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ROYAL DUTCH SHELL PLC - 4th Quarter and Full Year 2016 Unaudited Results

PR Newswire

London, February 2

ROYAL DUTCH SHELL PLC

4TH QUARTER AND FULL YEAR 2016 UNAUDITED RESULTS

Royal Dutch Shell Chief Executive Officer Ben van Beurden commented:

“We are reshaping Shell and delivered a good cash flow performance this quarter with over $9 billion in cash flow from operations. Debt has been reduced and, for the second consecutive quarter, free cash flow more than covered our cash dividend.

Production and LNG volumes included delivery from new projects, with ramp-up continuing in 2017 and 2018. Meanwhile we are operating the company at an underlying cost level that is $10 billion lower than Shell and BG combined only 24 months ago. We are gaining momentum on divestments, with some $15 billion completed in 2016, announced, or in progress, and we are on track to complete our overall $30 billion divestment programme as planned.

Looking ahead, we will further focus the portfolio and strengthen the company’s financial framework in 2017. Our strategy is starting to pay off and in 2017 we will be investing around $25 billion in high quality, resilient projects. I’m confident 2017 will be another year of progress for Shell to become a world-class investment.”

FOURTH QUARTER 2016 PORTFOLIO DEVELOPMENTS

Integrated Gas

During the quarter, Shell was appointed by the Energy Market Authority of Singapore as one of the importers for the next tranche of LNG supply into Singapore, expected to commence from 2017. Shell and another importer will each have exclusivity for three years to market up to 1 million tonnes of LNG per annum.

In January, Shell agreed to the sale of Shell Integrated Gas Thailand Pte Ltd and Thai Energy Company which hold a 22.222% interest in the Bongkot field, and adjoining acreage offshore Thailand consisting of Blocks 15, 16 and 17 and block G12/48, for $900 million.

Upstream

During the quarter, the non-operated Lapa production system started up with the interconnection of the first production well to FPSO Cidade de Caraguatatuba (Shell interest 30%) offshore Brazil. This is the ninth FPSO in the Santos Basin pre-salt and has a processing capacity of 100 thousand barrels of oil per day.

In Kazakhstan, first export of crude oil was reached at the non-operated Kashagan development (Shell interest 17%).

In Malaysia, Shell announced first production from the Malikai Tension Leg Platform (“TLP”) (Shell interest 35%), located 100 kilometres off the coast of the state of Sabah. Malikai is expected to have a peak production of 60 thousand barrels of oil equivalent per day (“boe/d”).

Shell continued to divest non-strategic Upstream positions during the fourth quarter 2016, with divestments completed in the quarter totalling $1.2 billion. This included the following transactions:

In January, Shell agreed to sell its interest in a package of United Kingdom North Sea assets for a total cash consideration of up to $3.8 billion, including an initial consideration of $3.0 billion and a payment of up to $600 million between 2018-2021 subject to commodity price, with potential further payments of up to $180 million for future discoveries. The transaction is subject to partner and regulatory approvals, with completion expected in the second half 2017.

On January 27, 2017, Shell Nigeria Exploration and Production Company Limited (“SNEPCo”) became aware of an Interim Order of Attachment (“Order”) issued by the Federal High Court, sitting in Abuja, attaching the property known as Oil Prospecting License 245 (“OPL 245”) which is held jointly by SNEPCo and Nigerian Agip Exploration Ltd pending the conclusion of the investigation into alleged corruption, bribery, and money laundering in respect of the 2011 settlement related to OPL 245. SNEPCo made an application on January 31, 2017 to discharge the Order on constitutional and procedural grounds.

Downstream

During the quarter, Shell completed the Scotford HCU debottleneck project (Shell interest 100%) in Canada, increasing hydrocracking capacity by 20%.

In the United States, Shell Midstream Partners, L.P. acquired a 49% interest in Odyssey Pipeline L.L.C. and an additional 20% interest in Mars Oil Pipeline for $350 million.

