you in June.

Lydia, you are next.

Lydia Rainforth -- Barclays -- Analyst

Thank you. A couple of questions, if I could. On the cost base, I know you talked about sort of being happy with that. But if I make an observation, the costs did go up both year on year for 2018 versus '17 and quarter on quarter.

So can you talk about, is that something that you're happy with? And then link that a little bit to some of the digitalization process on whether the CAPEX number really is -- whether you're -- what the sustaining CAPEX number is and what that might look like. And then, sorry, just a very quick follow-up, one on the reserves replacement number. If I look at adding back the Groningen and the divestments, is it right that it is actually over 100% for this year, so 112%?

Ben van Beurden

Jessica, do you want to have a first go at it?

Jessica Uhl -- Chief Financial Officer

Good. I'll start from the top. So on the cost number, indeed, up slightly from last year quarter on quarter, ending the year at about $39 billion. I'd say it's a bit of a mix story.

Overall, I'm very pleased with the performance of the company in terms of how we're reshaping the company, becoming a simpler company and that coming through in the business lines, as well as kind of the functions. I mentioned CP and finance, we're taking hundreds of millions of dollars out of our processes over the next couple of years. So I think a lot of really good progress being made. There's also things like FX, which had a negative effect year on year, and that's probably close to about $0.5 billion driving that difference.

So I think we're making real progress in terms of changing the way we're running the company. We're making a simpler company, and our underlying cost base is being reduced. But of course, I have further ambition. And I do think there's more for us to see coming from the digitalization agenda.

I think we're at the very beginning of that journey. We're seeing a lot of positive signs again in the business, whether it's how we do predictive maintenance in our Upstream, which is taking costs out of inventory, increasing uptime to making robotic processes in finance for things like accounts payable. But again, it's very much at the beginning stages. And I think it can have a material effect on our cost base, and that's certainly what we're pushing for for the next couple of years.

You had a question on sustaining CAPEX. So again, we're committed to our CAPEX range of $25 billion to $30 billion, to be clear, and that's a capital investment number, and that includes inorganic as well. So just -- so everyone's clear on those numbers. And sustaining CAPEX is a lower number than that and depends on how you define that.

But somewhere between kind of the $15 billion to $18 billion range is what we talk about in terms of sustaining numbers for the company. In terms of RRR, I -- if I'm doing the math that you're doing, I think you're right. We can check that we've understood your math, and Maarten confirms from his perspective that your math is correct. So, yes.

Ben van Beurden

OK. Thanks. We go to you, and then we have a question online first.

Gordon Gray -- HSBC -- Analyst

Thanks. Gordon at HSBC. You've seen a nice welcome improvement in returns on capital employed. Obviously, they've come off a very low base.

Can you tell us, given what you're showing us on projects, do you think your returns target is conservative? And how far do you think that can go given what we're seeing on digitization, what we're seeing on individual project economics? And a small one, cash CAPEX. The promotion of cash CAPEX in the $25 billion to $30 billion target for this year.

Ben van Beurden

Yes. I think the returns, of course, are partly a function of history, the capital employed. And we will take some time to work off a very capital-intensive period, which we had during the high oil price world, but also, of course, the capital that we had to put in the balance sheet after the BG acquisition. That will work its way through.

We'll continue to improve. And of course, it's a function of oil prices as well and gas prices. So I think that the reference conditions that we have said, $60 real term in 2020, I think 10% is eminently doable. That can we have high returns -- or will we get to high returns as we will continue to invest in projects that are fundamentally and intrinsically more returning than the projects that we tended to do in the last 20 years? Yes, we should, yes.

But then, of course, that also takes into account certain assumptions on oil price. I think, yes, we will see that digitalization, as Jessica already started saying, will have something to do with that. It will help us making our capital projects and has helped us making our capital projects more effective. Our cost competitiveness has gone up significantly because of the benefits that modern technology brings.

And it will also help us in terms of downtime. It will help us optimizing, squeezing a little bit more out of our assets and also in the way we interact with customers. So yes, I do believe that digitalization will bring significant benefits. The two main areas where we see the benefits are in asset management in general, so on things like predictive maintenance, on reducing downtime but also in the subsurface domain.

We see a lot of benefits also with AI. We have now drilled a number of wells completely on AI. You can imagine the cost improvements that come from it, but also what is a tremendous improvement is the consistency with which we can drill long laterals, which produce productivity of wells, all the sort of benefits that you -- relatively smallish contributions in a one by one sense. But collectively, they can make up a very significant amount of value.

Cash CAPEX, the correlation between capital investment and cash CAPEX, Jessica?

Jessica Uhl -- Chief Financial Officer

Roughly $1 billion to $2 billion is what's coming through in terms of capital -- leases being capitalized, yes.

Ben van Beurden

OK. Let's do a question online.

Operator

Roger Read from Wells Fargo. Please go ahead.

Roger Read -- Wells Fargo -- Analyst

Yes. Thank you. Good afternoon. Just a couple of questions.

I guess, one, you laid out on Slide 23 the plans with cash allocation. With the gearing now reduced essentially to 20%, expectations of about $5 billion of asset sales in the coming years, how should we think about that cash allocation going forward? Is it a goal to reduce gearing further? Or should we think about that into other sources? And then as you think about your Permian position, you talked about it a little bit earlier, how do you like the way it's set up today versus maybe what would be a more optimal position in the Permian longer term?

Ben van Beurden

Well, let me take that second question first, and then Jessica will take the first one. I actually happened to again tour our Permian operations in December and I came away even more impressed than before. It's a very strong performance. It clearly shows that in the Permian, we are in the top quartile or the top quintile of the top 20 performers.

So I believe we have earned our right in -- as a responsible and good, efficient, competitive operator in the Permian. And as I said before, we are interested to take a more balanced view on -- in our Upstream portfolio and would be interested to add to the positions that we have. At the same time, though, for the avoidance of doubt, I also want to say that we totally are committed to our financial framework and to our capital discipline, which means that we will be investing within the $25 billion to $30 billion range. And that includes, for the avoidance of doubt, as Jessica already said, also inorganic spend.

So we will have to juggle a number of balls, but I'm very confident that we have a good position and a good capability in the Permian. And if opportunity presents itself to add to it, we will take a good look at that. Jessica?

