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Royal Dutch Shell (A Shares) (RDS.A)
Q2 2020 Earnings Call
Jul 30, 2020, 9:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Welcome to the Royal Dutch Shell Q2 2020 announcement results. Today's call is being recorded. [Operator instructions] I would now like to introduce the first speaker, Ben Van Beurden. Please go ahead.

Ben Van Beurden -- Chief Executive Officer

Thank you very much, Rochelle. And ladies and gentlemen, welcome to our second-quarter 2020 results call. Thank you very much for joining us today. We realize it's a very busy day today.

I hope that you and your families and friends and colleagues are safe and well and that you are taking good care through these very extraordinary times that we are facing at the moment. Before I get going, let me point out to you again the disclaimer statement. But as I said, these are extraordinary times. They are challenging times for our business, many others, of course, as well.

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You will see the effect of COVID-19 and the overall global economic weakness and what they have meant for Shell in the second quarter when Jessica speaks shortly about the results and while there's, of course, nothing that Shell can do about the times we find ourselves in, we can always run our business well. We can keep it resilient, and that is exactly our focus. So today, I would like to give you some insight into the actions, the big ones, the small ones that Shell is taking. So, yes, we are in the midst of a global crisis, but we are working to make sure we come out of it much stronger and much fitter.

Through the second quarter, we continued operating our assets with minimal disruption, and we saw resilient cash, and that shows both the quality of our assets and our people. The near-term macro demanded quick action, and we took decisive measures to protect value, to strengthen our balance sheet and preserve cash. It was included rethinking and substantially reducing our cost, as well as rebasing our dividend and not continuing with the next tranche of the share buyback program. We quickly changed our processes, our operations into the virtual world, accelerating digitalization initiatives that were already under way.

And we can already see that these actions will also reap long-term benefits. And while we remain focused on preserving cash, counter near-term challenges, we continue to position Shell for what comes next because the foundations of our investment proposition go deeper than a resilient balance sheet. We believe the long-term fundamentals of our business are strong. And that is why despite all the immediate action we have taken, we have not rushed to change our strategy and our cash allocation priorities.

Strategy is still very much centered around our customers, and it is centered around driving in the energy transition to a lower carbon future. But before I go any further, I must give you an update on something that is crucially important no matter what time frame you look at, our performance on health, safety, security and the environment. Through these challenging times, our priority has been to ensure safe business continuity. And after a difficult 2019, I'm pleased that we have not had any work-related fatalities, Shell-operated ventures in the first half of the year.

We've also reported about 40% fewer injuries in the first half of this year, if you compare it with the same period in 2019. And we improved our performance in process safety, but also the volume of spills. And we remain below our target on greenhouse gas intensity emissions, both upstream and integrated gas. Now, our refineries and our petrochemical plants, however, have been unable to match this performance on greenhouse gas intensity as we saw lower utilization across many sites due to the economic environment, and at lower utilizations, these assets simply run at higher intensity.

But with a good progress on our health and safety performance, pleasing as it is, I'm also very sad to say that COVID-19 has left its mark on Shell. Seven of our colleagues are among the hundreds of thousands worldwide who have regretfully fallen to this virus. We are doing all we can to support their families, their communities. Safety is always a top priority, and current environment calls for even more vigilant care for each other.

This quarter, we have continued to work with partners and governments around the world to help local communities to respond to the global pandemic. So, in Brazil, for example, we supported the construction of a field hospital in Rio de Janeiro through the Brazilian Petroleum, Gas and Biofuels Institute, the trade association. And in Nigeria, we work with renewable energy companies to provide solar power to emergency health centers that are being set up to fight the COVID-19 pandemic there. Across all our assets, our contingency plans have worked well in the quarter.

So, as an example, 99% of our retail sites have remained open. And besides the usual safety measures, we are taking extra precautions with our front-line people. So, at our Rheinland refinery in Germany, our site staff are staggered in shifts and keeping the same teams working together to minimize new contact. Our lubricants customers in Canada and China are now offered a zero-touch oil change.

And our trading team that currently manages 1,300 sea ferries, 40 Shell-managed vessels has reduced the level of contact when our ships arrive at ports and terminals to load or discharge. Most of our people, tens of thousands, normally work on our facilities. And with the lockdown in many locations, we have virtualized processes and operations significantly. We have increased the number of virtual inspections, using images, project and instrumentation diagrams, robots, even augmented reality embedded in helmets that support remote technical activity.

Amongst other initiatives, we are validating and testing the design of our projects and equipment virtually, using the expertise of our teams in different locations around the world to ensure business continuity. And we are also using technology to support our customers remotely as if we were just next to them. So, for example, we recently launched a new lubricants logistics model optimizing U.S. and Canada customer deliveries by successfully handing over our logistics operations to Penske in a virtual environment.

We've also launched an app-based virtual payment card in China and in India for our customers with fleets of cars and trucks, growing our business-to-business solutions in these two markets. And then in finance, in the first quarter of 2020, we closed our financial books faster than in any quarter in 2019 in a fully virtual environment. And this quarter, we set a new record and closed the books even faster. We're working to make the efficiency gains structural and to free up resources across all countries and businesses in which we operate.

Through the current virtual working environment, we have also progressed further digitalization. For example, we further integrated machine learning into predictive maintenance activities of our refining and our deepwater assets with the potential to now roll it out across other parts of the portfolio as well. We have implemented new digital features that allow us to further optimize the inventory of materials in our refineries, and we are increasing the use of artificial intelligence to run and optimize our assets in this unprecedented environment, as well as to simulate return-to-office scenarios for it. For us, all these actions are more than initiatives to just ensure business continuity through the crisis.

They are actually opportunities to further build resilient operating models and optimize costs. Now, talking about cost improvement, let me give you an update on how we are progressing the countermeasures we have taken to reduce our operating expenses. We're on track to deliver the reduction in underlying operating expenses by 3 to $4 billion by the end of Q1 2020. And that is compared with 2019 actuals.

As you can imagine, that scale of action meant some difficult decisions had to be taken, like initiating voluntary severance programs and announcing no staff bonus this year. But beyond measures with short-term impact, we have also challenged ourselves to find structural improvement opportunities in operating models across our businesses and functions. So, for example, in shales, we have implemented a new operating model through a zero-based approach, focusing on core workflow and asset centricity. And this new model, once fully implemented, is expected to reduce overhead expenses by around 40% per annum when compared to 2019 levels.

And the majority of these savings will be recognized between now and 2021. We're also reducing feasibility study cost across our portfolio and identifying operating efficiency opportunities in IT, in asset maintenance and with suppliers. Across all our businesses, we are further moving activities to our business operation centers, where we can optimize and standardize our process. And this is a journey that we had already embarked on quite some time ago, and we continue to see opportunities benefits in this model.

So, for example, we are further consolidating research and development into those centers, which will bring structural cost reduction. And finally, as we improve our processes and operating models, we are reviewing the structures around them to maximize the efficiencies we can create. That is why in the second quarter, we have also started a program in Shell to redesign and restructure toward a fundamentally simpler, more effective organization that can deliver the very best from our traditional businesses, from our customer-centric businesses as well and rapidly and purposefully innovate for our future business models. You will hear more about all of this in time, but I can tell you now that besides reshaping and redesigning, we will also resize as appropriate.

We're working to reduce our contingent workforce. We are rationalizing our expatriation pool and further accelerate automation and digitalization. A simpler, leaner and a more focused organization will also cost much less. We're also finding cost efficiencies when it comes to capital expenditure.

And we are doing so while spending what we need to spend to ensure asset integrity and to continue with projects that are under construction. In some cases, we have decided that joining these are currently not attractive enough, and we stopped them. We're also deferring many projects. So, we can better face the capital spend while maintaining the flow of projects we need to sustain growth.

For example, we have reduced our exploration budget by some $600 million for 2020, which partly appears in our capital expenditure numbers, partly in operating expense. An agreement with partners and with governments, we plan to drill 22 exploration wells this year, and that compares with 77 originally planned. By reducing the spend, we have continued adding resources to our growth fund. In addition to stopping and deferring projects, we have rethought how we can become more efficient in deploying capital.

So, in shales, for example, we have reduced activity in various basins, taking advantage of the thought cycles and the flexibility that they allow. And with all these initiatives that I just mentioned, we are on track to achieve $5 billion reduction in cash capital expenditure from our originally planned levels for this year. So on this slide here, you can see how that translates to each of our businesses for 2020, focusing on our ability to reduce spend and make choices, minimizing the impacts on our growth funnel and future cash flows. So, we are keeping the growth in the leading transition themes, balancing our capital spend with upstream and we continue to invest in power.

For example, last night, the CrossWind consortium, a joint venture between Shell and Eneco was awarded a tender for a subsidy-free offshore wind farm off the coast of the Netherlands. Offshore wind as a source of low-carbon electricity will play a pivotal role in the energy transition. As we said previously, our annual ceiling for the period from '21 to '25 was around $30 billion, but this level assumes a stable macroeconomic environment. However, in the current recessionary environment, if it warrants it, we can extend this year's cash capex spend of around $20 billion to next year as well.

Currently budgeting for those scenarios, designing our capex plan for 2021 with flexibility in mind, so we can respond to the environment accordingly. But then, of course, we're also reviewing our future capex beyond 2021 as part of our broader strategic review. And we plan to provide revised details at our strategy day early next year. Now, these are, as I'm sure you will appreciate, major moves, but all this action does not change the cash priorities we have previously set out.