As part of Shell’s stated intention to concentrate its Downstream operations where it can be most competitive, the following agreements were reached:

Shell continued to divest non-strategic Downstream positions during the fourth quarter 2016, with divestments completed in the quarter totalling $1.7 billion. This included the following transactions:

KEY FEATURES OF THE Fourth QUARTER 2016

Full year 2016 cash flow from operating activities was $20.6 billion, which included negative working capital movements of $6.3 billion, compared with $29.8 billion for the full year 2015, which included favourable working capital movements of $5.5 billion.

Full year 2016 underlying operating expenses decreased by $1.3 billion versus 2015, to $38.3 billion.

Full year 2016 oil and gas production was 3,668 thousand boe/d, an increase of 24% compared with 2015. Excluding the impact of divestments, curtailment and underground storage utilisation at NAM in the Netherlands, a Malaysia PSC expiry, PSC price effects, the Woodside accounting change (see page 14), and security impacts in Nigeria, 2016 production increased by 27% compared with the same period last year, or by 2% excluding BG.

With 2016 production of 1.4 billion boe, the proved Reserves Replacement Ratio for the year on an SEC basis is expected to be 208%. The 3-year average proved Reserves Replacement Ratio on an SEC basis is expected to be 81%.

At the end of 2016, total proved reserves on an SEC basis are expected to be 13.2 billion boe, after taking into account 2016 production.

Further information will be provided in our 2016 Annual Report and Form 20-F, which is expected to be filed in March 2017.

SUMMARY OF IDENTIFIED ITEMS

With effect from 2016, identified items include the impact of exchange rate movements on certain deferred tax balances, as set out in Definition B. The comparative information in this Report has been restated following this change.

CCS earnings attributable to shareholders for the fourth quarter 2016 reflected the following items, which in aggregate amounted to a net charge of $763 million (compared with a net gain of $268 million for the fourth quarter 2015), as summarised below:

EARNINGS BY SEGMENT

Fourth quarter Integrated Gas earnings excluding identified items were $907 million compared with $1,245 million a year ago. Identified items were a net charge of $879 million, compared with a net charge of $120 million for the fourth quarter 2015 (see page 7).

Compared with the fourth quarter 2015, earnings excluding identified items were impacted by the depreciation step-up resulting from the BG acquisition and an increase associated with the start-up of Gorgon. Earnings were also impacted by higher taxation, and higher operating expenses, mainly due to the consolidation of BG. The impact of higher oil prices was more than offset by the decline in LNG prices. Earnings benefited from higher production volumes related to the contribution of BG assets, start-up of Gorgon and improved operational performance which more than offset the impact of the accounting reclassification of Woodside.

Fourth quarter 2016 earnings included the negative impact of some $120 million related to deferred tax reassessments.

Fourth quarter 2016 production was 908 thousand boe/d compared with 633 thousand boe/d a year ago. Liquids production increased by 10% and natural gas production increased by 60% compared with the fourth quarter 2015.

LNG liquefaction volumes of 8.57 million tonnes increased by 51% compared with the same quarter a year ago, reflecting the impact of the acquisition of BG, including an increase associated with Queensland Curtis LNG in Australia, Atlantic LNG in Trinidad and Tobago, and the start-up of Gorgon in Australia.

LNG sales volumes of 15.34 million tonnes increased by 51% compared with the same quarter a year ago, mainly reflecting Shell’s enlarged portfolio following the acquisition of BG.

Full year Integrated Gas earnings excluding identified items were $3,700 million compared with $5,057 million for 2015. Identified items were a net charge of $1,171 million, compared with a net charge of $1,887 million for 2015.

Compared with 2015, earnings excluding identified items were impacted by the decline in oil and LNG prices, and higher taxation. The consolidation of BG resulted in higher operating expenses and a step-up in depreciation. These effects were partly offset by increased production volumes mainly as a result of the contribution of BG assets, and lower well write-offs.