Jessica Uhl -- Chief Financial Officer

In terms of the gearing outlook and the priorities for cash, clearly, we're very pleased to be at the 20.3% gearing level for the quarter. That has been an important priority for us to strengthen the balance sheet and ensure we have a balance sheet that's resilient for us through the cycle. I do think it's important to highlight, though, it was a relatively exceptional quarter in terms of the amount of working capital that was released that increased our cash balances. That could reverse to some extent in the next quarter, so I think being aware of that, just the inventory impact alone was $7 billion, and that's a combination of both price and volumes.

Volumes are relatively low in the fourth quarter, so those volumes may come up a bit. And of course, as prices go up a bit, that will also have an impact in terms of our working capital balances, our cash balances and therefore, our net debt balances. So on the one hand, very pleased with where we are. We're not declaring victory on the gearing number yet, and that's why I referred in my speech about continuing the trajectory to 20% because we want that to be sustainably at 20%.

It's not just, oh, we touched it one quarter and then we move on. We're happy with the 20%. We could see it going down below the 20%. I don't think that's urgent.

But through time, I think that's a good place for us to be given our -- the company and the nature of a volatile environment that we work in and the size of our capital program. So I think something between 15% and 20% is a good place to ultimately land. But once we get to 20%, it's making sure we get the right balance between capital investment because we want to grow the company, we want to grow cash flow and of course, we want to increase shareholder distributions. And this is where we're trying to, as Ben said, juggle many balls, and we believe we have the cash flow to achieve all of those things.

So with $50 billion in CFFO, excluding working capital for the quarter or for the year, I'll wait for the quarter, not quite yet. For the year, we have the cash to enable us to meet all of those objectives, to continue to pay down the debt, to continue to invest in the company for growth and to increase shareholder distributions. OK, thank you. Oswald?

Oswald Clint -- Sanford C. Bernstein -- Analyst

Yes. Thank you very much, Ben. Perhaps first question kind of related to what you've just been speaking about, more about the dividend and the buyback. I think you've said to us, you do have a longer-term ambition to bring the dividend back to the old Shell levels of $12 billion or so.

Is that still the case? And obviously, to get there, you wouldn't -- you get there with another $20 billion of buybacks. You probably need another $35 billion or so in order to get the dividend back down to that level in order to start to grow the dividend per share. So I know it's longer term. I know it might be stealing some thunder from June.

But I just want to get a sense, is that still how you're thinking about the dividend and competitively being able to grow the dividend per share, was the first question? And since Maarten's on the stage, I guess it's a year and a bit since you put out some punchy numbers on 8% to 12% returns in New Energies. A year and a bit into the program, into the spending, is that still a realistic set of returns to come from that business?

Ben van Beurden

Yes, Oswald. Indeed, we -- in the end, it's about dividend per share growth. Yes, that's what we will have to deliver as well. If you have a $16 billion dividend bill, and a -- by the way, dividend yield of well over 6% at this point in time, of course, dividend per share for growth is not exactly a sort of top-of-mind priority.

I think in the end, sure, we need to bring dividend down. We're not going to do that by cutting a dividend per share, we're going to do it by just buying back what we issued. Now we made a very clear commitment, we would offset the scrip that we issued and we are well on our way to doing that. And we will make a major step taking back some of the shares that we issued as part of the BG deal.

If I don't get ahead of myself and cover things that are better cover in June this year. But yes, in the end, if I lift a tip of the veil, of course, we will have to manage this prudently. We have to make sure that as we go forward, we have a repertoire of shareholder distributions that just make sense. In the end, individual shareholders are interested in a dividend that is sustainable and growing per share.

And that is very clear in our mind, is what we have to deliver. How we will go about that, we will tell you in a bit more detail in June. Maarten?

Maarten Wetselaar -- Integrated Gas and New Energies Director

Yes. Thanks for giving me some work, Oswald, that's appreciated. Yes, the 8% to 12% range, we still believe is the right range for us to target and to be in. It's early days.

Most of our investments in New Energies are less than one year old and are quite diverse in the customer end, in the generation end and some of the technology end. So some of it will take a few years to actually prove itself because these things have long time lines. Some of these early chains are operating already. I think the hypothesis is that at the generation end of the business, it's likely to sit at the lower end of the 8% to 12% range.

And then at the customer end, because it's lower capital and we are able to sell own Shell service and other products that we are able to sit at the higher end of that range. And so across the totality of our investment, looking for double-digit returns on this business. At the generation end, it will be leveraged in many cases. And so we will be seeking to put project level debt into these vehicles in order to get the returns to the right level.

We see that being possible; number of investments are playing there. The real challenge is -- for us is to scale that up, so it becomes a meaningful business and still has these returns because at the lower end return, and it's easy to scale up. But that's not where we want to put our money.

Ben van Beurden

OK, thank you. Christyan?

Christyan Malek -- J.P. Morgan -- Analyst

Thanks for taking my questions. Christyan Malek from J.P. Morgan. First of all, I'm having trouble reconciling an M&A strategy potentially in the U.S. with your capital or cash returns.

And the question is if you do M&A, would you fund it through debt or equity, given on the same vein you're actually buying it back? The second question is regarding your reserve replacements. And I know we can sort of argue the optics around 100%, but what I'm trying to understand is how do you plan to arrest the continual falling reserve life? And why is it on a like-for-like basis, it is on the lowest among the super majors? I think you can sort of argue it both ways. But what do you -- how are you planning to solve for that? And third, apologies for the third question. Your cash breakeven this year is $60.

That's what the oil price is. Are you comfortable with that in terms of managing your dividend cover in what is an increasingly volatile oil market?

Ben van Beurden

OK. I'll take the reserves life question because that seems to be a question that keeps on coming back. And then, Jessica, if you will focus on the other two. So the way we look at reserves life or at the sustainability of the business because that's what this is all about is to look specifically strategic theme by strategic theme, how we see things evolve over the next 10 years plus.

So I believe it is much more sensible to just try to forecast how your current assets will play out, how your production will play out, what sort of declines you're going to see and, therefore, how much you need to develop to replace your declines and keep that business healthy, not just from a free cash flow perspective, that is easy enough, but also from a top line, so a CFFO perspective. For each of the businesses, we have very clear views on how to do that. And we have very strong funnels that we believe are adequate to see us all the way through into the second half of next decade. And then of course, we are working on strengthening the funnels to see us through into the '30s.