So, our near-term focus remains on reducing net debt, strengthen the balance sheet and maintain AA credit metrics. So, we are paying dividends and investing at the revised cash capex levels. Strong credit metrics are important due to the high volatility in price and margins, combined with high cash obligations that we need to meet. And for us, it is particularly key given our integrated business model.

So, for example, to support trading contracts without the need for collateral payments and for our long-term offtake and supply agreements. And it is also important with self-insurance, as well as for liquidity and cost of debt. And I'm sure you will agree that the last six months demonstrate the importance of having this strong balance sheet. So in the current recessionary environment, we look to protect value.

And this means further deleveraging to maintain AA credit metrics, paying an annual dividend of $5 billion, spending around $20 billion in cash capex. In the current environment, we expect our gearing to remain or even be higher than the top of the end of our range of 15 to 25%. But then bear in mind, gearing is only a proxy for the multiple credit metrics that we consider when managing our balance sheet. And as the macroeconomic situation recovers and there is a surplus of cash, we intend to strike a balance between additional shareholder distributions, capex to enable additional growth and further strengthening of the balance sheet.

So, in a more stable environment, we would further deleverage within our gearing range of 15 to 25% to maintain AA credit metrics through the cycle. We would raise capex for growth and increase dividends per share, as well as undertake share buybacks, also what we said before. In the last few years, we had enough liquidity to cover the dividends and bought back around $15 billion in shares. With a rebased dividend and lower cost, we expect to ensure that our sources of cash meet our cash obligations in 2020 and beyond.

And as the world recovers, strong balance sheet will allow Shell to stride out better than ever. Now, let me hand over to Jessica. She will give you some further details on our second-quarter performance.

Jessica Uhl -- Chief Financial Officer

Thank you, Ben, and to everyone for joining the call today. I hope you and your families are all safe and well. As Ben just said, Shell is becoming a simpler, leaner, more focused organization. We are changing the company even as our cash priorities remain the same.

We can do this because of the strong fundamentals of our business. To show you where the strength comes from, I'm going to speak to you of our resilient cash generation and sector-leading cash flow. So, let me start by outlining Shell's financial performance in the second quarter. Our Q2 2020 cash flow from operations, excluding working capital movements, was $6.5 billion, and our adjusted earnings amounted to $638 million in the quarter.

Return on average capital employed was 5.3%. At the end of Q2 2020, our gearing increased to 32.7%. 2.8% of this was driven by impairments and pension remeasurements impacting the equity side of the equation. Our cash capital expenditure in the quarter was $3.6 billion, which was kept low, mainly due to the countermeasures highlighted earlier by Ben.

Now, let us look at our Q2 earnings in more detail. Q2 2020 earnings were down, reflecting the impacts of COVID-19 on energy demand, prices and margins. Adjusted earnings this quarter were $638 million. Integrated gas adjusted earnings were $362 million due to lower realized oil and LNG prices, as well as unfavorable movements in deferred tax positions and well write-off compared with the second quarter 2019.

In upstream, production reduced by about 7% compared with the second-quarter 2019, but sales volumes were up due to the timing of liftings, mainly in Brazil. We reported an adjusted loss of $1.5 billion, largely reflecting lower realized oil and gas prices. In oil products, adjusted earnings were $2.4 billion in the second quarter, very strong contributions from crude oil and product -- crude and oil products, trading and optimization, as well as lower operating expenses offset lower realized refining margins and lower marketing volumes compared with the same quarter last year. This strong performance from trading and optimization was underpinned by unprecedented market volatility, as well as by price, demand and supply dislocations among different geographies.

We also saw the emergence of fixed and floating storage opportunities resulting from the contango structure during the quarter. We are already seeing a reduction in volatility we experienced in the second quarter, and I would note that the very strong trading and optimization performance in the second quarter is not necessarily an indication for the third quarter. In chemicals, adjusted earnings were $206 million, up from the second-quarter 2019, reflecting lower operating expenses compared with Q2 2019. Finally, in the corporate segment, our adjusted earnings reflected lower net interest expense.

Given the outlook of the macroeconomic and energy market impact of COVID-19, as well as expectations on long-term supply and demand fundamentals, we revised our commodity price and margin outlook. This resulted in lower medium- and long-term oil and gas prices and a reduction in our refining margin assumptions by about 30% on average compared with our prior assumption of mid-cycle refining margins. These lower prices and margins, among other assumptions, have resulted in several impairments across our portfolio. In total, we are writing down $16.8 billion of our assets, post-tax, which represents about 6% of our average capital employed.

Although impairments do not affect our adjusted earnings, they reflect our current outlook of the near and long-term environment, as well as our expectations on capital allocation and development plans. In line with accounting practices, impairment tests are performed on a stand-alone basis at the cash-generating unit level. This does not take into account the value generated by the integration of our portfolio. Given our integrated business model, value from an asset may be realized in other parts of our portfolio.

And as we continue focusing on cash generation in our assets, we are constantly high-grading our portfolio. For example, we've previously said that we plan to further rationalize our refining footprint, focusing on the truly strategic assets. We plan to reduce our refining assets from 15 less than 10 refineries over time, and some of the refining assets that we impaired this quarter will be strategic for us as we evolve these into new low-carbon value chain. Our cash generation proved resilient this quarter.

Cash flow from operations in Q2 2020 was $2.6 billion and was negatively impacted by working capital movements of around $4 billion, driven by the increase in oil and gas prices in the quarter. Our cash flow from operations, excluding working capital movements, amounted to $6.5 billion. This primarily reflected lower earnings compared with Q2 2019, partly offset by the cash effect of tax. Cash flow from operations was also negatively impacted by the settlement for the unitization of the Lula field in Brazil.

This is offset by a positive impact in cash flow from investing activities, so there is no impact in free cash flow from this unitization settlement at the group level. I would now like to turn to a longer-term perspective on our cash generation and how our strategy, portfolio actions and operational performance contributed to the step change in our cash flow profile. Over the last few years, we have high-graded our portfolio and focused on improving operational excellence across. We now have each of our businesses generating significant cash, improving our resilience and competitiveness through the cycle.

With material cash generation from our customer-facing businesses in downstream and integrated gas and resilient cash delivery from upstream, the repositioned portfolio of higher-value barrels that retain upside potential. This has translated into the highest cash flow in our peer group for more than three years, and we've demonstrated disciplined execution. Our performance on unit cash flow has increased significantly in the last few years in upstream and integrated gas, as well as in oil products, which is also leading within our peer group. This shows the quality and resilience of our integrated business model, as well as our leading position in deepwater, marketing and LNG in particular, bolstered by our trading and optimization capabilities, which differentiates us in the sector.

With that, let me hand back to Ben.

Ben Van Beurden -- Chief Executive Officer

OK. Thanks, Jessica. So, let me sum it up. On the one hand, this was a quarter that confirmed our earlier expectations on the challenging macroeconomic condition.

But then on the other hand, it was also a quarter that confirmed our competitive advantages. And this starts with what we have today, strong portfolio with strong fundamentals, market leader of a resilient and growing LNG business with a portfolio that is continuously optimized by our trading capabilities, world-class deepwater asset with very low breakeven prices and Tier 1 resources, the Brazilian presold in the Gulf of Mexico. Sector-leading marketing business. This offers high returns and has been steadily growing, bringing the brand of choice for customers worldwide.

But this strong portfolio is managed with disciplined execution, and we are taking tough decisions to strengthen the balance sheet and we are extracting more value out of the already high-value portfolio, leading the peer group on cash generation. And if you look ahead, our strategy embeds the transition to the cleaner energy system in every single one of our business. We're making sound choices, not only looking at the financial side of the balance sheet, but also future-proofing our portfolio. We're taking steps to remain competitive, but also reorienting Shell for the future, seeking higher returns through all our businesses, that's grow value per share, delivering superior returns for our shareholders.

But this is our investment proposition, platform growing shareholder value. Now, we are looking forward to providing you with a comprehensive update on all of this on our next strategy day, which will be on the 11th of February 2021. With that, let's go for your questions. [Operator instructions]

Questions & Answers:


Thank you. [Operator Instructions] We'll take a question from Oswald Clint with Bernstein.

Oswald Clint -- Sanford C. Bernstein -- Analyst

Ben, Jessica, thank you very much. Ben, I'm sorry, just a broad or high-level question, actually, on the topic of hydrogen that something Shell know pretty well, and I see it's blended into your wind project yesterday in the Netherlands. And actually it'll be great if you could talk about expected returns on that project. But the bigger question is, with everything that's happening with hydrogen, is there a risk or are you worried about some of these projects in the Middle East, solar turning into ammonia and transporting ammonia, and then you could crack that back to hydrogen that can be blended into gas residentially, even into power stations and even talking about burning ammonia? So is this potentially some serious threat to gas and LNG demand risk, I guess, in much longer term? And then secondly, a little bit closer to the quarter.

Chemicals pretty strong. One of the best quarters you've had, I think, in the last 12 months, at least. Utilization was down, so it's cost reduction and you gave a lot of good group examples there within your comments. But which one was applicable to chemicals? How did you get the cost out of a finely tuned Chemical business? And frankly, I mean you didn't downgrade your Chemical margins in the macro reset.

