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Shell's BG Bid Underscores Climate Strategy

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While the primary motivation for Royal Dutch Shell's bid for BG last week may have been short-term concerns, such as shoring up reserve replacement levels and cash flow, it also underscores one of the main pillars of the Anglo-Dutch supermajor's long-term climate change strategy -- to supply more natural gas as a cleaner-burning alternative to coal (NE Mar.26'15). Its acquisition of BG bolsters Shell's already leading position in global LNG supply and trade, demonstrating the attractiveness of natural gas assets in the largest oil and gas industry tie-up since the last spate of megamergers in the late 1990s (WEO Apr.10'15). Shell's strengthened emphasis on gas could also deflect warnings of "stranded" fossil fuel assets under government carbon controls, but some point out that natural gas also involves a questionable life-cycle carbon footprint and note that oil is a strong component of BG's portfolio. Climate change is certainly a factor in the proposed transaction since gas is the cleanest fossil fuel and has better growth prospects than oil and coal in a more carbon-constrained environment, said Marco Scherer of Deutsche Bank's Deutsche Asset & Wealth Management. While investors are mostly focusing on the returns they are getting, the argument for more sustainable investing is certainly becoming stronger, he said. LNG assets are a good example, showing it is possible to combine pure economic considerations and "more socially responsible investing," Scherer said. In particular, the LNG business provides a relatively stable cash flow because it is sold on less volatile, long-term pricing terms than oil or spot gas, Scherer argued. In addition, gas projects show a much more stable production rate than oil projects, where production typically declines by a few percent every year, he insisted. But while it may be a good strategy to become more gas-focused from a climate change point of view, another analyst suggested Shell "should be careful not to insist too much on that, otherwise investors could start questioning how safe oil assets will remain in the future." And Shell shows no signs of turning its back on oil -- its production split is around 50-50 between oil and gas, a ratio that will not fundamentally change under the deal with BG. BG's Brazilian deepwater Santos Basin oil play was a key selling point for Shell in addition to the gas and LNG side of BG's business. Shell may see natural gas as a strategic bet and a bulwark against arguments that it faces the risk of potentially stranded assets in a future carbon-constrained world, as gas emits 50% fewer carbon emissions than coal. The firm has maintained that gas will be an important bridge fuel, or even a destination fuel, for many decades to come -- particularly as developing countries such as China look to reduce emissions. Others are less convinced. Shell's consolidating of its position as a gas and LNG player would "not necessarily" address investor concerns on stranded assets, said Ben Caldecott, head of Oxford University's Stranded Assets Program (NE Feb.19'15). "It depends on the life-cycle emissions of the gas -- which varies considerably depending on methane leakage and other factors. There are also other environmental considerations, such as water use and whether the gas fields in question are in high water stress locations or not," he told EI New Energy. Norwegian environmental group Bellona is also concerned about such life-cycle emissions for natural gas: "You only have to have a few percentages of leakage in transport [such as in gas gathering and pipelines] before it comes out exactly the same as coal fired power plants, which are 30 years old," asserted Hallstein Havag, Bellona's director of policy and research. Investors concerned with environmental risks also need to look beyond potential carbon emissions embedded in company resources and reserves, Caldecott added. "There are clearly other sustainability and pollution issues able to generate material financial risks that can strand assets. That's not to say embedded emissions aren't important, but other issues also need to be considered." Concerns like this, about the sustainability and environmental impact of Shell's Alaska plans, have made it a target for environmental campaigners (NE Nov.6'14). Having started with a Greenpeace campaign, the criticism faced by Shell over its Arctic drilling campaign "will build and build" suggests top UK environmentalist Jonathon Porritt. But because Shell is now gaining access to other, attractive deepwater prospects on BG's books, including in Central America and East Africa, the more challenging and controversial Arctic need not be such a high priority for Shell in the future. Ronan Kavanagh London, and Philippe Roos, Strasbourg

Topics:
Gas Supply, Carbon Capture (CCS), Low-Carbon Policy
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