We think that is the only sensible approach that I know to manage the company going forward. Now I know that I'm in a privileged position of actually knowing the company inside out. Some of the things that you will have to have proxies for like reserves life and everything else. But then I also need to again tell you that there are accounting effects in reserve lives that are distorting these things.

So for instance, we have issues with proven undeveloped reserves. If you look at our Energy Canada project, for instance, we have booked zero reserves on that. And it is simply because SEC booking guidelines for LNG projects require you to actually have off-take contracts for LNG before you can book the reserves associated with it. We have an off-take contract with ourselves because that is our business model for the LNG business.

So therefore, strictly speaking, we cannot book a single TCF or a single cubic feet even, which doesn't mean that we have built this, that we are going to build this energy project without the prospects of the gas being there. It is simply the accounting treatment that we have to follow by the SEC rules, and we are sticklers for that. The other thing is the deep water. We have said that before as well.

We have a very large deep water business with significant issues when it comes to booking as well, then analogs are not available. We need to be conservative with the bookings that we can make. And therefore, we book relatively few barrels with our deep water FIDs. And if you look at shales, again, it's the same thing.

SEC rules require you to have five-year development programs for a project in order to be able to book reserves. Well, it doesn't work. That on Shell is very much sort of on an ongoing commitment program well by well, etc. So effectively it means that we hardly book any reserves.

So these things are distorting effects because we are the largest integrated gas player and a very large or the largest deep water player, we are hit by it disproportionately. It doesn't mean that our position us not competitive, and it definitely does not mean that we cannot sustain this business throughout the '20s. Jessica?

Jessica Uhl -- Chief Financial Officer

So perhaps building on what Ben just said. We are very comfortable with our development funnel for our upstream business but also the funnel of opportunities we have to grow our downstream business and our integrated gas business. And again, we're focusing on growing value for the company, growing cash flow for the company. And we don't feel any anxiety around our reserves levels.

And importantly, we don't have an M&A strategy per se. We don't need to buy assets or buy companies to continue to grow the cash flow of the company. So we don't have an M&A strategy per se. That being said, we're always looking for opportunities around the world in terms of, is there a value-accretive deal to be done to accelerate our strategy and to grow value for the company? And we're looking at opportunities around the globe.

Whatever we do, it will need to be within the context of our financial framework and ensuring that through 2020, we're able to meet our obligations around getting gearing sustainably at 20% or below, delivering on the share buyback program of $25 billion. So that's our financial framework. That's our commitment. And whatever we do in that space will ultimately allow us to deliver on those commitments through time.

Very comfortable with our dividend coverage and where we stand as a company in terms of the cash that we're generating. Again, reflects the very strong project delivery we've had, the quality of the projects we've brought on stream, all of that coming through. It's coming through again in our integrated gas business, our downstream business, as well as our upstream business. So I think the quality of our cash is quite strong.

We've made good progress in our operational expense agenda. So overall, in terms of the direction of travel from a returns perspective and a cash-generation perspective, I feel very good about. And I think that the dividend question's no longer really a question. But we're not going to continue, of course, to improve our cash flow and grow our cash flow over the next couple of years, again to meet those further -- the next generation of commitments that we have.

Ben van Beurden

Irene?

Irene Himona -- Societe Generale -- Analyst

Thank you. Irene Himona, Societe Generale. In your very large Asian-oriented LNG business, but also perhaps in the Downstream, are you seeing any signs at all about the Chinese economic slowdown, which has so scared global stock markets? A second question on Brazil. It's a top three country.

It will be a very big contributor to the $5 billion free cash flow you expect. You're not the operator. Can you perhaps update us on what appear to be issues in the domestic industry delaying some of the replicant FPSOs? How is that looking? And a final question on share buybacks, if I may. I think, Jessica, your exact expression was that you believe in your ability to do the $25 billion, subject to debt reduction and the macro.

I realize it's a commitment to shareholders. I realize debt reduction is a priority. So can you give us a rough sense, of course it's not an arithmetic formula, but a rough sense of what the macro would have to be over a period of time to perhaps reduce or even suspend that buyback?

Ben van Beurden

OK. Jessica will take the share buyback question, and I think Maarten is best placed to talk to China. I think on Brazil, Irene, of course you're right, we are not the operator, so I prefer not to make any statements on behalf of Petrobras. Brazil is indeed a very important country for us.

It is, depending on whatever measure you take, in the top three of countries in terms of value and cash flow, etc. We continue to see growth there. Still extremely happy with our Brazil position, but it hasn't been without its issues. But in the main, it has delivered with the expectations that we had at that time we did the acquisition.

We will have to stay very close to what is happening there. I think the outlook for Brazil remains very strong, not only for the positions that we have, but also for the new positions that we have acquired. And having briefly met new President and Finance Minister, I believe their agenda is very supportive for the industry as well, and I hope to hear a little bit more when I meet them in two months' time. But I believe our plans for Brazil are still the right ones.

And we would probably have appetite for taking on a bit more Brazil risk if the opportunity would present itself. Maarten, you want to talk about China first?

Maarten Wetselaar -- Integrated Gas and New Energies Director

Yes. Trade wars and Chinese economic growth, to the extent that it drives global GDP, it obviously has an impact on, let's say, some of the important profit drivers for all of the company because it drives oil price trends, etc. But when it comes to gas demand in China, actually, the drivers are a bit different or at least the main driver isn't actually economic growth. We've seen 2018, which was indeed mix in terms of economic growth in China, the gas markets still grow by 16%, one-six.

And because domestic production isn't going so well, the energy imports into China grew by 40%. So if that's a disappointing year in China, then long made last in terms of the gas market. And it is because very much policy driven. It's around air quality.

It's around displacing coal. And we see the growth of gas in China very much into industry and into heating, not so much into the power sector. So we believe it is quite a resilient demand for gas. And still, we are well below the 10% penetration of gas in the energy mix in China.

So we believe there's still a lot of replacement of coal displacement scope to go. And elsewhere in Asia, we see a similar trend in India. It's earlier days, and policies are not yet as well matured and implemented as we see them in China. But it's starting.

So India is a 4% gas market growth and leading to 10% LNG import growth. So I do think these markets still have a lot of resilient growth ahead of them that is, to a large, actually decoupled from their exact economic performance because of the displacement.