So, can you just give us what are you looking at, or when can we expect this next chemical upcycle to really begin?

Ben Van Beurden -- Chief Executive Officer

Thanks very much, Oswald. Really a nice set of questions. I'll take a stab at both of them and then hand over to Jessica. The hydrogen story, yes, it's -- and for those of you who have not paid close attention to that particular press release yesterday evening so we -- in winning the HKN wind tender in the Netherlands, we also have as part of the integration into the downstream value chain division that we should build a very large hydrogen plant in Rotterdam fueled by green electricity.

We will use that hydrogen for which there is, at this point in time, not a high-graded, high-quality market other than, say, industrial use. We will use that hydrogen initially in our refining and chemical facilities, but then with a view that we, over time, upgrade it to hydrogen for heavy-duty road transport, building that business in Northwest Europe from the Port of Rotterdam throughout the distribution systems of Northwest Europe. I think that's a typical example, in my mind, of how these businesses can play to our strength. Many a time when we talk about new energies or power, people think of us just being another wind farm developer.

And in reality, of course, it needs to be much more sophisticated if we really want to play to our strengths and if you really want to have superior returns that you can build on the back of it. It'll be a bit presumptuous, I think, at this point in time, Oswald, to say, well, these are the returns. This is a market that we have to -- and that will take us some time. But I do believe it will set us up very well already as one of the largest, if not the largest, hydrogen player in the mobility sector to really capture very significant parts of that future value pine.

You're absolutely right that there are multiple other energy vectors under consideration, ammonia being one of them, and the idea of ammonia for shipping is a good one. And indeed, Middle East, cheap solar could be a way of doing it. I couldn't see why that also wouldn't be a way for us if that was a very valuable way of developing it. And we try to unlock these types of opportunities with a strategic update of looking at the sectors of the economy to bring value into the house.

So, figuring out what customers need and then working back from there. I can also see how hydrogen and liquefaction could be an opportunity, and that's why we are also participating in pathfinding projects to do liquid hydrogen shipping. Now, bear in mind, I'm incredibly excited by the opportunities that this will bring, but this will not be a business to rival deepwater in the next 10 years. This will take some time as many of these businesses will take decades to develop.

But the first movers who lay out the strategic advantages in their own networks and capabilities will be the winners of the future. And that's why you see us go after these opportunities with so much bigger. Chemicals is indeed a bit of a bright spot at this point in time, and everything is, of course, relatively speaking. I couldn't say that chemicals is anywhere near sort of average conditions, but some aspects of chemicals have performed really well.

And you can probably guess which ones they are. So, those sectors that feed the detergent market, the personal care market, but also the packaging market, the medical sector, all these segments of our chemical business have performed well. Not so well, of course, is durable goods, cars, fridges, etc.. But then again, these things will probably come a little bit later as we see the economy picking up.

So, there is more to come, but I'm hopeful that chemicals has entered the path of recovery now. In terms of cost and other aspects, Jessica, anything to add?

Jessica Uhl -- Chief Financial Officer

Perhaps two points. Just on the first one to emphasize, things like HKN and getting into the wind project in the Netherlands is really the kind of the starting point of creating options and designing and implementing new business models for the low-carbon energy future. And linking that to our existing capabilities and where we believe the energy system is moving ultimately to hydrogen -- excuse me, pointed to something. And the integrated value chain that we can create, starting with this wind position, converting it to hydrogen and then bringing it into the transport sector or to the manufacturing sector, that will create differentiated business models for us that I think we're uniquely placed to deliver against and also differentiated return potential.

So, it's not the unsubsidized wind project return that we're interested in. We're interested in that bigger story, that bigger idea around the integrated value that we believe significant value and returns can be created. On the chemicals business, a couple of points to pull out of the story. Feedstock has also contributed to some of the better performance that we're seeing in the quarter.

So, some of the lower costs, the lower prices are helping part of our business. And of course, as Ben mentioned, all of the belt-tightening that we're doing across the organization, every corner of the company is being touched and that's also being reflected in the operating cost for chemicals.

Oswald Clint -- Sanford C. Bernstein -- Analyst

That's excellent. Thank you.

Ben Van Beurden -- Chief Executive Officer

OK. Thank you very much, Oswald. Rochelle, who can we go to next?


To Alastair Syme with Citi.

Alastair Syme -- Citi -- Analyst

Hi. Thanks to both. Can I just ask about impairment? I was still trying to figure out how much of the macro change is ultimately COVID-related versus something that's been maybe building in your thinking for some time. For instance, I made the observation that the plan to rationalize the refining footprint from 15 to 10 assets has been in place for some time.

So, what sort of why wait until now to impair? And then, the second question, just to pull on the strap-line that Shell is becoming a leaner, more focused company. It sounds very similar to something I remember at the time of the BG acquisition. So, I wonder really what that means and how you think you'll measure success on that metric.

Ben Van Beurden -- Chief Executive Officer

OK. Thanks, Alastair. Would you take the impairment question first, Jessica? I'll work to more focus.

Jessica Uhl -- Chief Financial Officer

Yes. So, the impairments are a reflection or an outcome of our resetting our long-term prices for oil, gas and refining margins, in particular. That was the main driver, price. But of course, we've completely changed our capex profile in the near term, and that also has implications.

The ultimate value will realize from some of our assets. So, both the price change and the shift in some of the developments that we'll do, given the capex program that we're following, also has an impact. Now, how much of that is COVID versus kind of other circumstances, a significant portion of it is COVID. Certainly, the near-term outlook is largely, if not entirely, driven by the macroeconomic implications of what COVID has unleashed.

But indeed, as you mentioned, Alastair, there are some strategic elements that we have been speaking to for the last couple of years. So, our outlook on the refining sector and where we believe we can create value and where we see the refining business fitting into the future of energy and the future low-carbon energy system, certainly is influencing our view on the assets and the potential that we see with the assets, but that came into play as well, both in terms of our margin outlook, as well as kind of the investment profile that we have for our assets.

Ben Van Beurden -- Chief Executive Officer

And then on the more focus, I do, first of all, believe, Alastair, that the BG acquisition gave us more focus. So, on the back of it, we created from two strong parts of our portfolio, two really strong crown jewels and maybe even helped the third one. So, our Deep Water business, which was a good business, became a really core focus area in our portfolio as we added the BG deepwater assets into it. And very clearly, now it is a foundation piece going forward.

And the same can be said about our LNG business where we -- basically through combining No.1, two, and if you go a bit further deep, the Repsol acquisition, also No. 3, into a really significant, now global player that is totally unrivaled. We -- you could argue that some of our trading capabilities were further boosted as well, and that's our third crown jewel that we have. And then in the process, we went out of oil sands.

We rationalized the portfolio in one relatively concentrated effort with $30 billion of assets that we got out of, with another $10 billion being worked on, the half of which has been delivered already last year. So, yes, indeed, the portfolio has become much more concentrated on back of that BG deal. Now, can we do that again? Well, in a different way, yes, we can. I do believe that if, indeed, we reduce our refining footprint, we probably have a much more high-graded view on how we want to cluster our manufacturing assets in general together.

So, refining and chemicals, I think, is now really down to a very high-quality core footprint around which we can trade and optimize and that can serve multiple segments of the economy so that, again, will be a portfolio simplification in that area with all the simplifications that come with it, all the attributes that organizationally hang of it can be made much more focused. And the same will be true for our upstream portfolio. I have no doubt that at the end of the journey, we can present you with a much more high-graded focused portfolio that really concentrates on the core assets within it, core countries within it and where we will have a differentiated approach, do what it is that we will really nurture and look after and what we will really manage is for residual value. And then with all of that, I'm sure we can also, having learned in the last six months how to operate things differently, become much more focused about where we want to emphasize controls and oversight.

So, having had to work on a very -- either localized level or a very centralized level, we are discovering new ways in which we can actually effectively manage this very large portfolio of businesses, markets, assets, etc.. And also there, therefore, we can make some further simplification, which ultimately will lead to more nimbleness, but also more focus on where we want to put our attention, where we want to put our money, where we want to make our difference. It will be, therefore, a slightly different story than the BG story, but it will be an equally compelling story, Alastair. Rochelle, how can we go to the next?


We'll hear from Michele Della Vigna with Goldman Sachs.

Michele Della Vigna -- Goldman Sachs -- Analyst

Ben and Jessica, it's Michele. I wanted to ask you two questions. The first one is about cash distributions to shareholders. You operate in a highly cyclical business, and it's important to preserve flexibility.

But I was wondering how you're thinking about the current cash distribution model of progressive dividend and buybacks in upcycles versus a possible model of progressive -- of variable dividends with a guaranteed floor and the more cyclical element to it as well? And then, secondly, in terms of investment opportunities, you continue to upgrade your portfolio. I was wondering if the economic environment improves and you can increase your capex back toward the mid-20s, which project and which area would you give priority to for that extra investment.

Ben Van Beurden -- Chief Executive Officer

OK. Very good. Thanks very much, Michele. Why don't you take the shareholder distribution question first, Jessica? I will talk a little bit about the capex and upgrade portfolio.