Full year 2016 production was 884 thousand boe/d compared with 631 thousand boe/d in 2015. Liquids production increased by 9% and natural gas production increased by 55% compared with 2015.

LNG liquefaction volumes of 30.88 million tonnes were 37% higher than in 2015, mainly reflecting the impact of the acquisition of BG, including an increase associated with Queensland Curtis LNG in Australia and Atlantic LNG in Trinidad and Tobago.

LNG sales volumes of 57.11 million tonnes increased by 46% compared with 2015, mainly reflecting Shell’s enlarged portfolio following the acquisition of BG.

Fourth quarter Upstream earnings excluding identified items were $54 million compared with a loss of $1,009 million a year ago. Identified items were a net charge of $19 million compared with a net charge of $449 million for the fourth quarter 2015 (see page 7).

Compared with the fourth quarter 2015, earnings excluding identified items benefited from increased production volumes mainly from BG assets and improved operational performance, and higher oil prices. Operating expenses were lower, more than offsetting the impact of the consolidation of BG. Earnings were impacted by higher depreciation resulting from the BG acquisition and higher taxation.

Fourth quarter 2016 earnings included the negative impact of some $190 million related to deferred tax reassessments.

Fourth quarter 2016 production was 2,997 thousand boe/d compared with 2,406 thousand boe/d a year ago. Liquids production increased by 30% and natural gas production increased by 17% compared with the fourth quarter 2015, driven by the impact of BG.

New field start-ups and the continuing ramp-up of existing fields, in particular the Corrib gas field in Ireland, Sabah Gas Kebabangan in Malaysia, and Kashagan in Kazakhstan, contributed some 109 thousand boe/d to production compared with the fourth quarter 2015, which more than offset the impact of field declines.

Full year Upstream earnings excluding identified items were a loss of $2,704 million compared with a loss of $2,255 million in 2015. Identified items were a net charge of $970 million compared with a net charge of $6,578 million in 2015.

Compared with 2015, earnings excluding identified items were impacted by lower oil and gas prices, and increased depreciation mainly related to a step-up resulting from the BG acquisition. This was partly offset by increased production volumes mainly from BG assets. Earnings also benefited from lower operating expenses, which more than offset the impact of the consolidation of BG, and lower exploration expense.

Full year 2016 production was 2,784 thousand boe/d compared with 2,323 thousand boe/d in 2015. Liquids production increased by 24% and natural gas production increased by 15% compared with 2015.

New field start-ups and the continuing ramp-up of existing fields, in particular the Corrib gas field in Ireland and Erha North ph2 in Nigeria, contributed some 69 thousand boe/d to production compared with 2015.

Fourth quarter Downstream earnings excluding identified items were $1,339 million compared with $1,524 million for the fourth quarter 2015. Identified items were a net gain of $236 million, compared with a net gain of $978 million for the fourth quarter 2015 (see page 7).

Compared with the fourth quarter 2015, earnings excluding identified items were mainly impacted by lower trading and refining margins and higher taxation. Earnings benefited from lower operating expenses and stronger underlying marketing margins, more than offsetting the impact of adverse exchange rate effects and divestments. Earnings also benefited from stronger chemicals industry conditions and improved operational performance.

Fourth quarter 2016 earnings included the negative impact of some $50 million related to deferred tax reassessments.

Oil Products

Refinery intake volumes were 3% higher compared with the same quarter last year. Refinery availability increased to 87% from 83% in the fourth quarter 2015, mainly as a result of lower unplanned maintenance.

Oil products sales volumes increased by 3% compared with the same period a year ago, reflecting higher trading volumes partly offset by lower marketing volumes, mainly as a result of divestments.

Chemicals

Chemicals sales volumes increased by 6% compared with the same quarter last year, mainly as a result of improved operating performance in Europe, partly offset by weaker intermediates demand. Chemicals manufacturing plant availability increased to 93% from 81% in the fourth quarter 2015, mainly reflecting recovery at the Moerdijk chemical site in the Netherlands.

