Shell wants to stay in the fossil fuel game as long as possible

The energy transition is proving both a win-win and can’t win situation for Shell.

On the one hand, the £164bn company has such a broad remit across all imaginable facets of the world’s energy mix that it is almost uniquely positioned to succeed in any permutation of the energy transition.

But despite that, it seemingly won’t quit the fossil fuel game or the profits that come with it, no matter the volume of social justice campaigning.

The disconnect between Shell and its many detractors is that for the oil giant, it’s ‘can’t’, but the rest say it ‘won’t’.

“While the world still relies on oil, we will supply it – but – with lower emissions,” said Shell chief Wael Sawan this past week as the firm published its energy transition update, prompting a minor share price gain.

The company has chosen to focus on altering the “carbon intensity”, i.e. the emissions produced by each unit of energy that Shell sells, by 15 to 20 per cent by 2030 compared to 2016 levels – previously, it had committed to a 20 per cent reduction.

Theoretically, this means it could produce more gas at a lower emissions intensity but still raise its total emissions if production is increased.

It also dropped a plan to reduce net carbon intensity by 45 per cent by 2035 due to “uncertainty in the pace of change in the energy transition.”

And therein lies the company line on why it’s not slowing down on oil and gas.

It said that current renewable investment is around £1-2 trillion behind where it needs to be to reach net zero by 2050 and that “significant investment will be required to keep supplying oil and gas while low-carbon alternatives are developed and made commercially available.”

“This continued investment is needed because demand for oil and gas is expected to drop at a slower rate than the natural decline of the world’s oil and gas fields, which is at 4 per cent to 5 per cent a year,” the company added.

While the recent strategy update includes a new target to reduce the scope three emissions from its oil business by between 15-20 per cent by 2030, compared with 2021 levels, it has not set a similar target for its gas business, which is expected to grow by 50 per cent by 2040.

The group added the equivalent of 200,000 barrels of oil and gas production, and it plans to start enough new fossil fuel projects to add half a million barrels a day to its oil and gas production by 2025.

These commitments to gas growth and diluting of emissions targets provoked criticism from environmental campaigners last week.

“With this backtrack, Shell bets on the failure of the Paris climate agreement, which requires almost halving emissions this decade,” Mark van Baal, founder of Follow This, an activist shareholder group, said.

“This backtracking removes any doubt about Shell’s intentions. The company wants to stay in fossil fuels as long as possible.”

 Jonathan Noronha-Gant, a senior campaigner for non-profit organisation Global Witness, concurred, saying that Sawan’s pay packet was a “cynical distraction” from the watering down of the targets.

“Shell cannot be trusted on targets – it will put profit first every time,” he said.

Global Witness analysed data from energy research specialist Rystad Energy and claimed that in 2030, Shell’s oil and gas projects are projected to emit 487m tonnes of carbon, more than the UK and the Netherlands – the company’s two corporate hubs – together produce in a year. 

Customer emissions from the use of Shell’s oil products were 517m tonnes equivalent of CO2 in 2023 and 569m tonnes in 2021, so though still high, 487m tonnes in 2030 would represent exponential reductions.

When Shell reports results, the easy criticism to make is that it should spend more of its massive purse on renewable energy projects.

However, earnings from the firm’s Renewable and Energy Solutions division fell drastically over 2023 compared to 2022 levels, with adjusted earnings falling 60 per cent and adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) dropping 43 per cent.

In November of last year, Sawan said the firm would be returns-focused and more litigious on renewable investments, given the volatility of the sector’s current infrastructure in regards to its ability to return for shareholders.

Viktor Katona, the lead crude analyst for trade intelligence firm Kpler, told City A.M. that the “lambasting” of the firm’s latest green commitment alteration is unfounded and unfair, and investors should be thankful for Sawan’s approach.

“Shell being brave enough to admit that some offshore wind projects might not be worth it, some solar projects need a higher market maturity for an oil major to enter, that is all a reflection of a new kind of constructive behaviour on behalf of Shell,” he said.

“Sawan isn’t cutting the company’s ambition per se. He’s dovetailing it with the idea that Shell should still be generating enough cash to be an attractive investment,” he added.

Such is the fraught nature of current geopolitics that investors don’t see a cut in oil production or a move to renewables as a wise move, and it’s likely to stay that way while the stock remains strong.

It’s still possible that Shell will end up showing a green thumb in allyship to the green energy sector in the future.

But for now, and in the foreseeable future, it’s not quitting what’s working for investors.