Jessica Uhl -- Chief Financial Officer

Thank you for the question. And it's a very important question and one that we spend a considerable amount of time considering and looking at different alternatives and options to ensure that the dividend policy that we have is right for the company and, hopefully, right for our shareholders. It's also an area that we've actively sought input from our shareholders on as well, and we continue to do that. I think particularly at this moment in time, given, as you said, this high degree of cyclicality that we're experiencing and particularly with the uncertainty around the outlook, our view is that certain level of stability is warranted and appropriate and getting to a dividend level that is sustainable and resilient through the cycle and through considerable stress, which brought us to the dividend level that we're having today.

As things recover, at this moment in time, we think the progressive dividend is the right way to go. Of course, we can top that up with share buybacks, and I would expect that would be a feature as we have excess cash in terms of the nature of shareholder distributions going forward. But at this moment in time, I think right now, we see the value of stability and introducing a high degree of volatility around the dividend, particularly at this moment in time, didn't look like the right choice for us, but we actively review it. And as the company changes, cash flow changes over the next five to 10 years, different models may be appropriate, and we'll continue to actively consider it.

But with the progressive dividend, combined with share buybacks, we think that's likely the right outcome for us at this moment in time.

Ben Van Beurden -- Chief Executive Officer

And then on the portfolio development and where to grow capex back, of course, we will give you a lot more detail in the strategy day when we get there, and we have done a lot of work, and we have a better view on, indeed, how that economic recovery is playing out. But there's a few hints already, of course, in today's material and also if you look back at our management day last year. So if you look back at our management day last year, we were going to keep upstream basically in sustained mode. We were going to put disproportionate growth into the transition themes, and we were going to mature over time a power business that will position us for the future.

If you look at our capital program today, which, of course, we had to vigorously scale back, you will basically see that we are not sustaining our upstream with the sort of capital nurturing that we give it. We still try to grow our transition themes where we can, partly also because there's projects under way. And we preserve a certain amount of money for good opportunities in the Power theme. Now if we find ourselves a bit more cash to spend and if we want to prioritize some of that cash back again to growing capital project portfolio, first of all, we will have plenty to choose from because a lot of it has been squeezed out of this year, potentially even next year into years to come.

So, we will have a very rich cupboard to pick from and we will, of course, pick the best projects. But you will probably see the same sort of trend as a trend between today's program, what we were talking about last year. So in other words, a preference for leaning into the energy transition, a desire to build the business of the future, but all of that having to compete with what you could almost call the base projects in upstream that bring a certain return around and that we also have to sustain in order to provide the cash for the future. So, I think that healthy tension where the different sort of strategic vectors compete for capital, we will maintain, but we will have a clear view to understand our capital allocation, we lean into the energy system of the future.

With more details to come, Michele, in February next year. Rochelle, can we go to the next question, please?


Yes. We'll hear from Thomas Adolff with Credit Suisse.

Thomas Adolff -- Credit Suisse -- Analyst

Good afternoon, Jessica, Ben. Two questions for me as well. Just firstly, on trading. Trading, obviously, is a key part of how you run and optimize your business and your value chain, be it in oil, gas and in the future, electricity.

And in this quarter, you generated strong earnings in oil. They're still in gas products' life. But generally speaking, how differentiated and how difficult is it to replicate such business model as yours? And then, secondly, as it relates to the electricity business, and I'm excluding trading optimization here. In your view, what is the competitive advantage that Shell brings versus in terms of the incumbents, the utility companies? And what are the benefits or trade-offs of having everything under one roof?

Ben Van Beurden -- Chief Executive Officer

OK. Very good. Thanks, Thomas, two very important questions. Usually, I would talk about Electricity business and Jessica about trading.

Why don't we flip it around? I will talk about trading, and Jessica will talk about the logic that we want to deploy in our power business. So is trading really differentiated, or if you -- if there is a strong contango in the market, well, people who actually are so minded can make money, whether you are a good or a bad trader. Well, first of all, let me say, indeed, we did make money off the conventional contango plays. We did very well, and we have a lot of opportunities to do so.

But it's not just a conventional contango plays we make money with. We are very well positioned to enter into contango plays of non-benchmark crudes that we understand a whole lot better than your average commodity trader in the market. We can also make money out of contango plays in blending components, particularly in fuel oil where the reconstitution of these components into end products, having gone through a contango phase, can be value that is very hard to see unless you truly understand structure and the nature of the business. So, yes, contango plays have been important, but I think we do contango on steroids.

Then if you look at second factor of value creation, it's around volatility. And of course, a lot of people can make money in volatility. A lot of people, by the way, can also lose a lot of money. But what we see, again, is arbitrage opportunities that we can capture, and we can probably see and understand and lock in these arbitrage opportunities a bit better than some of the others.

That is because we are very well positioned with our marketing positions around the world, shipping operations that have access to a lot of data, our refining positions that we have. And the sheer trading flow that we have gives us a data flow that allows us to really eke out transient value a whole lot better than perhaps your average trader. And then again, we can do it with assets. It's not just a matter of, can I arbitrage unlocking an advantage, but again, can I lock it in or blending in unusual ways, or can I do really things that others can't do? And let me give you a really nice example.

So, take the Pernis refinery in Rotterdam, largest refinery in Europe, sits in a market where it produces normally quite a bit of jet fuel. That market disappeared for 90%. We were able to completely reconstruct the way we work around this refinery, but that it could produce zero jet fuel, but that we could buy jet fuel, make money on the -- on that particular trade and then, again, reconstitute the products coming out of its refinery to make money elsewhere. That's not ordinary trading.

That is actually optimizing market positions that we know better than anybody how to take advantage of. And then more generally, the amount of data flow that comes through our trading and optimization organization is, I think, probably the richest in the world. So again, if we want to, we can understand where positions are opening up, which positions are smart to take, but also how we can see things coming. So, every week, on every Wednesday and every Sunday night, I read the trading analysis of what we see coming in the week, and I see how we respond to it.

The insights that we have, truly unique. And they are not just trying to understand what is happening with hydrocarbons around the world that tap in into multiple data repositories of every aspect of the economy. So, it is a very sophisticated machinery that also works with the underlying asset base and the underlying market positions to create value that others cannot create. So yes, did it work particularly well in today's environment? Of course, it worked particularly well.

But again, it is -- it has an element of uniqueness in it that I believe sets us apart from many of the other conventional players in the market. Let me hand over to have you talk about electricity.

Jessica Uhl -- Chief Financial Officer

Great. Thank you, Thomas, for the question. And let me speak to a number of points where I think Shell brings distinct competitive advantage to the power sector. Start off with, we are the second largest marketer of power in the U.S., which is the largest market available -- energy market available to private players.

And we've created that position over the last 10, 15 years, and that gives us capability insight that we're increasingly leveraging in other parts of the world, whether that be in Europe, in Australia or Brazil. So, we have experience and capability today in the power system that is unique, certainly, in our sector. If you think about the future and the future of the energy system, power will be essential into the decarbonization of the economy. And going back to the project we were just speaking about, HKN, it's a great example of what the future of energy is going to look like, what the future business models are going to look like.

I think there's a few companies that can compete with Shell in terms of trying to create these integrated business models and value chains. There's a few companies that could participate in the building and operations of these large wind farms, then build the largest electrolyzer planet to convert that to hydrogen and then bring that to refineries, our own refineries which has certain amount of de-risking in it, but importantly, then to build out the hydrogen molecule flows for transport in Europe. And I don't think there's any other company that can span that in the same way, bringing capabilities that we have today and positions that we have today to serve the business models and the future energy flows. Our position in energy around the globe, I think, again, gives us unique insight on how energy flows today.

That speaks to the trading capability and, importantly, the position that we have with -- across different sectors, where we're increasingly taking a sectorial approach to how we believe the systems need to decarbonize. The leadership that we can bring to that in terms of our convening power and bringing groups of people together to figure out how do we decarbonize these different value chains and then bringing genuine skill and capability and making that happen. We've talked about how we're doing that in the aviation sector. That's more speaking to kind of future of biofuels and other and bio jets, so a different way of serving that sector.

But if you think about the IT sector, the Microsoft, the Amazons, the Facebook, they have significant power needs around the globe, and they're trying to decarbonize their companies, and they're speaking to us because we're present around the globe. We bring the power capability today, certainly from the trading perspective and increasingly from the generation and development perspective, solar and wind assets. And again, being able to bring together these different capabilities, bring together different participants in a sector to figure out how do we decarbonize these sectors. And to do this globally, leveraging our assets and our people and skills, I believe, is a distinct advantage that we bring to power.

Ben Van Beurden -- Chief Executive Officer

Thanks, Jessica. OK, Rochelle. Who is next?


And next, we have Biraj Borkhataria.

Biraj Borkhataria -- RBC Capital Markets -- Analyst

Hi. Thanks for taking my questions. I have also two, please. The first one is on the CrossWind announcement yesterday.

Obviously, there's a bunch of elements attached to that that you've run through and it does strike me as something very Shell like to find innovative ways to do things. I guess the question I have is, is these innovations are not always good for the shareholders? So maybe could you talk about the extra elements of that project and what it does for project returns? I'm just trying to understand whether -- or understand the benefits of being a fast mover versus a fast follower in that type of business. And then the second question is on your shales business. There's obviously a lot of focus on new energies at the moment, but you're still planning to spend $1.5 million on shales this year, which is more than in new energies.

