Shell Refines Energy Transition Guidance

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Royal Dutch Shell's latest energy transition report updates targets outlined back in February, reinforcing the direction of travel while stopping short of firm commitments to absolute emission reductions targets. Shell stands out among its European peers in holding back from a headlong rush into renewables and is keen to leverage its trading heritage to forge a broad relationship with customers, delivering a range of future energy services. To the chagrin of critics seeking deeper commitments to decarbonize and equity analysts trying to model its transition, Shell's targets are aspirational and the refreshed roadmap has few concrete details (NE Feb.18'21). Nevertheless, Shell has pledged to achieve net-zero emissions by midcentury, setting interim targets for lower greenhouse gas (GHG) emissions and reduced carbon intensity along the way. It hasn't set near-to-medium term targets for absolute emissions, perhaps understandably given its oil and gas outlook: While oil production is expected to gradually decline, natural gas is set to expand, with, for example, at least 7 million tons per year of new LNG capacity due online by mid-decade. A distinct feature in the plan is an asset-light approach to renewables, with an emphasis on sales rather than the significant ownership favored by BP and Total. Big reductions in GHG emissions will come after 2030-35, supported by plans to scale up carbon capture and storage (CCS), plus a heavy reliance on carbon offsets. Shell defends the modest reduction in carbon intensity targets to 2030 on the grounds that it cannot assume a rapid change in customers' energy use, which will indeed become a crucial factor in reaching the 2050 net-zero target: "If we moved too far ahead of society, it is likely that we would be making products that our customers are unable or unwilling to buy," the company says (NE Apr.15'21). Shell's carbon intensity targets call for a 2%-3% reduction in 2021, 3%-4% in 2022 and 6%-8% in 2023 from a 2016 baseline. Overall, the aim is a 20% reduction by 2030 and 45% by 2035, reaching net-zero by 2050. CEO Ben van Beurden maintains that the targets are "fully consistent with the more ambitious goal of the Paris Agreement: to limit the increase in the average global temperature to 1.5°C above pre-industrial levels." CCS and Offsets Shell's plans place a huge reliance on carbon offset capacity, which will rise to some 120 million tons per year by 2035 from "high-quality" projects, alongside a relatively tame rise in CCS, with an additional equity stake in 25 million tons/yr by then (NE Mar.11'21). Shell spent $70 million on CCS last year and $100 million on offsets and its future investments in CCS and other offsets will depend on what projects get the go-ahead, not only by Shell itself but by other developers it might partner (related). "Aspects of the strategy are dependent on significant scaling of technology such as CCUS, hydrogen and credible provision of biodiversity offsets," says Adam Matthews, chief responsible investment officer at the Church of England Pensions Board. "These uncertainties are areas for further engagement and will require Shell to provide evidence of delivery." Power Sales, Assets The approach to renewables pitches Shell as a power purchaser and trader rather than an owner/operator. While it will certainly seek to own wind and solar assets Shell is eschewing the scale envisaged by its European peers. Plans call for a doubling of renewable electricity sales by 2030 to 560 terawatt hours, with a focus on Europe and the US, Australia and other Asian markets. "We can grow our sales of low-carbon energy without necessarily investing in producing it ourselves by buying it from third parties and selling it to our customers. This model is part of our business today, we sell more than three times the energy we produce ourselves," Shell notes. Three Pillars Shell now speaks in terms of three business pillars: upstream, transition and growth. On the upstream side, oil production is expected to drop by 1%-2% per year, driven by natural decline and non-replacement. No new frontier exploration is likely after 2025 and upstream will be rationalized into "nine core positions," in which gas will comprise roughly 55% of the portfolio by 2030. "The rest of our positions will be run on a leaner operating model. They will be tasked with either maximizing cash generation or becoming core positions," Shell says. "In some cases, such as onshore Egypt and the Philippines, we will simply divest" (IOD Mar.9'21). The transition pillar includes LNG, petrochemicals and refining, with an emphasis on reducing the carbon intensity of these products and operations as well as offsetting their emissions. The growth pillar includes the retail business, electric vehicles and battery charging, plus lubricants, biofuels, renewable power and hydrogen.

Gas Demand, Carbon Capture (CCS), Low-Carbon Policy, Hydrogen, Energy Storage, Electric Vehicles, Carbon Markets , Corporate Strategy , Electricity Prices
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