Ben van Beurden

Jessica?

Jessica Uhl -- Chief Financial Officer

And then on the share buybacks, when we made the commitment, and consistent with how we framed it sends, it is, of course, subject to the macro environment and the price environment and our ability to deleverage the company. We've, I think, been very prudent, if that's quite the right word, but measured in each step that we've taken as we've gone through the last couple of years and meeting each of the commitments because we want to do this in a sustainable way. We've already delivered $4.5 billion in share buybacks over the last four, five months. We started that program before the ramp-up to prices above $80, and of course, in the fourth quarter, prices declined materially.

Those decisions have proved robust as prices were lower, went up and then went down. And that's how we're trying to design our company, reshape the company for it to be resilient through these swings that happen within the quarter so that we can ultimately achieve the $25 billion by the end of 2020. You've seen us do that in the $60 to $70 price range. That's the numbers we've been exposed to over the last, as I said, four, five months.

And we're doing all we can to ensure we generate enough cash flow to give us the flexibility, as I said, to continue to deleverage the company and meet the commitments. I think it'd have to be a pretty dramatic, sustained change in the environment for us to start speaking differently, but it is a volatile environment. And so we just want to be clear that we are trying to manage all three of these things, as I said, grow the company, deleverage and increase shareholder distributions. And we've been able to manage and achieve that over the last 12 months, and we want to continued on that path for the next couple of years.

Jason Gammel -- Jefferies -- Analyst

It's Jason Gammel with Jefferies. First question on the capital program for 2019. You've kept the range of guidance at the full $25 billion to $30 billion range. Can you talk about when you think you might be able to narrow the range on your guidance and the key variables that are preventing you from narrowing it right now? Is it just oil price? Are there inorganic opportunities you're evaluating currently, etc.? Second question, very specifically on LNG Canada.

Thus far, you have only sanctioned essentially the downstream component of the project. And when it's fully operational, it'll be a two BCF a day consumer of gas. When do you think you need to make the decision on whether to proceed with your own equity gas and when you need to start drilling versus just buying the gas off the grid?

Ben van Beurden

Good. We'll quickly talk about the $25 billion to $30 billion. Indeed, that's the guidance for next year. Seems to work, but without joking, we're very serious about that range as well.

So the $30 billion is a hard ceiling. I've said that a number of years. And $25 billion, if you have seen, is flexible, and as a matter of fact, we have more often at just below the $25 billion than above the $25 billion. And that's still pretty much the way we want to manage it.

You can say, "Well, why can't you narrow it down to $1 billion?" Well, why should I? It is hard to manage a capital program with lumpiness in it as sometimes happens. We talk about here capital investment. So it also includes leases that you bring on. It includes transactions that you may do.

It sometimes depends, will something happen in December or in January. It's -- there's enough agonizing I have to do to run the company well, so I can do it without that type of agonizing. But I'm very clear. It's not more than $30 billion.

And of course, you can imagine that if we have an affordability challenge with low oil and gas price environment, yes, of course, we'll be at the bottom end of the range. And if we have no affordability issues, we know we can go all the way up to $30 billion. But how exactly it will play out is something that I don't want to necessarily sort of box myself in and right at the beginning of the year. We will just do what is right by the company doing, as Jessica says, number of things at the same time, growing the company, deleveraging the company's balance sheet and improving shareholder returns.

And having a little bit of room to maneuver in the capital is actually quite helpful. Yes. You want to talk about LNG Canada?

Maarten Wetselaar -- Integrated Gas and New Energies Director

Yes. The short answer is not yet. But important to say is we only have 40% of the LNG Canada, of course. We don't quite need to get up to two Bcf.

But we do need to produce more gas. We have a fair amount of gas on-stream as we speak, actually, in Canada that we sell into largely the local market, attracting fairly poor netbacks. So to some extent, LNG Canada will finally give an outlet to that gas that is much more advantaged than the AECO price. So to some extent, it is just placing current production or current wells or current sustaining programs into a better value chain.

We will need to invest in some more gas gathering and compression facilities to get all the way up to the volumes we need to fill the trains, and we will probably make a decision in about two years from now. It also depends a little bit on how we see the market because if we see AECO be as weak as it's been, then we'll probably look to procure more of the gas and not drill as much as -- and not drill all of it ourselves, which is one of the interesting elements of LNG Canada, that we can actually kind of play the Canadian upstream market and how much do we want to drill, how much we are very happy for other people to drill and sell it to us at what is currently a very depressed local gas price. So that will all go into -- we will manage it carefully, and we will want to keep some optionality to optimize, let's say, the last 20%, 25% of our gas needs.

Ben van Beurden

OK. Thomas?

Thomas Adolff -- Credit Suisse -- Analyst

Thank you. Thomas Adolff from Credit Suisse. I've got two questions. The first one for Ben.

I think you've been now CEO of the company for five years, and maybe we can call it half time. If we call it half time and look back to 2014 and the ideas you've had for the company, has things gone according to plan? And what are the key lessons from the past five years? And the second question is for Maarten. I think your estimate is that global LNG markets will double by 2035. So when we think about Shell and LNG, should we think about Shell maintaining the current size we're growing in line with the market or the reality is somewhere in between?

Ben van Beurden

Why don't you go first, Maarten?

Maarten Wetselaar -- Integrated Gas and New Energies Director

First I'll say we don't, obviously, have a market share target in LNG. That will be wrong thing to have. But we do think that our current scale in absolute terms but also in relative terms brings in advantages that give us returns on our business that others will struggle to copy. So essentially, I think it's reasonable to say that as the LNG market continues to grow, we will want to grow with that market.

So I would not want to sacrifice our current position of strong leadership in that market, whether that means what exactly percentage, at the moment, we're somewhere between 20% and 25% of the market in terms of delivered LNG. Where in that range we would sit depends a bit -- is a bit opportunistic. But more importantly, how we get there will really depend on the build and buy decisions that we take every time we come across an opportunity. So in the case of Canada, we clearly decided to build, to put our capital down ourselves and to go full value chain.

But in quite a lot of other instances, we're quite happy for other people to put their capital on the ground and be the off-taker of the LNG because we have advantaged market access over almost anybody else. And as long as we continue to pull these two levers, I think there's quite an affordable pathway to having an integrated gas business that is a lot bigger than what we have today, as long as the markets continues to grow in line with that vision. So yes, comparably, we want to be in that situation by 2035. Exactly where we sit in the range, we will find out.

