Shell Lays out First Steps for Transformation

By Glenn Dyer | More Articles by Glenn Dyer

Energy major Royal Dutch Shell continues to flesh out its transformation process first revealed in February by setting out plans to cut its oil and gas production by around 5% a year.

In a report released late last week, Shell underlined the desire to be a net-zero emissions energy business by 2050, in step with society’s progress towards the Paris Agreement goal of limiting the increase in the average global temperature to 1.5°C.

The shape of its transformation was made public in February and last week’s release fills out the company’s ambitions ahead of what looks like being a contentious annual meeting in May.

That’s when the oil majors ask shareholders to take part in an advisory vote on Shell’s climate plans for the first time.

While the vote will not be binding, the company will be under enormous pressure to react if there is large protest vote by some shareholders, as some activists claim there will be.

It is going to be a tough sell for Shell, but the company seems determined to start the process as soon as possible and if that means battling activists at the AGM, then that will be the course of action for management will take.

“More than 90% of our emissions come from the use of the fuels and other energy products we sell, so we must also work with our customers to reduce their emissions when that energy is used,” Shell said.

“That means offering them the low-carbon products and services they need such as renewable electricity, biofuels, hydrogen, carbon capture and storage and nature-based offsets,” Shell said in the report.

That means a redirection of its investment plans in coming years away from conventional energy plays towards renewables at all levels, from consumer facing businesses, to distribution, to technology with partners and production.

For example, Shell plans to limit its investments in the upstream (production) sector and expects a gradual decline of about 1-2% a year in oil production investments until 2030.

That means less spending in Australia and possible asset sales – it still has a big investment in Queensland LNG.

This will include divestments – so shareholdings or even complete ownership of oil and gas investments could be sold off.

Instead, the company plans to maintain its investments in its transition businesses.

To reach this aim, the company plans to slash annual spending on exploration by more than 30% — from around $US2.2 billion in 2015 to around $US1.5 billion between 2021 and 2025.

Shell said that after benefitting from what it said were “attractive exploration opportunities” in the first half of this decade, it will now stop moving into new frontier exploration positions after 2025.

Oil will be where the cuts in output occur because Shell says it aims to keep the share of gas in its hydrocarbon production at 55% by 2030.

Shell said its changes are all about decarbonizing the energy system.

This it says will require structural changes in the end-use of energy, as well as changes to the supply of energy products.

It will require energy end users to improve, update or replace equipment so that they can use carbon-based energy more efficiently, or switch to low- and zero-carbon energy (from renewables).

“For example, in the transport sector, decarbonization includes replacing internal combustion engine vehicles with electric and hydrogen vehicles. In industry, replacing oil- and coal-fired furnaces with electrical furnaces would be one solution, carbon capture and storage is another. And in buildings, replacing gas heating systems with electric heating systems would also contribute to decarbonization,” the company said in the report.

Among the six ways Shell has set to decarbonize energy in the short, medium and long term are; pursuing operational efficiency in its assets, shifting to natural gas, growing a low-carbon power business, providing low-carbon fuels such as biofuels and hydrogen, developing carbon capture and storage, and using natural sinks.

Shell said the transition to low-carbon energy also needs to be in line with the demand of end-users without moving “too far ahead of society.”

“For example, if we invested in producing sustainable aviation fuel, and made it available on commercial terms at all the airports Shell serves today, the investment would not significantly lower our or society’s carbon emissions.

“Most aircraft are not yet certified to fly on 100% sustainable aviation fuel and the cost of the fuel is considerably more than traditional jet fuel, making it an uncompetitive choice for the airlines,” the report said.

Aviation is going to be a very difficult areas because the changes Shell sees coming will start at a time when airlines and associated businesses are vulnerable to cost and other pressures as they seek to recover from the impact of Covid.

Credit ratings group, Moody’s said in a recent report that business travel will not recover globally until 2025 to 2025 and jet fuel consumption – especially internationally – will not regain 2010 levels until much later this decade.

Zoom and other technologies have made business travel increasingly hard to justify for many businesses and these and other new technologies or applications will continue this pressure in coming years, according to Moody’s.

Shell wants to increase its low-carbon investments in collaboration with partners groups – including aircraft manufacturers, airlines, airports, major airline users and governments. It says this will help stimulate and increase demand for sustainable aviation fuel.

“For example, in the road freight sector, we are working with transport companies, truck manufacturers and policymakers to identify pathways to decarbonization. In the near term, we will continue to increase production of low-carbon biofuels.

“And we will offer biogas and LNG for trucks to customers in Europe, China and the USA. In the longer term, we intend to increase our sales of hydrogen for transport,” it explained.

In releasing this report last week Shell CEO, Ben van Beurden said the company was asking shareholders to vote at the May AGM for an energy transition strategy “designed to bring our energy products, our services, and our investments in line with the temperature goal of the Paris agreement and the global drive to combat the climate crisis.

“It is a strategy that we believe creates value for our shareholders, our customers and wider society,” he said in the report.

As part of the plan Shell says it will remain in the downstream business at the consumer level – convenience stores, energy refuelling points (AKA service stations) which will gradually switch from hydrocarbons to EVs and hydrogen refuelling points and distribution.

Odd then that it sold off its service stations in Australia several years ago – oops!


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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