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    From the Editor: Shell comes out of its shell [Gas in Transition]

Summary

Rather than simply transforming from oil and gas producer to renewable energy generator, Shell will rely on its supply and trading abilities to prosper in the net-zero economy. [Gas in Transition, Volume 1, Issue 2]

by: Karel Beckman

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From the Editor: Shell comes out of its shell [Gas in Transition]

Shell’s Energy Transition Strategy, which the company published in April and will put up to its shareholders for an advisory vote at the annual meeting on May 18, provides fascinating insight into how one of the major oil and gas companies in the world is planning to meet the climate change challenge.

Shell has clearly chosen to remain an integrated energy company – and indeed one of the major energy suppliers in the world. There is no reference in the strategy to divesting businesses or specialising in particular activities. On the contrary, Shell is aiming to broaden its activities to encompass alternative fuels and low-carbon products.

It may be surprising to some, but as David Hone, Shell’s chief climate change advisor and one of the 13 members of the Shell Scenarios Team, explains in an interview with NGW, Shell regards itself above all an energy supply and trading company. The “trading” part is often underestimated. Shell produces around 1% of the oil and gas in the world, but supplies a stunning 4.6% of the world’s primary energy. In other words, the company supplies much more energy than it produces.

And, as the Energy Transition Strategy makes clear, it intends to continue to do so in the future. This means it will try to secure leading positions in new products and activities, such as bioenergy, electric cars, renewable energy, carbon capture and sequestration (CCS), and carbon offsets. In all these sectors Shell will build or buy assets, since, as Hone notes, to trade successfully a company does need an asset base. But Shell will not necessarily try to dominate the “upstream” part of these activities.

None of this means that success is guaranteed for Shell. One big challenge is that, as the Energy Transition Strategy points out, in the emerging zero-emission economy it will be necessary to cooperate with many different players in the various sectors. Thus, for example it does not make sense for an energy producer to produce hydrogen, or for a shipbuilder to build a ship that runs on hydrogen, or a car company to manufacture hydrogen cars, if there is no hydrogen market and no hydrogen infrastructure. The same holds true in other sectors, such as CCS and electric transport.

This has important implications for the way the company has to operate. As the transition strategy notes, rather than focusing on separate product value chains, Shell’s activities will be much more sector-based and require much more cooperation with different actors. External relations will become crucial. That has not always been the company’s strongest suit.

Looking at concrete sectors, natural gas is clearly still viewed by Shell as a key bridge (a rather long one) to the net-zero future. The company does see a “peak” lying ahead for natural gas, but later than for oil. Shell also intends to continue to make the most of its chemicals business.

The company still sees a long, if slowly declining, future of fossil fuels ahead, with emission reductions being achieved through “natural sinks” (offsets) and CCS. It is interesting to note that of the 340mn metric tons/year of emission reductions Shell wants to achieve by 2030, 35% (120mn mt/yr) is to come from natural sinks and just 7% (25mn mt/yr) from CCS. As the transition strategy notes, Shell participates in a number of large CCS projects, but it is not necessarily taking the lead in any of those.

Shell’s plans in renewable energy generation are not very clear yet either. The strategy provides an overview of Shell’s “new energy” activities, but they do not add up to a very coherent picture as yet, although it is likely that biofuels, electric charging and offshore wind will be attractive sectors for Shell. Nevertheless, the company will face tough competition with utilities and renewable energy producers which are in many ways ahead of Shell in renewable energy. In line with David Hone’s suggestions, Shell may well focus more on trading and selling renewable power than producing it.

Shell has a target to supply 560 TWh of electricity by 2030, which amounts to around 2% of today’s global electricity production. With electricity demand expected to grow strongly, that share will be more likely around 1% by 2030. (For comparison, a country like the US consumes around 4,400 TWh, while Germany uses some 650 TWh.) Shell’s target in the increasingly important electricity sector seems therefore not hugely ambitious as yet.

How profitable will the new Shell company be? That may be the billion-dollar-question. The company may feel that its profitability will move in step with the global energy transition. After all, the transition will have to be paid for somehow, so Shell may feel, not unreasonably, that it can rely on the revenues – whether through government incentives or not – that the new activities must be able to generate.

However that may be, Shell clearly has no intention to withdraw into its shell and make the most of what it has. It is coming right out of there and meeting the energy transition challenge head on. That does show courage.