But that is the intent. The most important thing we do in that is actually creating market and signing up customers and getting privileged access to markets. That is actually probably the most differentiated element in our strategy. Obviously, our technology and our operating capability and our optimizing capability are all important, but I think defining will be the market access.

Ben van Beurden

Yes. And you're right. It's five years. And let me not comment on why that's a half term moment or not, but let me say that I'm far from ready to start thinking about my legacy.

There's a lot more things to do. But if I look back at the beginning of 2014, the things that I thought were important at that time, which was not sort of coming from an inspection on the first of January but was a long-held belief in my then, what was it, almost 30 years in the company was we needed to have a stronger performance focus, with more people feeling really deeply and personally connected to bottom lines rather than just delivering engineering outcomes or KPIs. People needed to feel that this was a game that we needed to win financially rather than just delivering excellence. I think we have come some way, and we have had some really notable successes.

And in areas where we haven't been able to succeed, we have taken some pretty rigorous portfolio action as well. So everybody gets it at this point in time, and most people are able to live up to the challenge. I thought what was important was that we had much more strategic clarity about the direction of the company than we have had before. So putting in place a strategy that is clearly purpose driven but on the basis of eight and now seven strategic themes was very clear what we needed to deliver, not only in terms of financial outcomes, but also how we were going to deliver, what the role of the strategic theme was in the overall financial framework.

That requires a lot of clarity as well. So who can grow, who needs to deliver the cash, how you're going to do it, etc., I think has really helped for people to get clear a lot what the roles are and what contribution is. And then I think the whole company is, I think more disciplined in terms of affordability and where we spend the money and how much we can spend. We are not constrained.

And it hasn't been a time, but certainly, not in recent past have we been constrained by opportunities. But everybody understands what the game is that we are playing. Of course, from time to time, we have to push back things. And I would much rather push back things then ask people to please come up with opportunities.

But everybody understands where the pushback comes from, and everybody can agree with that. So I think a company that is much more orientated toward value delivery is really clear that one of our three strategic objectives is to be world-class investment case. That they have a role to play in it, I think is quite a nice achievement that I am proud of. What are the reflections other than the things that have happened? I think the most enduring reflection that I still have today is how hard it is to reestablish a track record.

I think we have lost some trust of the investment community over a number of years. I've been very, very adamant also inside the company. We need to reestablish that trust by building an undeniable track record. I think we are doing that, but it is sobering to see how long it takes before that track record is being recognized.

I'm very -- I have a lot of time left in me, a lot of perseverance and we will deliver. OK? Yes, no, there's a mic coming.

Unknown Analyst

Ben, it's an interesting year, and you've got much better visibility on the opportunities that may be coming through than we do. But I think what's potentially on offer this year, Qatar, gas for LNG; Brazil, sizable acreage on offer; Permian, U.S. onshore, you're associated with a number of things, and I think you're clear in terms of your comments around your own interest in having greater optionality, whatever, in that area. And then obviously, New Energies is also a priority and something that has -- or that you're intent on growing and expanding in.

Life doesn't work, unfortunately, the way that everything pans out nice and evenly. And this year, it's that and next year, it's the other. This year seems like it might be quite a lot. So the question really is when you look at your portfolio, your opportunity set, your growth avenues and all of those areas that are kind of key to Shell's core future, how should we think about your prioritizing? I'm almost saying that there's almost going to be too much on offer within the frame as you're trying to -- as you have structured and as you can continue to, but there will be hard choices.

Ben van Beurden

Yes. Well, it's the same every year, yes? And so what we do, at the beginning of the year, when we look at the capital program, we say, "Listen, let's just give ourselves a little bit of room so that we can understand, when opportunities do come up, whether we want to do them, yes or no." It's pointless to begin the year with a plan where we are trying to figure out how on Earth we get below $30 billion. Of course, we will manage it because we by now have the disciplined processes and everything else to do what it takes to get within the ranges we need to be at. But it's a whole lot easier if you just say, well, there's a few things we can do during the year.

Let's see how they play out. Let's see where they actually do play out. Let's take a really good look at it, and let's make some choices. And indeed, there will be a few that we will have to regret.

And I actually quite like that because that means that the people will have to fight for the money to have really understand that it's not just a good-enough opportunity. I can meet a hurdle. They have to compete with the other three, four or five good ideas that our colleagues have. And there will be a few things that will be agonizingly difficult to get right.

Do we go for this, not knowing what the other one could also be there? But hey, that has been our life for quite a few years. So I'm quite used to it. Perhaps it's a little bit more visible because of the examples that you mentioned, which are somehow very well advertised. But it's the way we do the capital investment committee in Shell.

So I would say, welcome to our world. Yes.

Unknown Analyst

And one short one for you to follow up, Sorry. Any indication of the size of the project that you're thinking about at this time, that you may FID in 2020?

Ben van Beurden

It's a world-scale one. That's all I can say about it. So it is a full blown. But it's -- how exactly that looks like, let's just wait for the final bit of appraisal.

We will be ready to talk about it in the course of this year. Yes. OK.

Biraj Borkhataria -- RBC Capital Markets -- Analyst

It's Biraj Borkhataria, RBC. Just one question on the downstream. 2020 should be a very good year for refining and trading as a combined entity. How should we think about 2019? Are you going to be pulling forward any maintenance so you can go up and running full speed in 2020? And then just a very quick clarification on the free cash flow targets.

Downstream's mid-cycle in your numbers, I'm assuming that doesn't include any benefit for IMO in the target you put out, just to clarify that.

Ben van Beurden

If you could talk about that, Jessica. I think in general, it is -- we do, of course, have some flexibility. Sometimes we are forced to create some flexibility when it comes to maintenance when things go wrong. But in general, when we talk about maintenance, and here you talk about planned maintenance, of course, we tend to follow what is an optimal strategy.

So we look into the future as much as we can to understand when is the optimal time to do work. Most of the time, it is to extend maintenance cycles as much as we can, inspection cycles as much as we can and then to reoptimize the scope within a given number of days, minimize the number of days so that we can benchmark them to be world-class against our competitors. So at this stage of the game, typically, when you think about starting maintenance programs about 24 months in advance, you don't really sort of 10 months in advance, "Ah, right. Why don't we do it next month?" You simply do not have the flexibility if you want to do a professional job.