And a couple of years ago, you and all your peers were extremely positive on that theme and talked about growing the business. And I just wonder, at this point, given your view on commodity prices, could you outline why you need to be in that business at all? It doesn't appear that you have an obvious strategic advantage. The track record isn't great. And you've got plenty of competition that is willing to plough more money in that business model, which hasn't been proven, especially at scale.

So, would you consider exiting? That would be -- just some thoughts on that would be helpful.

Ben Van Beurden -- Chief Executive Officer

Thanks, Biraj. Let me talk about CrossWind, and Jessica will say a few words about shales and the strategic logic and what we're trying to achieve there. Indeed, I thank you for recognizing that doing a project like CrossWind with a broader value chain hanging off it is very Shell like. I think that is an important observation.

We like to think that as well for the reasons that Jessica just mentioned. We are able to actually assemble a future value chain, not just building a wind farm and trying to sell it in the merchant market in the Netherlands, but assembling an entire value chain around it. That again will set us up to win. What the returns of these value chains are? Well, let me focus on the power project first.

We think the power project is competitive. But the -- and what exactly the returns are? We normally don't disclose very much depends, of course, also on your outlook on the power market. But then again, setting up the value chains of the future, forward integrating it into hydrogen for transportation and industrial use is actually a pathfinding way that will, in the midterm, I think, give differentiated returns, simply because we are capturing markets where people want to decarbonize, but do not have the available tools to do so. So, before such a technology becomes common good and completely commoditizes and becomes subject to the usual competitive forces, there is a sweet spot where, indeed, very good revs can be captured.

But to enter that sweet spot, indeed, you have to take risk. Or sometimes, you have to figure out ways and means to make the economics work, sometimes even with government support and other ways to sort of level the playing field against the conventional alternatives for the industrial and mobility sectors. That is our game as well. We are not just a commodity player where we step in as the No.

4 or No. 5 follower. We break open new technologies, new markets. We were trailblazers also in the field of LNG.

I am sure that you would be able to go back to those times. People were wondering, why bother? This is a small market. Doesn't really matter. Here we are, indeed, many years later, but now we believe it's one of the most successful sectors of the oil and gas industry going forward.

So sometimes, you have to place these things in a somewhat longer perspective, Biraj. It's -- are we splashing billions of dollars on hydrogen? No, of course, not. This is a -- these are structurally seeding our businesses, and we have to go at a pace that it is absorbable, that we understand how we are derisking it, that we are ready to make the next step, etc.. But it is definitely a path we want to travel because we do believe that in years to come, we will look back on these decisions and say, right, that was a good strategic move, and now we are enjoying a growing business with strong returns.

On shales then, Jessica?

Jessica Uhl -- Chief Financial Officer

Yes. So, on shales, fundamentals of shales can translate to what we believe is a high-return business. If you've got the right assets, you've got the right capability and you steward the resources appropriately, we can see our way to high returns with our shales business. Our Permian asset, we think, is one of the kind of crown jewels in the Shale industry.

The capability we've developed in terms of our wells' performance, we believe it's best in class. And our stewardship of capital and the kind of unit development costs we've been able to achieve and what we're doing on the operational expense side that Ben spoke to earlier, speaks to, I think, the quality of our management, as well as the quality of our stewardship. So, when you put those different elements together, it can be a very exciting business and a very competitive business in the upstream sector. And of course, at this moment in time, I think it's challenging for many upstream businesses to look particularly good at the very low point in the cycle.

So, I wouldn't use this moment to necessarily judge the quality of the sector nor the quality of the business. But again, you need to have each of those elements in play in order to achieve good return business. A couple of other points I would -- I think, are worth mentioning. I think the shales business has been an important area of innovation for the upstream business.

We've gained a lot from our participation in our shales business that we've translated to other parts of Shell, where we've tested some of our digital technologies, innovative ways we're working with data and learning how to do the upstream business out of a very different pace. So, I think there's other knock-on benefits of continuing to operate in that sector. In addition, as most of you know, there is a high degree of flexibility. So, when you think about the portfolio and the ability to ramp up and ramp down, which can be difficult in other parts of the upstream business, that's one of the elements that Shale brings to the party that other parts of the upstream business doesn't.

And then finally, there's the integration opportunity, particularly in North America, that we have and that is a source of potential of further value creation, either connecting to our downstream business or through our trading by optimization activities, as well as from a risk management perspective and that's served us well over the last couple of years. I think there's a number of reasons to believe it is a difficult moment in the cycle. But the fundamentals, if you run the business well, are worth it.

Ben Van Beurden -- Chief Executive Officer

Thanks, Jessica. Thanks, Biraj. Can I have the next question please, Rochelle?


Yes. Certainly, we'll hear from Lydia Rainforth with Barclays.

Lydia Rainforth -- Barclays -- Analyst

Thanks and good morning. Two questions again. The first one, when we're talking about the idea of fundamentally restructuring and simplifying Shell, is that what you need to do to get to that 3 to $4 billion of operating expense reduction by next year, or is it [Inaudible]. And secondly, there's something you talked about in the opening remarks about being clear, both on the customer and shareholder value.

If I reflect on that, we have seen a lot of changes in the last six months, be it the move toward net zero, the dividend change, the lower oil and gas price assumptions, the downstream impairments. But as a lot of things changed, has your thinking [Inaudible] out the strategy, and what [Inaudible]?

Ben Van Beurden -- Chief Executive Officer

Thanks very much, Lydia. You were on the line, broke up a little bit, but I believe I got what it is that you said. Let me try to see whether I can get to your next question, which I thought was -- there's a lot of change as our strategy fundamentally changed. I'll say a few words about the fundamental change and the relation to cost.

And I'm sure that Jessica will have a few things to add there as well. We discussed that also in great detail over the last few weeks and yesterday with the board. I think on the sort of the change that you mentioned, stronger customer centricity. Indeed, we have come out with a sharpened ambition.

We have better articulated what it means to be in line with Paris. I think these are natural progressions from strategy that we probably entered into years ago, when we said we want to be part of the energy system of the future, and that means that we have to change the product portfolio, probably has to mean that we have to have a slightly different investment mix. And progressively, we have found out that we have to actually work from the customer back, particularly if you want to have a focus on reducing Scope 3 emissions and finding the business models of the future that will do so. So, I wouldn't say that things that you've heard in that space are somehow radical rethink.

They are progressive insight that is founded by the idea that if you want to thrive in the energy transition, if you want to be around in another 100 years' time, we need to evolve as we have evolved over the last 100. Now, indeed, it's tempting to think that that then is sort of logically connected to the dividend and other things that we have done, maybe even the impairment, etc., but it isn't. The reduction in dividend and the reset that we had to do was the result of a macroeconomic shock that gave us the risk of reducing our financial resilience we have to countermeasure, not only with cost and capex measures, but unfortunately, also with shareholder distributions. So, there is no correlation between one and the other.

We could have done one and the other at the same time in a normal macro environment as well. I think that's quite important to note. And the same is true for the impairments. The impairments are a -- if I put it as a gross of a simplification, but nevertheless, a bit a core of truth in it, it's an accounting event.

If you look at the fundamental change in the company, well, yes. So, we are, as we said, a bit progressive insight, understanding what we need to do different in order to position the company successfully for the future on the energy transition and other things that are happening. But at the same time, we're also learning how to cope with the pandemic, anticipating what would come next from it and also learning out of necessities sometimes, how different ways of working can actually be quite beneficial. So, if you just don't want to suffer the pandemic and see how you work your way through it, but if you want to see it as an opportunity for renewal, you think through, what am I going to do differently at the end of this? And there is actually quite a few things that we can do different and actually then require us to rethink.

It's not just going to be trimming at the edges. That's all work from home a day, a week. It's completely rethinking how we are going to run this company in a different way and how we're going to have maybe different ways of oversight, different portfolio as a result of it, and that's what I mean. Now to what extent do we need to do all of this to deliver on the original commitment, let me hand over to Jessica.

Jessica Uhl -- Chief Financial Officer

Lydia, thank you for the question. I was going to start with the strategy, but I'll start instead with the cost piece. When we set out the target for the market in the first quarter to reduce our opex by some 3 to $4 billion by the end of Q1 2021 relative to 2019, that was before we initiated this larger look at our organization and how do we ensure we're designed and organizing our resources to deliver on our strategy going forward. That was looking at what are the measures that we can take in the next 12 months to reduce our costs.

And you see that happening already today. So, our costs in the second quarter were down by some $1 billion relative to Q1 and, importantly, on an underlying basis, down some $2 billion from Q2 2019. So these are the immediate measures we've put in place. There's things like reducing travel costs, there's the stopping of the bonus for this year, which is about $1 billion and reducing activity, repacing growth spend, etc.

And I have a lot of confidence that we'll achieve that reduction over the next 12 months. But not all of those reductions are sustainable, and they are short term -- a number of them are short-term measures. This is where the reshape program that we're doing looks to then sustainably change the way we work to ensure we're designed to support delivery of our strategy and ultimately be a simpler company and have lower costs. But that will be really felt kind of 2021, 2022 as those changes are put in place.