Full year Downstream earnings excluding identified items were $7,243 million compared with $9,748 million in 2015. Identified items were a net charge of $655 million, compared with a net gain of $495 million in 2015.

Compared with 2015, earnings excluding identified items were mainly impacted by weaker refining industry conditions, lower trading margins, and higher taxation. Earnings benefited from lower operating expenses and stronger underlying marketing margins, more than offsetting the impact of divestments and adverse exchange rate effects.

Oil Products

Refinery intake volumes were 4% lower compared with 2015. Excluding portfolio impacts, refinery intake volumes were 3% lower compared with 2015. Refinery availability was in line with 2015.

Oil products sales volumes increased by 1% compared with 2015, reflecting higher trading volumes partly offset by lower marketing volumes, mainly as a result of divestments.

Chemicals

Full year Chemicals sales volumes increased by 1% compared with 2015. Chemicals manufacturing plant availability increased to 90% from 85% in 2015, mainly reflecting recovery at Moerdijk, partly offset by unit shutdowns at Bukom.

Fourth quarter Corporate results and Non-controlling interest excluding identified items were a loss of $505 million, compared with a loss of $188 million for the same quarter a year ago. Identified items for the fourth quarter 2016 were a net charge of $101 million, compared with a net charge of $141 million for the fourth quarter 2015 (see page 7).

Compared with the fourth quarter 2015, Corporate results excluding identified items mainly reflected higher net interest expense driven by increased debt following the acquisition of BG, partly offset by higher tax credits and favourable exchange rate effects.

Fourth quarter 2016 earnings included the negative impact of some $110 million related to deferred tax reassessments.

Full year Corporate results and Non-controlling interest excluding identified items were a loss of $1,054 million, compared with a loss of $1,104 million last year. Identified items for 2016 were a net charge of $856 million, compared with a net gain of $366 million in 2015.

Compared with 2015, Corporate results excluding identified items mainly reflected favourable exchange rate effects, almost fully offset by higher net interest expense driven by increased debt following the acquisition of BG.

OUTLOOK FOR THE FIRST QUARTER 2017

Compared with the first quarter 2016, Integrated Gas earnings are expected to be negatively impacted by a reduction of some 100 thousand boe/d. This includes the impact of operational issues in and a controlled shutdown of Pearl GTL in Qatar, the accounting reclassification of Woodside, partly offset by the full quarter of production from BG assets (first quarter 2016 included two months), and the start-up of Gorgon.

Compared with the first quarter 2016, Upstream earnings are expected to be negatively impacted by a reduction of some 40 thousand boe/d associated with increased maintenance and 45 thousand boe/d associated with divestments. Earnings are expected to be positively impacted by production from BG assets for the full quarter (first quarter 2016 included two months).

Refinery availability is expected to increase in the first quarter 2017 as a result of lower maintenance compared with the same period a year ago.

Chemicals manufacturing plant availability is expected to increase in the first quarter 2017 as a result of improved operational performance at Bukom compared with the first quarter 2016.

As a result of divestments in Malaysia and Denmark, oil products sales volumes are expected to decrease by some 35 thousand barrels per day compared with the first quarter 2016.

Corporate results, excluding the impact of currency exchange rate effects and interest rate movements, are expected to be a net charge of $350 – 450 million in the first quarter and around $1.4 – 1.6 billion for the full year.

BG will be fully consolidated within Shell’s results for the full first quarter 2017, compared with the first quarter 2016 when BG was consolidated within Shell’s results for two months.

FORTHCOMING EVENTS

The Annual General Meeting will be held on May 23, 2017.