So I think we are set for our schedule in '19 and most of '20 as well.

Jessica Uhl -- Chief Financial Officer

With respect to IMO, lot of preparations happening in the company, primarily preparations to ensure optionality because it's not clear exactly how the market's going to unfold in terms of what customers will ultimately choose. Will it be a different fuel, scrubbers, etc.? So embedding optionality in terms of how we can supply customers around the world. We've been, I think relatively measured and thinking around and planning on the upside associated with IMO. So it is part of the thinking in terms of what will happen with our cash flow.

But I'd say we're on the prudent side because we simply don't know how things will unfold. So we've got it in our expenses and in our capital, but have been relatively light in terms of what we're thinking in terms of increased revenue.

Ben van Beurden

You and then Jon and then Martijn. And then go to the online questions.

Colin Smith -- Panmure Gordon -- Analyst

Colin Smith from Panmure Gordon. Just coming back to the dividend again. In the past few years, you've preannounced the first quarter dividend with the fourth-quarter results, and you haven't done that this year. And I just wondered if that opened up the route to increase the dividend for 2019, was the first question.

And then one for Maarten, wondered if you'd just like to give or if you can or would be willing to give a little bit more visibility on when we can expect first LNG from Prelude. Thank you. OK.

Jessica Uhl -- Chief Financial Officer

So no signaling meant by the absence of that disclosure. So there's no in particular in terms of what we're trying to signal with respect the dividends. We remain committed in terms of our current dividend levels, and the first priority right now is on the share buyback program.

Maarten Wetselaar -- Integrated Gas and New Energies Director

Yes. So Prelude, as you know, we opened the wells at Christmas. No particular intended timing there, but it just happened to be over Christmas. Upstream is performing very well.

In the midstream, we are basically switching on unit by unit and getting into the cold end, making sure that safety and quality come first and always with an eye on making sure that actually there, we take care of a strong ramp-up rather than hit a particular date. So it will produce its first cargo when it produces its first cargo. And it's always risky to put time pressures on teams that go through such delicate start-up and commissioning processes. But the team is fully on the ball.

It's highly optimistic, and we will let you know when the first cargo sails.

Ben van Beurden

Jon?

Jon Rigby -- UBS -- Analyst

Thank you. Yes. It's Jon Rigby from UBS. Can I just have a look or get you to look at the strategic themes table and the cash flow evolution? And I think you sort of signaled that, in overall aggregate terms, you're pretty close to bottom end of that $25 billion to $30 billion free cash flow.

But if we sort of disaggregate it, looks like the Upstream and the shales are still looks like they've got work to do, especially if you correct for oil price as well. So I just wondered whether you were able to give some insights on what has to happen over, I guess the next 24 months to hit those 2020 targets? Is it old portfolio or is there something else that has to happen? And flipping around the other way, Maarten's here. So it's also evident that Integrated Gas is ahead of your 2020 target. Is that something that is just unusual to the 2018 market and may reverse, there's a bit of supernormal profitability in there? I'm clear, obviously, you've spoken about Prelude coming on this year so that would, on the face of it, improve your performance further into 2020.

So I wonder whether you could talk a little bit about your segment's performance in the context of that target.

Ben van Beurden

Yes. I think, Jon, you're right. There is some more work. I already said there's $5 billion of cash flow yet to come from projects that are going to ramp up further and still start up.

So the big one that still has to start up is Appomattox. That will start up somewhere this year. But then there's quite a few projects in Upstream that still need to ramp up. So we have still ramp-up facilities that have started up in Brazil.

We have two more FPSOs to come on-stream in Brazil. We have the Permian, of course, which is not necessarily one single project, but we are still in a very significant ramp-up phase there as well, with new production coming on-stream in '19 and then again in '20. So yes, there is more work to do. But as I said earlier on as well, it's heavily de-risked because it's either already there and just needs to get to max gap or it is about to come on-stream, and we are in the final phases of delivering it.

Integrated Gas, you want to talk more a bit about that?

Maarten Wetselaar -- Integrated Gas and New Energies Director

Thanks, Jon. And it's good, of course, to be there, although we're there at $71 per barrel, not at mid-$60s. So corrected for price, we're not above the range we're in. Of course, with Prelude coming on and with Elba coming on this year, which of course not on our projects list because it's Kinder Morgan investment, but it will be 100% Shell off-take.

We will have some extra cash potential cash flow coming in from these assets. There's also a few that are -- that we sold, of course. So Thailand was still partly of this year, and we have New Zealand until December. So there'll be some offsets, but of course, they're smaller than Prelude and Elba.

So I think we feel pretty good about our ability for Integrated Gas to be well into that range. Even if you take out there's been some dislocations in the global LNG market in 2018 that we were very well-prepared and positioned for and that we managed to exploit. Yes, in the next 10 years, we have multiple of these events and we will be again well-positioned for them. But how much of them getting into the single year is never knowable.

So there'll be some trading margin that is -- depends a bit on how the market behaves, where the Polar Vortex in the U.S., whether it stays in the Midwest or goes to the coast. But I don't think -- but that's not a driver of our -- us being in or out of that range. That's more cream on top than anything else. So we think we're well into that range in the coming two years.

Ben van Beurden

OK. We'll take Martijn, and then we take the question online.

Martijn Rats -- Morgan Stanley

Yes. It's Martijn Rats from Morgan Stanley. I wanted to ask if you could talk a little bit about the announcement from early December on carbon. I guess I have to say I don't feel I like fully understand it.

The metric of net carbon footprint, the way that you sort of talk about, that it is an intensity measure, not a sort of total tonnes of CO2 equivalent number, right? And also, within the constraints that you sort of now sort of agree to, how do you expect it to sort of impact the business in terms of the choices that are now more likely or the choices that are now less likely? Is this a constraint to any growth in area -- in any area or not at all? I mean it's a tricky topic. And in late '17, you talked about it as an ambition, which is a little bit more loosely defined. Now you're talking about it as an actual target. So I'm just trying to figure out how much more important it has become in terms of actual driving business decisions.

Ben van Beurden

OK. Thanks, Martijn. That's a really good question. Let me explain first, again, what the net carbon footprint is, why we have it and then what the difference is from having an ambition to now having a target.