So there are different numbers and kind of different activity levels that are driving those outcomes, probably comparable numbers [Inaudible]. But the first one is really kind of the short-term measures. Well, the restructuring program or the resizing program, that is more about how do we sustainably change the way we work, both in terms of delivering our strategy, but also to be more simpler and lower cost going forward. On the strategy one that Ben has more than well covered very well, I just want to -- I would characterize it as, as Ben said, progressive insights, that is kind of an evolution of the strategy.

I think the important point for me is that it's increased pace and increased intensity. It's not that they're new ideas or new concept. A lot of this has been embedded in our thinking when we had the strategic pillar of driving to the energy transition. We believe that the appetite and the opportunity is accelerating.

And it's with that in mind that we're looking to move probably more quickly and more intensely than perhaps 12 or 24 months ago.

Ben Van Beurden -- Chief Executive Officer

Thanks, Jessica. Thank you. I see we have quite a few more questions in the queue, so let's see whether we can add a little bit of comment at the end of it to make sure that we cover them all well. Rochelle, who can we give the mic to next?


We'll hear from Jon Rigby with UBS.

Jon Rigby -- UBS -- Analyst

Hi, yes. Thanks. A question or two, please. First, on the impairments, you've alluded a couple of times to accounting issues.

You also then talked about the benefits of locking together some of the Shell activities, the BG activities in LNG. You obviously reported a huge trading benefit and talked about the recurring nature of the optimization around assets and so on. And my question really is, is there a genuine -- particularly in the downstream and integrated gas, is there a genuine impairment in value that you're signaling with this Q2 impairment charge? And when you considered and looked at this, was there an option to sort of think about the sort of consolidated activities of the business rather than the way that the legacy and assets had originally been constituted because it seems to me is there's been a lot of repurposing over the last few years? That's first question. And the second one is, I noticed that you took about a $5 billion charge through equity for the pension fund.

And the pension fund, there's an obligation, I think, of about $95 billion at the end of the year of 2019. So, not much short of your market capitalization. And that's a big swing. So, I just wondered whether, a, is there a way of managing that going forward, or is that an obligation that we're going to have to live with and some of the implications that come with that, which are often not good? And the second is, is there a potential for increased cash out going forward to fund that pension obligation?

Ben Van Beurden -- Chief Executive Officer

Very good questions. So, Jon, let me make a beginning on the impairment point and then hand over to Jessica, who will undoubtedly add some to it and then can also cover with the pension fund adjustment. So if I understand your question correctly, Jon, so how can you square the idea that we would impair assets, say, for instance, in integrated gas, where you've seen actually the largest impairment occur, when there is so much associated trading value, for instance, with that asset? And is it indeed correct to take the impairment in the way that we have done. That is a very good question, but we are absolutely bound by accounting convention, where we have to look at the cash-generating unit, which is often just very narrowly defined to the asset that sits on the books.

The intangible value that sits in our trading organization that adds a lot of extrinsic value to such an asset because it's part of a portfolio within which we can trade and optimize around that asset. We can, from an earnings perspective, segment that income perhaps back to that asset that is not possible to use as a methodology when we go through the accounting process of impairing of value erosion review on assets. That's narrow. So, that means that, indeed, in some cases, yes, we have to recognize that the asset was on the books with more value than it strictly speaking has on an intrinsic basis, but it doesn't necessarily mean that that value has disappeared.

And we have that not only in our gas business, we also have that in other businesses, but the assets are part of a broader value creation network as value creation extrinsic to the asset cannot be taken into account when looking at the valuation of that asset on. Let's see whether I have that sufficiently correct for Jessica to add something to it. And then maybe if you can also talk to the pension fund question, Jessica.

Jessica Uhl -- Chief Financial Officer

Sure. Jon, thank you for the questions. And I think Ben covered it well. We engaged deeply on this with our internal accountants and our auditors as well because some of the answers that are right from an accounting perspective are not intuitive from a business perspective for the reasons that you've mentioned, Jon, and Ben has as well.

So, we're doing this technically correct. But does that mean that the impairment reflects the true kind of economic value of that asset in the value chain? In many cases, it doesn't. And so, there are many instances in assets that were impaired this quarter, where they provide tremendous value to our integrated gas business, to our downstream business, and as I mentioned in my speech, where we see some of these assets to be very strategic for us in the future. But that is -- we're doing things right from an accounting perspective, but it may not make intuitive business sense.

That being said, there are some assets that -- where there is value, some of the exploration assets that we're not going to pursue. But I'd say, a significant number of the larger assets that were impacted are ones that we see significant strategic and economic value going forward. Pension fund. It's a really important question and good to raise and acknowledge that is a large number from a liability perspective.

We also have significant assets against those liabilities. And what you're seeing is kind of the net of those two things. The impact on that balance does change, driven by the interest rate environment. That's been the single largest driver of change in the last couple of years.

Sometimes that has gone in our favor. So, last quarter, we had opposite effect of a comparable amount as interest rates increased. So, that is a reflection of the interest rate environment. I don't think there's much we can do.

That's simply the accounting and the reporting. And if you look over the last couple of years, it's been pluses and minuses going both directions. You also have movements on the asset side as well. And so, as the equity markets recover, the asset values also increase.

And so, what you're seeing is the net of all of those effects coming through. That's on the reporting side. That's different from the funding side. Funding is handled very, very differently, and it's given -- it's driven by the requirements of each of the pension plans in the countries where we operate.

There is the potential for us to have additional funding requirements. To some extent, that's always the case. We manage this very carefully as a group. And I believe we're in a very solid funding position.

But depending on what happens with interest rates, what happens with the equity markets, additional funding can be required and that's part of what we planned for and resiliency of the company and the cash flows going forward. So, it depends on what happens, as I said, in the interest rate environment and the equity markets, in particular, but that's well-considered in all of our plans going forward.

Ben Van Beurden -- Chief Executive Officer

OK, thanks. Can we have the next, please -- question please, Rochelle?


We'll hear from Christyan Malek with Morgan Stanley.

Christyan Malek -- Morgan Stanley -- Analyst

Yes. Thanks for taking my questions. It's Christyan Malek with JP Morgan. First, the outlook for demand.

Shell prides itself on being integrated in most end markets yet this crisis is sort of seeing the entire energy complex contracts in unprecedented way. What green shoots are you seeing, if any, in the outlook for crude demand when compared to your views a quarter ago? Has anything, I guess, changed the better or worse? And I guess, secondly, in allied to that. I wanted to ask you more about the portfolio reshaping as far as being fit in the future vis-a-vis your volatility and not the least, energy transition? But February next year does seem quite a long time away, and I'm not sure I can take away from this call the major changes on the horizon or not, especially in what you would consider core versus non-core. Are you open to divestment? You mentioned deepwater LNG marketing quite a bit.

And would it be fair to say that you may need a more radical overall in the business? And what I'm trying to get to is, can you at least provide a basic framework into helping us model Shell Version 2.0, the backdrop being that one could argue the financial frame as it stands, either need the major cash injection or higher all-in order to deliver the investment needed to materially scale up new energies?

Ben Van Beurden -- Chief Executive Officer

OK. Thanks, Christyan. I'm not entirely sure whether I got everything because there was a bit of a disturbance on the line as well for me. The demand outlook, it's, of course, a very important question.

I'll talk to that a little bit. Jessica, you OK to do some of the portfolio reshaping? It is, of course, very hard to predict exactly where demand will go going forward. It -- in some sectors, we see the beginnings of a recovery. I mentioned earlier, the Chemical sector that is still a very significant driver for oil and gas demand as well.

But of course, for us, it's also a significant part of cash flow if it works well, and we see the beginnings of a recovery trajectory, we believe. On the more conventional fuel side and, therefore, oil, I think it's very mixed. So, in some sectors, we see actually quite good recovery. So, take, for instance, motor gasoline and diesel, there's a fair degree of recovery, particularly in countries that are a bit further down the first wave.

We see actually, in some cases, a stronger demand than we saw before the pandemic. That's not -- that we have, but it's in a few cases, absolutely true, partly because people tend to use public transport less and a more safe and secure in their own car for commuting. We see countries coming out of lockdown, of course, going into a bit of a fast recovery on personal mobility fuels. And then there is a wide spread in this.

So, we see resilient demand in China, as I said, ahead of last year. The biggest growth we are actually seeing in Russia, that's 13% up. But the worst-performing market is India, 45% down. So, we are dealing with a very wide tapestry of market recovery archetypes.

If you look at lubricants, we see also quite a wide range of performance. So, Europe down very considerably, but now recovering back to 90% of what it was. But then in other places like China, for instance, we are seeing 15% more lubricants' demand in the second quarter of this year than in the second quarter of last year. So, it is quite surprising to see the differentiated approach.

I probably don't have to tell you much about aviation, where we probably see a recovery back up to, well, probably 50% what it used to be by the end of this year. So, altogether, I do think that we will end this year not in a fully recovered market. And it may well take 2021, of course, to get back to where we were. What happens after that is, I think, much more difficult to predict.

And everybody who can tell you certain things with certainty, I think you have to take with a great pinch of salt. And of course, we don't know how this pandemic is going to work out. I hope it will work out well. And I hope that any subsequent episodes are going to be limited to outbreaks rather than massively new waves, and I hope we will be able to deal with it a whole lot better.

But the uncertainty that hangs over the market is still, I think, very palpable, not only in demand, but I'm sure you've seen as well, pricing and everything. So on gas, I'm a little bit more hopeful. I think the gas markets will recover more strongly. Industrial demand will come back.