First quarter 2017 results and first quarter 2017 dividend are scheduled to be announced on May 4, 2017. Second quarter 2017 results and second quarter 2017 dividend are scheduled to be announced on July 27, 2017. Third quarter 2017 results and third quarter 2017 dividend are scheduled to be announced on November 2, 2017.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of preparation

These unaudited Condensed Consolidated Financial Statements of Royal Dutch Shell plc (“the Company”) and its subsidiaries (collectively referred to as “Shell”) have been prepared on the basis of the same accounting principles as, and should be read in conjunction with, the Annual Report and Form 20-F for the year ended December 31, 2015 (pages 120 to 125) as filed with the U.S. Securities and Exchange Commission. In addition to those accounting policies, following the acquisition of BG Group plc, Shell accounts for net investment hedges where the effective portion of gains and losses arising on hedging instruments that are used to hedge net investments in foreign operations are recognised in other comprehensive income until the related investment is disposed of.

The financial information presented in the unaudited Condensed Consolidated Financial Statements does not constitute statutory accounts within the meaning of section 434(3) of the Companies Act 2006 (“the Act”). Statutory accounts for the year ended December 31, 2015 were published in Shell’s Annual Report and a copy was delivered to the Registrar of Companies in England and Wales. The auditors’ report on those accounts was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not contain a statement under sections 498(2) or 498(3) of the Act.

2. Acquisition of BG Group plc

On February 15, 2016, the Company acquired all the voting rights in BG Group plc (“BG”) by means of a Scheme of Arrangement under Part 26 of the Act for a purchase consideration of $54,034 million. This included cash of $19,036 million and the fair value ($34,050 million) of 218.7 million A shares and 1,305.1 million B shares issued in exchange for all BG shares. The fair value of the shares issued was calculated using the market price of the Company’s A and B shares of 1,545.0 and 1,538.5 pence respectively on the London Stock Exchange at its opening of business on February 15, 2016.

BG’s activities mainly comprised exploration, development, production, liquefaction and marketing of hydrocarbons, the development and use of LNG import facilities, and the purchase, shipping and sale of LNG and regasified natural gas. The acquisition was to accelerate Shell’s growth strategy in global LNG and deep water, with material additions to proved oil and gas reserves and production volumes, and to provide Shell with enhanced positions in competitive new oil and gas projects, particularly in Australia LNG and Brazil deep water.

The fair values of the net assets acquired were provisionally recognised in the Condensed Consolidated Balance Sheet in the first quarter 2016, together with goodwill arising on acquisition of $9,024 million, being the excess of the purchase consideration over the fair value of net assets acquired. The fair values were adjusted in the third quarter 2016, resulting in an increase in goodwill to $10,587 million, and were finalised in the fourth quarter 2016, resulting in a further increase in goodwill of $410 million to $10,997 million and in reclassifications mainly between decommissioning and other provisions and trade and other payables. The adjustments in the third and fourth quarters reflect the circumstances existing at acquisition date from a market participant’s view. The final fair values of the net assets acquired are set out in the table below.

The net asset fair values, in line with accounting standards, were determined, where applicable, by reference to oil and gas prices as reflected in the prevailing market view on the day of completion. Oil and gas prices were based on the forward price curve for the first two years, and subsequent years based on the market consensus price view.

Income for the third quarter 2016 included a credit of $254 million after taxation relating to the first half 2016 in respect of fair value adjustments, primarily reflecting lower depreciation charges as a result of a change to depreciate certain property, plant and equipment over proved reserves rather than proved developed reserves.

Acquisition costs of $391 million ($47 million in 2015 and $344 million in the first quarter 2016) were recognised in the Consolidated Statement of Income in production and manufacturing and selling, distribution and administrative expenses.

The acquired activities of BG are now integrated with those of other Shell entities and therefore it is impracticable to identify separately either the amounts of revenue and income since the date of acquisition that BG has contributed to the Consolidated Statement of Income, or the revenue and income of Shell for 2016 had the acquisition date been January 1, 2016.

3. Segment information

Segmental reporting has been changed with effect from 2016, in line with a change in the way Shell’s businesses are managed. Shell now reports its business through the segments Integrated Gas (previously part of Upstream), Upstream, Downstream and Corporate. Comparative information has been reclassified.