So what we've always said, we want to be a responsible company that remains relevant through the energy transition. If you look at what the world will need to do in order to meet Paris, it will have to decarbonize the energy system. So in other words, energy being consumed will have to have a lower carbon content. The world, on its way to less than two degrees C, will have to reduce the carbon intensity of the energy it consumes, forgive me some using some engineering units here, to around 40 grams of CO2 per megajoule of energy consumed.

We at Shell at the moment, with our portfolio roughly at 80. Of course, we have predominantly hydrocarbons in our portfolio. The world itself is -- will be close to 72, but that's because the world in total has lots of hydro and nuclear and biomass, etc., which we don't have in our portfolio. So we have said if we want to be relevant and if we want to be with society on the path of less than two degrees CO, 1.5, we have to be at 40 by 2050 as well.

So effectively, it means that we have to have the intensity, carbon intensity of the energy products, not the assets, the energy products that we put into society. Why do we talk about products? Well, because that's the real impact we have on society. We have on society impact because we provide energy products that people use and that, in their use, produce greenhouse gases. I think it's insufficient and wholly inadequate to say we are going to make the production of hydrocarbons less carbon intensive.

Really? Why would that be somehow compatible with Paris? So it's about the energy products that we sell and reducing the carbon intensity of these energy products to be in line with what society needs to do to meet Paris. It's complicated description, but I think it's the only thing that will keep us relevant if we want to remain relevant as a company throughout this energy transition. Now then how are we going to do that? We're not going to do that by, as I said earlier on, somehow making our refineries efficient and energy plants more efficient. But we have to do it as well.

We have to show that we -- charity starts at home. We do the right sort of things. But it's just not going to move the needle enough. In the end, we have to change the makeup of our product portfolio.

So that means that we'll have to introduce more low-carbon energy solutions, so therefore, renewable power, more biofuels. And also, indeed, we will have to put offsets, mitigating effects because many of our customers will continue to use hydrocarbons well into the second half of the century. And therefore, if you want to have a net 0 energy system, society will somehow have to find offsets for that, yes? And if you want to offset the emissions of a plane or the emissions of a ship or even emissions of cars that are not electric, you will have to have things like reforestation to make it happen. So the main levers that we have to reduce the net carbon footprint of our energy products are just that as well, yes.

Of course, it's more gas because gas is less carbon intensive than oil. And it's, of course, less heavy oil, more light oil, etc. But again, this is all marginal. It is mainly more renewable power.

It is nature-based solutions, and it is more biofuels. We think we can get there by 2015, but of course, we can only get there as society as a whole gets there. We can't do it on our own. I've said this many times before.

Sounds a bit flippant, but it is absolutely true, I cannot fill up a car with electricity if it doesn't have a battery in it. Our customers tend to come en mass with internal combustion engines, it's going to be a problem if you want to have more electricity in your product output. But anyway, we think we can get there. Now the ambition that we have set for 2050 is just that.

We want to meet that ambition. And of course, many of our shareholders but also many of our critics have said, "Why don't you make it a really hard target? Come what may, you will have your net carbon footprint." I said, well, that's a bit unfair because I may not be around by 2050. So and secondly, you need to have a little bit of flexibility to see how things will play out. But I'm OK to talk about targets if we talk a little bit more near term.

So we have a trajectory that we know we have to travel, and I'm quite OK to talk about what are we going to do three years now, five years from now. And I'm also OK, just to make sure that you really understand we mean business, that I link my salary to that. So this is not some sort of fancy thing that we can talk about and nobody worries what really happens in 2050. No.

We commit to link our remuneration to the long-term incentives program, to the reduction and net carbon footprint that we can achieve in that sort of timeframe that we typically have long-term incentives. And that's the way we have operationalized an ambition, by making hard targets. How does it constrain us? No, it really doesn't. The only thing we have to do is to change the makeup of our portfolio.

It doesn't mean that I cannot sell or produce oil and gas anymore. It just means that the mix has to be lower carbon. And that is actually quite in line with what we want to do. We want to have a portfolio that is much more balanced.

So we have oil and gas, and we have petrochemicals and we have power. At the moment, the oil piece is more than two-thirds, the gas piece is more than a quarter and chemicals and power is less than 10%. But if you want to be a relevant company through the quarter of the century, it's probably not a bad idea to have a little bit more balance in it. But it's not a constrained game.

It is actually making sure that you focus on the right opportunities. And the opportunities of power are very significant, yes. If you think about what the world will have to do, it will probably have to build 5 more electrical systems of the same size as the one that we have built in the last 135 years. So the opportunity that is associated with that is enormous because we're not going to somehow subsidize four or five more of these things.

There will have to be a real business behind it. Otherwise, it's just not going to happen. I'm quite confident that Paris will be delivered because there is a very significant societal push behind it, and if it has to be delivered, it has to be delivered through business. And I intend to fully benefit from that.

Sorry for the long answer. Timo? There's a question from the line, isn't it?

Operator

Jason Kenny from Santander. Please go ahead.

Jason Kenney -- Banco Santander -- Analyst

Yes. Good afternoon. Thanks for the insight today. A couple of details, if I may.

So I'm looking at South America Upstream, cash-generative but still loss-making in the quarter. And I'm wondering when it might actually make positive earnings? And then on Asia in the Upstream, looks like it's strong year on year. And I appreciate you've got Kazakhstan's support. But can you talk to potential Oman pricing support, if possible, and the sustainability of Asia Upstream earnings as well going into 2019? But then thirdly, if I may, just on oil projects.

I'm just trying to dig in to the potential contribution of refining and trading going forward. I mean if I look over the last three or five years, you're averaging somewhere between $300 million and $600 million a quarter. And obviously, $800 million plus in the fourth quarter was probably quite unusual. What is it that you're assuming from refining and trading in your 2020 cash flow target from refining and trading?

Ben van Beurden

Sounds like a question for you, Jessica.

Jessica Uhl -- Chief Financial Officer

Good. I was thinking the Oman, but I didn't quite understand it. And perhaps Martijn can help me on the Oman one. In terms of South America, indeed, we're always looking for each part of our business to be generating positive earnings.