There is limited short-term alternatives for that. I think also if we see a resumption of normal economic activity, pace heating, power demand, etc., will all come back. But I think the chances are that a full recovery are -- is going to be probably more toward the end of next year. Let me leave it at that.

And Jessica, can you take care of Christyan's next question?

Jessica Uhl -- Chief Financial Officer

Yes. Christyan, it was a little bit difficult to hear you. So, hopefully, I'm answering the right question. The main takeaway I had from your question was, do we have right portfolio as it fits for the future? So that's what I'm going to speak to and, hopefully, that touches on the elements that you wanted us to touch on.

I'd start off with what I believe is a view that the quality of our portfolio today is evident in the very strong cash generation that you see in the quarter against a very difficult backdrop, difficult prices, difficult margins, difficult volume levels, and yet, the capacity to generate 6.5 billion. I was kind of expecting, Christyan, you might ask us about the breakeven price because usually -- and this would be a good quarter to have that conversation, given the cash generated. Against this profile. So, I -- in terms of the quality of the portfolio, I think the results, certainly from a cash generation, large extent, speaks for itself in terms of the quality of the assets that we have in IG and in our deepwater business and our marketing business, which continues to show a lot of resilience through a number of different macroeconomic backdrops.

That being said, we want to continue to improve, make more robust, more resilient, more competitive our portfolio, so we're never off that train. On the refining side, we've been clear that we're going to reduce the number to some 15 to less than 10, and that is about having the assets that best align with our strategy and where we think we can competitively differentiate. And with those assets to continue to retool them for a low-carbon energy future. That will be the work that we're doing in the portfolio over the coming years.

And then there's a piece of leaning into the energy transition. So, what are we going to do with our capital as the economy recovers? It will recover at some point in time, and we will have surplus cash. And when we have that surplus cash, we want to grow the company. Where are we going to look, and Ben talked about leaning into the energy transition.

And just to make sure when we use those words, energy transition, that we're clear what that means. It's not just our power business, it is our chemicals business, it's our retail business, it's our lubricants business, as well as power, hydrogen, biofuels. This is the future of the energy system. This is where we believe we can meet and where we're going to be building out these businesses.

And there are different degrees of maturity. Obviously, the chemicals business, retail business, lubricants business, those are all much more mature businesses. And so, your ability to invest more and see the returns and have confidence in that capital program is greater. Our hydrogen, biofuels, those are continuing to be maturing businesses and business models, so we're going to invest in those, but we're going to be prudent and make sure that we have confidence in the business model.

And the return profile, we'll take some risk, but we want to take prudent risk as we build out these new businesses and business models of the future.

Ben Van Beurden -- Chief Executive Officer

Great. Thanks very much, Jessica. Thank you very much. Can we have the next question, please, Rochelle?


We'll move to Henry Tarr with Berenberg.

Henry Tarr -- Berenberg Capital Markets -- Analyst

Hi. Thanks for taking my question. So, two quick ones, hopefully. Firstly, have you started marketing any of the refineries already? And is there any interest in those assets in what looks like a relatively challenged space longer term? And then secondly, at this point, balance sheet permitting, do you have any appetite for M&A with distressed assets available in certain sections, particularly, looking at the U.S.

where you suggest that shale remains a core part of the business?

Ben Van Beurden -- Chief Executive Officer

Thanks very much, Henry, and two very relevant questions. So, yes, we are marketing our refineries at the moment. We have active, and they are actually in active discussions. So, this is not like we've put out some information package.

We are actually in discussions, and they are at various stages of -- selling refineries is not a very trivial process. There's, of course, all sorts of, you can imagine, long-term liability issues and other things that have to be taken care of as well. But we started, when I worked in that business in 2004 with 55 refineries, now down to 15. So, we know how to also not only run them, but also to get rid of them.

And that's what we will be doing. On the M&A front, of course, we always have to look at opportunities in the market that you would expect us to do so. And of course, there could well be opportunities available. But we've also, I think, been very clear about what our priorities for cash are.

So, you can rely on the things that we have set when it comes to allocation of capital between the different priorities that we have. And we have to live within the frameworks that we have set out. Does that mean that we can do small-sized acquisitions that fit within the framework? Yes, absolutely. And that's why we are indeed looking, but we have to obey the constraints that we have set to ourselves, if we want to continue to market ourselves as a disciplined allocator of capital and one that preserves the financial resilience of the -- thanks, Henry.

Can we have the next question, please?


We'll move to Jason from Jefferies.

Jason Gammel -- Jefferies -- Analyst

Thanks very much. Ben, in your prepared comments, you mentioned that in a more stable environment, you would allocate capital to deleveraging, increasing growth capex and increasing shareholder returns. But I guess the question I have is, what's the priority there? Because you have talked several times about needing to step up capital spending for growth, and you've also talked about getting the leverage ratio back down into the guidance range. The second question that I had is, I thought it was quite interesting you made a comment about evolving some refineries into low carbon chains.

And I was hoping that you might expand a little bit on what you meant there. Is that converting into biodiesel refinery? Is that further integrating into petrochemicals? Just anything you can add there would be helpful and maybe even your outlook for the biodiesel market.

Ben Van Beurden -- Chief Executive Officer

OK. Great question, Jason. I'll take the second one, Jessica the first. Yes.

So, what we -- what I think is reasonably clear, I hope, from our outlook is. We believe the future of refining tech or pure refining is going to be challenged. Doesn't mean you can't make money in it? But you have to have a sophisticated position in it, but that means refineries with high complexity, very well placed, deeply connected into well operating trading networks, so we can do all the tricks that I referred to earlier on in this call, but also, of course, more deeply integrated with other parts of the business. Conventional way of doing it, of course, is petrochemicals.

But there's other ways you can do this. We can think indeed of bio components. We can think of also bringing green power, hydrogen and other ways of integrating to it. Now, so what you will see us do over time is indeed high grading.

That's sort of more broad manufacturing part of our overall asset portfolio to just that, very sophisticated, multipurpose energy parks, if you like, integrated with product facilities. So, what that means, in some cases, may well be reducing the straight-run fuels in a refinery, so rightsizing it down to a more fit-for-purpose output, but then repurposing some of the units to do other things with. So, you can repurpose, say, for instance, hydrocracking units to be a feedstock provider for extremely high-quality base oils for lubricants. And then you're tapping into a completely different market.

You can indeed integrate some of the biofuel technologies in units that then make more money than to just do, say, hydro processing. Or you can bring a deeper integration formula with petrochemicals in areas where that is possible. And so, what you will see us do is just that. So, it's probably going to be a combination of shrinking the fuel make, repurposing units in such a refinery to other types of processing capabilities and in the process, producing higher-quality products or products that are less susceptible to the pressures that we are seeing at the moment.

Very simple and conventional ways. If I just bring it to life with one more example is to say, for instance, why would I want to upgrade the bottom of the barrel to sort of middle distillate, if I can also turn it into bitumen? And that may not sound like a very sexy proposition, but I can tell you, if you are the most sophisticated bitumen marketer in the world, which we also are, it can actually be an incredibly profitable proposition. So, it is tricks like this that you will see us do over the coming quarters. Jessica?

Jessica Uhl -- Chief Financial Officer

Thank you, Jason, for the question on our capital allocation and how are we going to prioritize cash as we return to a stable environment, hopefully sooner rather than later. We've tried to be very clear about our cash priorities. We've spoken to them in the same way for the last three years. And I want to be very clear that paying of our interest, our dividend and, importantly, ensuring that sufficient capex to maintain our assets and doing that all within a AA frame is a top priority for us.

And so, the resilience of our balance sheet and acting prudently at this moment in time is absolutely front of mind and what drove the decisions that we've been making over the last six months and, in particular, the dividend decision. When the world returns to a more stable place and prices and margins recover and our cash flow recovers in that environment, we're looking to get to comfortably within AA range. We don't have to be at the bottom of our targets. We don't have to necessarily be in the middle of the target, but we want to be comfortably within it and have confidence in the outlook.

Once we're in that position, we are going to look at continuing to grow the company, so capex. We've put a lot of things on hold. And of course, everything hangs off of investing in the company and creating more value and generating cash that we're able to fund even greater shareholder distributions and work further growth going forward. So, the investment in the company and investing in future cash flow growth is important.

It's also very important that we have a compelling investment proposition for our shareholders. And increasing returns for our shareholders is also front of mind. We want to be No. 1 from a total shareholder return perspective, and that's only going to happen if we increase dividends or do buybacks and/or through share price appreciation.

And I hope that all three of those things are featured in our very near future. So, ensuring that we've got the right return profile for our shareholders is absolutely front in mind. But we've got to keep all of these things in balance. Right now, the priority, given the circumstances that we're in and the outlook and the uncertainty around the outlook, focusing on the balance sheet, I believe, is absolutely the right thing to do.

At one point in time, we'll be out of this moment. We'll have a strong balance sheet. We'll get comfortably in the AA metrics. We'll be looking to invest in the future of this company and creating value, and, importantly, ensuring that we've got a competitive and leading term profile for our shareholders.

Ben Van Beurden -- Chief Executive Officer

OK. Thank you very much. I see there's a few more questions. So, I know we are over time, but I want to make sure we do justice to all of you.