Integrated Gas is engaged in the liquefaction and transportation of gas, and the conversion of natural gas to liquids to provide fuels and other products, as well as projects with an integrated activity from producing to commercialising gas. Upstream combines the operating segments Upstream, which is engaged in the exploration for and extraction of crude oil, natural gas and natural gas liquids, the transportation of oil, and Oil Sands, which is engaged in the extraction of bitumen from oil sands that is converted into synthetic crude oil. These operating segments have similar economic characteristics because their earnings are significantly dependent on crude oil and natural gas prices and production volumes, and because their projects generally require significant investment, are complex and generate revenues for many years.

Segment earnings are presented on a current cost of supplies basis (CCS earnings), which is the earnings measure used by the Chief Executive Officer for the purposes of making decisions about allocating resources and assessing performance. On this basis, the purchase price of volumes sold during the period is based on the current cost of supplies during the same period after making allowance for the tax effect. CCS earnings therefore exclude the effect of changes in the oil price on inventory carrying amounts. Sales between segments are based on prices generally equivalent to commercially available prices.

4. Earnings per share

5. Share capital

At Royal Dutch Shell plc’s Annual General Meeting on May 24, 2016, the Board was authorised to allot ordinary shares in Royal Dutch Shell plc, and to grant rights to subscribe for or to convert any security into ordinary shares in Royal Dutch Shell plc, up to an aggregate nominal amount of €185 million (representing 2,643 million ordinary shares of €0.07 each), and to list such shares or rights on any stock exchange. This authority expires at the earlier of the close of business on August 24, 2017, and the end of the Annual General Meeting to be held in 2017, unless previously renewed, revoked or varied by Royal Dutch Shell plc in a general meeting.

6. Other reserves

The merger reserve and share premium reserve were established as a consequence of Royal Dutch Shell plc becoming the single parent company of Royal Dutch Petroleum Company and The “Shell” Transport and Trading Company, p.l.c., now The Shell Transport and Trading Company Limited, in 2005. The increase in the merger reserve in 2016 in respect of the shares issued represents the difference between the fair value and the nominal value of the shares issued for the acquisition of BG. The capital redemption reserve was established in connection with repurchases of shares of Royal Dutch Shell plc. The share plan reserve is in respect of equity-settled share-based compensation plans.

7. Derivative contracts and debt excluding finance lease liabilities

The table below provides the carrying amounts of derivatives contracts held, disclosed in accordance withIFRS 13 Fair Value Measurement.

As disclosed in the Consolidated Financial Statements for the year ended December 31, 2015, presented in the Annual Report and Form 20-F for that year, Shell is exposed to the risks of changes in fair value of its financial assets and liabilities. The fair values of the financial assets and liabilities are defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Methods and assumptions used to estimate the fair values at December 31, 2016 are consistent with those used in the year ended December 31, 2015, and the carrying amounts of derivative contracts measured using predominantly unobservable inputs have not changed materially since that date.

The table below provides the comparison of the fair value with the carrying amount of debt excluding finance lease liabilities, disclosed in accordance with IFRS 7 Financial Instruments: Disclosures.

DEFINITIONS

A. Earnings on a current cost of supplies basis attributable to shareholders

Segment earnings are presented on a current cost of supplies basis (CCS earnings), which is the earnings measure used by the Chief Executive Officer for the purposes of making decisions about allocating resources and assessing performance. On this basis, the purchase price of volumes sold during the period is based on the current cost of supplies during the same period after making allowance for the tax effect. CCS earnings therefore exclude the effect of changes in the oil price on inventory carrying amounts. The current cost of supplies adjustment does not impact cash flow from operating activities in the Condensed Consolidated Statement of Cash Flows. The reconciliation of CCS earnings to net income is as follows.

B. Identified items

Identified items are shown to provide additional insight into segment earnings and income attributable to shareholders. They include the full impact on Shell’s CCS earnings of the following items: divestment gains and losses, impairments, fair value accounting of commodity derivatives and certain gas contracts (see below), and redundancy and restructuring. Further items may be identified in addition to the above.