Part of the impact that you see in the numbers is the acquisition of the BG portfolio and the impact on the balance sheet associated with that. We of course still have more three FPSOs that are going to come on-stream in the next one to two years, so there's assets under construction, which is also weighing on the earnings. I would hope that as that works through the portfolio and the production ramps up that we can then turn that to a positive earnings environment if the macro supports. In terms of refining and trading contribution, I think probably looking at an annual level over the last three, four years you get a sense of what the contribution is.

I think in terms of order of magnitude, we're not looking for a huge switch between what's being generated from the Marketing business and the refining and trading was over the next couple of years. So I think there's not a shift in the portfolio or expectations between those different -- those two parts of our downstream business. So if you look at the last couple of years, and you get a sense of the relationship of those you, I think have a good insight in terms of what we're expecting for 2020. And apologies, it was difficult for me to understand the Asia Upstream.

There was mention of Kazakhstan and Oman, but I couldn't quite -- could you repeat that, please? I'm sorry. I didn't quite understand the question.

Jason Kenney -- Banco Santander -- Analyst

Yes. The Asia Upstream looked quite strong year on year. And I know you've got a Kazakhstan support in there. But I was thinking, because Asia's -- includes the Middle East as well.

So I'm also assuming there's some Omani possible pricing support that we can't really get the detail on in that number. And if it is something like that and is it strong in that quarter, is it sustainably strong as we go forward for Asian Upstream earnings?

Jessica Uhl -- Chief Financial Officer

I'm not aware of any significant...

Maarten Wetselaar -- Integrated Gas and New Energies Director

No. There's no unusual pricing support in Oman. So The business has run well. VBDO has had a very strong year in terms of its oil production.

But it captures the normal price advantage and structure -- physical structures that it attracts every year. So has not been unusual in the earnings there.

Ben van Beurden

No. I suggest that our Investor Relations team follows up with you just to make sure that we get the details right on the numbers that you are looking at and give you any further insight or color on areas that you may have concerns or questions about. OK. Let's see who has the final question.

Lucas Herrmann -- Deutsche Bank -- Analyst

Sorry, it's Lucas...

Ben van Beurden

Alastair, yes?

Alastair Syme -- Citi -- Analyst

Yes.

Lucas Herrmann -- Deutsche Bank -- Analyst

It's very quick, it's very easy, actually, because I think Jessica will just tell me wait until March. But you've got a slide in the back which talks about IFRS 16 and 35 percentage points up in gearing. When we get to margin, you talk things through with this, my assumption is that that's not the metrics you're going to start talking about reducing to 20% go -- the headline gearing to date number today is 20%. Looks as though accounting will change it to 25%.

Jessica Uhl -- Chief Financial Officer

But the substance hasn't changed, indeed.

Ben van Beurden

That was it. Alastair?

Alastair Syme -- Citi -- Analyst

I just had a question back on the Permian acquisitions. Are you confident that if you did make an acquisition, you could keep the cost of supply around $40, i.e., what you would be embedding in terms of acquisition costs? And secondly, how do you think about the vertical integration issue marrying up with your downstream portfolio?

Ben van Beurden

First of all, I noted there are all sorts of speculations that we just not add or subtract from them. It's -- so there is nothing that I have to announce or to fuel or pour cold water on, other than to say we are extremely committed to our capital discipline. And that includes inorganic investment. I think yes, absolutely, we have to look at vertical integration in the Permian.

That is not just necessarily looking at what can we do with refining capacity and petrochemicals, etc. That's sort of the large-scale integrated plays that we are also looking at, by the way, in the general in the U.S. Gulf Coast. But it's effectively making sure that we have a strategy that actually looks beyond the reservoir, that really understands what are the constraints, where we have our trading in midstream capability working as an integration player through the company so that we take positions that really maximize return back to the wellhead.

And there is a tremendous amount of value in that, if you look at the dislocations that's currently happening in gas prices, which are, of course, massive, but also in NGLs. But even in oil, there is a tremendous amount of value optimization that can be done by companies that are competent integrated players, have a trading and optimization capability and visibility into how the hubs play out, can take positions around it that nobody else has. And the Permian is, I think the sort of almost archetypal play for these type of integration challenges. So yes, absolutely.

We have that as a key priority. Certainly, already over '18 and '19, we will continue to focus on that because ultimately, if you don't get it right, there's just too much value that leaks away to probably somebody, but not to us. Yes. So I think that probably brings us at the end of the questions.

I'm sorry that in sweeping the room, I may have overlooked one or two of you. But don't worry, we are not immediately running away after this. So let me say thank you for all the questions, and thank you for coming today, and also for you online, for joining us. As already hinted at, we have quite a few events coming up in the next few weeks and months.

So first of all, we have the annual LNG outlook that is scheduled for February 25, and Maarten will be hosting that. And then as already mentioned, and drilled by a few of you also, we have something to say about IFRS 16 and what it all means. Our group controller will talk you through it on March 28. Then in May, we will, of course, have our first quarter results.

We, of course, also very much look forward to our AGM in May. And then I also very much, together with the entire executive committee, really look forward to seeing you again in June when we give you the strategy update that we'll talk in a bit more detail, obviously, the next few years playing out. So I hope to see you all then. Thank you very much for coming.

Duration: 117 minutes

Call Participants:

Ben van Beurden -- Chief Executive Officer

Jessica Uhl -- Chief Financial Officer

Chris Kuplent -- Bank of America Merrill Lynch -- Analyst

Lydia Rainforth -- Barclays -- Analyst

Gordon Gray -- HSBC -- Analyst

Roger Read -- Wells Fargo -- Analyst

Oswald Clint -- Sanford C. Bernstein -- Analyst

Maarten Wetselaar -- Integrated Gas and New Energies Director

Christyan Malek -- J.P. Morgan -- Analyst

Irene Himona -- Societe Generale -- Analyst

Jason Gammel -- Jefferies -- Analyst

Thomas Adolff -- Credit Suisse -- Analyst

Biraj Borkhataria -- RBC Capital Markets -- Analyst

Colin Smith -- Panmure Gordon -- Analyst

Jon Rigby -- UBS -- Analyst

Martijn Rats -- Morgan Stanley -- Analyst

Jason Kenney -- Banco Santander -- Analyst

Lucas Herrmann -- Deutsche Bank -- Analyst

Alastair Syme -- Citi -- Analyst

More RDS.A analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.