So, we're going to continue until the questions are done. Who can we give the mic to next, Rochelle?


Martijn Rats with Morgan Stanley.

Martijn Rats -- Morgan Stanley -- Analyst

Yes. Hi Martijn, not of JP Morgan. I'll keep it to one just because it's a long call already. Ben, you were recently quoted in a Dutch newspaper, talking about moving the headquarters to the U.K., and I briefly wanted to take you up sort of on that comment.

It seemed a little out of context, but I wanted to sort of make sure I raise it and not specifically at that point, but actually the broader sort of issue of the vacation of the shares. How do you think about that? And also as part of that, what did you actually say about moving headquarters to the U.K.?

Ben Van Beurden -- Chief Executive Officer

Thanks, Martijn. As both of you -- both you and I are Dutch speakers, I think you can actually read the interview in the Shell Dutch blog and see what exactly I said. I hadn't quite expected it to be actually a headline on the front page, I must admit. But it was entirely correct and true what I said.

So it's very clear, we are a unified company that is quite often insufficiently well understood. We are 100% British plc, but we are headquartered in the Netherlands. That means that we are subject to the tax regime of the Netherlands. That was a conscious choice we made at the time in 2005 when we did the unification.

Consequence of all of that was that we had to live with a unified share, but with two classes, if you like, or a single class but two versions of it, the As and the Bs, one with withholding tax and the other without withholding tax on the dividend. The expectation at the time was that the dividend withholding tax in the Netherlands would disappear. And at that point in time, we would indeed be able to simplify a dual share position as well. That hasn't happened.

We've been in dialogue with the Dutch government for a long time on that. We have looked at all sorts of alternatives. But so far, we have not been able to exactly resolve it. Now, is that an issue for us at this point in time? No, it's not.

But it gives us certain limitations that we have to obey. So, for instance, when we did the BG acquisition, we had to get permission upfront from the Dutch fisk to issue B shares to be able to do the acquisition. We got the permission, obviously, but it is less than ideal. We can also not completely freely buy back any -- and issue any of the two shares.

We can well live within that limitation, but I'm concerned that some point in time, that limitation is actually going to be a real constraint for us. So, we've been very clear that we need to resolve that over time. We are very clear that it's not an issue for us at the moment. And one of the solutions would indeed be to step out of the Dutch tax regime.

We have no plans of doing that. There is nothing in the making at this point in time, but it is indeed, you have to have an open mind on anything. That is just what good business people need to do, have an open mind. And that's exactly what I said.

I think we have now a new impetus to dialogue with key people in the Netherlands on how our share structure issue gets resolved, and I'm hopeful and confident that it will get resolved. But there is nothing specifically in the making at this point in time, much unlike it has been suggested in some Dutch newspaper. Now, let's -- OK, thanks, Martijn. Let's go to the next question, please?


We'll hear from Irene Himona with Societe Generale.

Irene Himona -- Societe Generale -- Analyst

Thank you. Good afternoon. One question from me as well, I guess, for Jessica. If we assume that the unprecedented volatility of the first half doesn't repeat, if we stay where we are, more or less in terms of pricing, can you say whether you're managing working capital so as to release cash in the second half of the year, please?

Ben Van Beurden -- Chief Executive Officer

Thanks, Irene. I think, Jessica, if you would take that one?

Jessica Uhl -- Chief Financial Officer

Yes. So, Irene, the working capital increase in this quarter was driven by the increase in price predominantly at about two-thirds, and then a third of it was associated with increase in volumes. And that, of course, is the basis of how we secure the trading upside that we saw in the quarter. So, the most important driver, typically, of our working capital changes, particularly with respect to inventory, which tends to be what drives the working capital number each quarter, is really price driven.

So, that's not so much a connection to the volatility. Volatility is probably connected to the volumes, but I think that's really difficult to kind of call. We -- that's part of the strength of our balance sheet is to use that to create value. So, to the extent that we see value out there, then we're going to maintain those volumes.

But if that's not the case, then potentially, you'd see a rundown in the inventory levels in the coming months. Hopefully, that's helpful.

Ben Van Beurden -- Chief Executive Officer

Let me add one point to it. We manage working capital on a relatively intensive basis. It is cash after all. And of course, while we can make good returns on working capital, as you have seen this quarter, it doesn't mean that it's on tap in the trading organization.

So, we have a very strict management framework with involvement from the treasury to make sure that we deploy working capital in a very disciplined way as well. Let me see whether we have a next question, please, Rochelle.


Yes. We'll move to Christopher Kuplent, Bank of America.

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

Thank you. Two questions, please. And please call me impatient, but both of them are trying to look ahead to your capital markets update and your 2025 outlook. Firstly, even if capex under a nonrecessionary environment steps up, currently, you're spending about 5% on emerging power.

And I think it wasn't so long ago that I heard Martijn say, you wanted to become the largest electricity company in the world in the 2030. So, would you agree that 5% of group capex is probably not the right level for the coming decade? Just to see where the direction is going. I don't want to put any words in your mouth. And secondly, you impaired assets down on a lower short-term price deck, but you still left the 60 brands real term.

And can you comment whether that is also going to be the very oil price that you used in the past for your 2025 outlook or whether actually impairment tests are completely separate from your view of the next five years as you're updating that plan to February?

Ben Van Beurden -- Chief Executive Officer

Thanks very much, Christopher, and we understand that you are impatient. I'm sure you're not the only one on this. You're also absolutely right that, indeed, with the constrained and reduced impaired back capital program that we have this year, everything had to give a little bit. And it -- and even though we may have been a little bit more prepared to still preserve a good de minimis investment program in power, it definitely did not escape very, very close scrutiny as well.

So, with this diet, can we succeed in our ambitions through the decade? Well, I can safely say, no. But then a decade is a long time. And a lot of things will happen and have to happen for us to evolve to the company we want to be. If indeed, this environment would stay with us for the rest of the decade, well, I guess we would be living in a totally different world at the end of the decade as well.

So, I'm not at the point where I just say everything is permanently different, and it will only be like this going forward. Of course, there will be a recovery. Of course, there will be more capital for us to play with. Of course, we will have again an abundance of choices to make.

We will not be on a very, very strict diet. And indeed, we -- if you are talking about a decade here, Christopher, let me set it very clearly as a preface, in the next decade, there will also be inorganic opportunities available to us if we play our strategic guides very well. So, with that, I think you all have to wait indeed for the 11th of February before we can say a little bit more about it. Jessica?

Jessica Uhl -- Chief Financial Officer

Thank you, Chris, for the question on the impairments and the price lines. In terms of the decision or the choice made in terms of our outlook on prices in April, May this year, to be clear for the upstream and IG business, that reflected a changed view in the outlook of prices, a reduction of some 15 to 20%, whereas in the downstream business, it was around 30%. So, we did change our long-term outlook, in addition to kind of the short- to medium-term outlook out to 2022. As part of the processes of -- we take a lot of input in terms of making the decisions of what is the right price line from an impairment perspective.

We compare that against peers, against consultants, against analysts, bank reports, etc.. In that comparison, we show up to be relatively conservative in the first few years and kind of middle of the pack to the lower part of the pack for the later years. So, just to get a sense of where we are in the range of informed opinions on the price line, this is an impairment line. Basis of what we do our strategy on and basis of what we plan on isn't necessarily these numbers.

Importantly, we're consistently looking at a range of outcomes because of the dynamic elements that we've been speaking to, not only of the short term, but of the long term as well. But I think it's an indication of a view, and it's certainly important in terms of the balance sheet valuation, and you have to pick one number when you do the impairment line. And we try and do that in a way that's informed and wise. And I think that these numbers represent that, but it's not necessarily the one view or the only view, particularly, when thinking from a strategic perspective and planning for the business.

Ben Van Beurden -- Chief Executive Officer

OK. Thanks very much. And I think actually, that brings us to the end of the call. We've gone over a bit.

And I apologize for that, but I hope you found it nevertheless valuable. Thank you very much for staying with us for this extra time. Thank you very much for all your questions and, of course, for joining the call in the first place. If there's any further questions outstanding, our IR team will make sure that they get properly answered.

Of course, we will have third-quarter results as well. They are on the 29th of October. And we look forward to talking to you then. And then, of course, we have the strategy day, which we will do on the 11th of February 2021.

And let me tell you, I look forward to seeing you then. And with that, I hope you will have a good rest of your day and, indeed, a good summer. Thank you very much.


[Operator signoff]

Duration: 0 minutes

Call participants:

Ben Van Beurden -- Chief Executive Officer

Jessica Uhl -- Chief Financial Officer

Oswald Clint -- Sanford C. Bernstein -- Analyst

Alastair Syme -- Citi -- Analyst

Michele Della Vigna -- Goldman Sachs -- Analyst

Thomas Adolff -- Credit Suisse -- Analyst

Biraj Borkhataria -- RBC Capital Markets -- Analyst

Lydia Rainforth -- Barclays -- Analyst

Jon Rigby -- UBS -- Analyst

Christyan Malek -- Morgan Stanley -- Analyst

Henry Tarr -- Berenberg Capital Markets -- Analyst

Jason Gammel -- Jefferies -- Analyst

Martijn Rats -- Morgan Stanley -- Analyst

Irene Himona -- Societe Generale -- Analyst

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

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