Impacts of accounting for derivatives

In the ordinary course of business Shell enters into contracts to supply or purchase oil and gas products as well as power and environmental products. Derivative contracts are entered into for mitigation of resulting economic exposures (generally price exposure) and these derivative contracts are carried at period-end market price (fair value), with movements in fair value recognised in income for the period. Supply and purchase contracts entered into for operational purposes are, by contrast, recognised when the transaction occurs (see also below); furthermore, inventory is carried at historical cost or net realisable value, whichever is lower.

As a consequence, accounting mismatches occur because: (a) the supply or purchase transaction is recognised in a different period; or (b) the inventory is measured on a different basis.

In addition, certain UK gas contracts held by Upstream are, due to pricing or delivery conditions, deemed to contain embedded derivatives or written options and are also required to be carried at fair value even though they are entered into for operational purposes.

The accounting impacts of the aforementioned are reported as identified items in this Report.

Impacts of exchange rate movements on deferred tax balances

With effect from 2016, identified items include the impact on deferred tax balances of exchange rate movements arising on:

The conversion to dollars of the local currency tax base of non-monetary assets and liabilities, as well as losses. This primarily impacts the Integrated Gas and Upstream segments.

The conversion of dollar-denominated inter-segment loans to local currency. This primarily impacts the Corporate segment.

The comparative information presented in this Report has been restated for this definition change. The following table sets out the impact of the definition change on the identified items for the year 2015.

C. Capital investment

Capital investment is a measure used to make decisions about allocating resources and assessing performance. It is defined as the sum of capital expenditure, acquisition of BG, exploration expense (excluding well write-offs), new investments in joint ventures and associates, new finance leases and other adjustments. The reconciliation of capital investment to capital expenditure is as follows.

Organic capital investment includes capital expenditure and new finance leases of existing subsidiaries, investments in existing joint ventures and associates, and exploration expense (excluding well write-offs). Inorganic capital investment includes investments related to the acquisition of businesses, investments in new joint ventures and associates, and new acreage.

D. Divestments

Divestments is a measure used to monitor the progress of Shell’s divestment programme. This measure comprises proceeds from sale of property, plant and equipment and businesses, joint ventures and associates, and other Integrated Gas, Upstream and Downstream investments, adjusted onto an accruals basis, and proceeds from sale of interests in entities while retaining control (for example, proceeds from sale of interest in Shell Midstream Partners, L.P.). As a result of our divestment programme, we expect gearing to reduce over time, and depending on terms and conditions of transactions there is the potential for gains as well as the potential for impairments with regards to certain assets.

E. Return on average capital employed

Return on average capital employed (ROACE) measures the efficiency of Shell’s utilisation of the capital that it employs. In this calculation, ROACE is defined as income for the period, adjusted for after-tax interest expense, as a percentage of the average capital employed for the period. Capital employed consists of total equity, current debt and non-current debt.

Return on average capital employed on a CCS basis excluding identified items is defined as the sum of CCS earnings attributable to shareholders excluding identified items for the period, as a percentage of the average capital employed for the period.

F. Gearing

Gearing, defined as net debt (total debt less cash and cash equivalents) as a percentage of total capital (net debt plus total equity), is a key measure of Shell’s capital structure.

G. Operating expenses

Operating expenses comprise production and manufacturing expenses; selling, distribution and administrative expenses; and research and development expenses. Underlying operating expenses exclude identified items.

H. Free cash flow

Free cash flow is used to evaluate cash available for financing activities, including dividend payments, after investment in maintaining and growing our business. It is defined as follows:

CAUTIONARY STATEMENT

All amounts shown throughout this announcement are unaudited. All peak production figures in Portfolio Developments are quoted at 100% expected production.

The companies in which Royal Dutch Shell plc directly and indirectly owns investments are separate legal entities. In this announcement “Shell”, “Shell group” and “Royal Dutch Shell” are sometimes used for convenience where references are made to Royal Dutch Shell plc and its subsidiaries in general. Likewise, the words “we”, “us” and “our” are also used to refer to subsidiaries in general or to those who work for them. These expressions are also used where no useful purpose is served by identifying the particular company or companies. ‘‘Subsidiaries’’, “Shell subsidiaries” and “Shell companies” as used in this announcement refer to companies over which Royal Dutch Shell plc either directly or indirectly has control. Entities and unincorporated arrangements over which Shell has joint control are generally referred to as “joint ventures” and “joint operations” respectively. Entities over which Shell has significant influence but neither control nor joint control are referred to as “associates”. The term “Shell interest” is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in a venture, partnership or company, after exclusion of all third-party interest.

This announcement contains forward-looking statements concerning the financial condition, results of operations and businesses of Royal Dutch Shell. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among other things, statements concerning the potential exposure of Royal Dutch Shell to market risks and statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions. These forward-looking statements are identified by their use of terms and phrases such as ‘‘anticipate’’, ‘‘believe’’, ‘‘could’’, ‘‘estimate’’, ‘‘expect’’, ‘‘goals’’, ‘‘intend’’, ‘‘may’’, ‘‘objectives’’, ‘‘outlook’’, ‘‘plan’’, ‘‘probably’’, ‘‘project’’, ‘‘risks’’, “schedule”, ‘‘seek’’, ‘‘should’’, ‘‘target’’, ‘‘will’’ and similar terms and phrases. There are a number of factors that could affect the future operations of Royal Dutch Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this announcement, including (without limitation): (a) price fluctuations in crude oil and natural gas; (b) changes in demand for Shell’s products; (c) currency fluctuations; (d) drilling and production results; (e) reserves estimates; (f) loss of market share and industry competition; (g) environmental and physical risks; (h) risks associated with the identification of suitable potential acquisition properties and targets, and successful negotiation and completion of such transactions; (i) the risk of doing business in developing countries and countries subject to international sanctions; (j) legislative, fiscal and regulatory developments including regulatory measures addressing climate change; (k) economic and financial market conditions in various countries and regions; (l) political risks, including the risks of expropriation and renegotiation of the terms of contracts with governmental entities, delays or advancements in the approval of projects and delays in the reimbursement for shared costs; and (m) changes in trading conditions. There can be no assurance that future dividend payments will match or exceed previous dividend payments. All forward-looking statements contained in this announcement are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Readers should not place undue reliance on forward-looking statements. Additional risk factors that may affect future results are contained in Royal Dutch Shell’s Form 20-F for the year ended December 31, 2015 (available at www.shell.com/investor and www.sec.gov). These risk factors also expressly qualify all forward-looking statements contained in this announcement and should be considered by the reader. Each forward-looking statement speaks only as of the date of this announcement, February 2, 2017. Neither Royal Dutch Shell plc nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information. In light of these risks, results could differ materially from those stated, implied or inferred from the forward-looking statements contained in this announcement.

This Report contains references to Shell’s website. These references are for the readers’ convenience only. Shell is not incorporating by reference any information posted on www.shell.com

We may have used certain terms, such as resources, in this announcement that the United States Securities and Exchange Commission (SEC) strictly prohibits us from including in our filings with the SEC. U.S. investors are urged to consider closely the disclosure in our Form 20-F, File No 1-32575, available on the SEC website www.sec.gov. You can also obtain this form from the SEC by calling 1-800-SEC-0330.

This announcement contains inside information.

February 2, 2017

The information in this Report reflects the unaudited consolidated financial position and results of Royal Dutch Shell plc. Company No. 4366849, Registered Office: Shell Centre, London, SE1 7NA, England, UK.

Contacts:

- Linda Szymanski, Company Secretary

- Investor Relations: International + 31 (0) 70 377 4540; North America +1 832 337 2034

- Media: International +44 (0) 207 934 5550; USA +1 713 241 4544

LEI number of Royal Dutch Shell plc: 21380068P1DRHMJ8KU70

Classification: Inside Information