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Shell Boss Expects 'Strong' Upstream Business Through 2030s

Copyright © 2021 Energy Intelligence Group
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Ben van Beurden has been CEO of Royal Dutch Shell since 2014. He spoke to Energy Intelligence about Shell's evolving strategy and portfolio as the European oil supermajor responds to the pressures of the low-carbon energy transition.

Q. Why didn't the Permian Basin fit within Shells plans going forward? The Permian was a short-cycle asset. It had lower-carbon emissions than your portfolio average. It's located in a global demand center.

We have worked very hard on this asset to turn it into what some people have said was a crown jewel in our portfolio and we indeed designated it as one of the core positions.

But what it did lack was actual scale and running room. For those of you who have followed the company more closely over the last few years, we have worked very hard to see how we could extend the scale and the running room of that position, building on the strength of the capability that we have built up.

In many cases we didn't succeed. So, we were left with a high-quality asset, but indeed an asset of low materiality, a low running room. So, when other opportunities started presenting themselves to monetize it, we had to look at it, as well as an alternative strategy.

In the end, at the valuation that we managed to realize, I think this was a very attractive way of monetizing early what otherwise would have been monetized over a period of a few decades.

Q. In the past year, we've see a couple surprising asset sales from Shell. In addition to the Permian Basin, there was the Deer Park refinery sale which had previously been earmarked as one of the six that you were going keep. What made you reassess the future of these assets? Is this simply about reducing emissions?

If you look at the Permian, the emissions associated with the Permian operations are very small. They're less than half a percent of our Scope 1 emissions, and then our Scope 1 emissions are less than 5% of our total emissions. So no, this was not an emissions reduction strategy. This was a portfolio rationalization strategy for the reasons that I mentioned.

Deer Park is a slightly different story. Of course, Deer Park the refinery has a more heavy emissions footprint, so it is a more tangible contribution to our 70 million tons of Scope 1 emissions, but again, the strategy was not to reduce emissions.

The strategy here was that, yes, we had said we would reduce the six sites that we would then high-grade and reconfigure into efficient energy and chemical parks. But I, I must admit Deer Park probably had the weakest plans in that list of six.

Therefore, again when we received an offer that was unsolicited. We had to evaluate whether that was perhaps a better plan than to have it in the family of six and that turned out to be the case.

But the key message is, you know, things are changing. The key message is nothing is ever fixed, so our core assets, the things that we believe are indeed important for us today may indeed change in terms of nature going forward. We have to evolve with the realities of the world around us.

Q. We’re seeing growing concern about companies like Shell selling assets to companies that might have less stringent environmental guidelines. Should the majors look to to wind down these assets as has been suggested by some rather than sell them to others? Is that a reasonable ask of the industry?

No, to be pretty blunt about it, I think that's a silly notion. Nobody is served by transferring assets from one to the other if we somehow try to play the game of hide and seek with emissions. In the end, I think assets may well change from one to the other company if they just are more valuable in another company.

Indeed, we will wind down operations when they come toward what we believe to be the end of high-quality economic life. I have in our portfolio plenty of failures still to be harvested by players who are more specialized or have priorities in slightly different places. That should be the natural order of things.

The whole idea, by the way, that we would just wind down our operations so that, you know, the world would be better off as well, is also a silly notion. In the end, the world needs oil and gas products for a long time to come. That needs to be served, ideally with high-quality companies like ourselves.

Q. Does the use of carbon offsets have a long-term place in Shell's net-zero strategy?

First of all, we believe that using for instance nature as a way to capture and sequester CO2 [carbon dioxide] in trees and roots and soils, etc. is not quite the last resort, but it should be among the last resorts together with CCS [carbon capture and storage].

So, the first order of priority is provide energy that is not carbon-based. But then of course there are quite a few areas of the energy system or the economy that cannot yet use no-carbon energy.

Yes, I do believe offsets and compensation mitigation measures work, but the focus — the main focus — should be on reduction first. Whatever remains needs to be mitigated.

Now, the endgame in my mind will be that indeed a number of emissions cannot be avoided. CCS and nature-based solutions have a role to play in the world, and I think we have to make sure that these solutions are the highest-possible quality. Here, I agree with much of the criticism that is sometimes leveled at these solutions.

There are plenty of emission mitigation measures out there where you can argue that the quality is not as high as it could or should be. Therefore, we advocate for a high-quality standard that we can all adopt and adhere to but in my mind it has to be part of the solution or we won't have 1.5º.

Q. What is needed for CCS to really ramp up to the level that is required for society to meet its goals and for Shell to meet its goals?

I think CCS is again one of those technologies that is going to be needed but like with many technologies that are somewhat precommercial, it needs to see a lot of cost takeout.

Some of it will come through original innovation, but much of it will come through repeated application — much in the same way, of course, as the pathways that have been followed by solar and wind or cell phones for that matter.

CCS has another disadvantage, and that disadvantage is that in many economies there is no business model for it. It's just a cost. Therefore, you have to create the business model and you do that of course by putting a price on carbon so that it becomes an economic proposition to capture and store CO2.

Q. You're investing in renewable generation capacity but you're more focused on selling power than producing as much power as some of your peers. Why is it that you prefer this approach?

We want to build up a power business that is focused on delivering customers' solutions. We call it sort of power as a service, but in principle it is indeed working from the customer back and building the renewable power assets that are needed to serve these customers.

So, sometimes people say, oh, you don't want to invest in power generation. Yes, we do, but we don't want to invest for the commodity market. We want to invest to serve customers where we believe there is more rent available in the entire value chain.

Q. What does a hydrogen industry look like? Is this something that happens regionally? Is it something that becomes an internationally traded commodity? What types of returns might investors expect from these hydrogen investments?

Well, now you are absolutely right that hydrogen is the favorite baby in the energy system, but let's bear in mind it is a baby. It is a very small component in a much larger system, but it does indeed have a lot of promises. It's a cute baby and therefore everybody loves it.

We think it will indeed grow into a significant business. Clean hydrogen initially will be deployed in heavy-duty transportation and in industry. You will see us, of course, work with heavy-duty transport because that's closer to our business models as well.

Ultimately I think these sectors will grow into other sectors of the economy. You can think of hydrogen as a power storage solution. I think that will be smaller at first, but maybe larger toward the end.

You can see liquid hydrogen can be the future LNG of the world. I think over time we may well see a large international liquid hydrogen business, but I don't think that will be material in let's say the next decade or so. But then again, you know in the '60s and the '70s everybody thought that LNG was going to be immaterial for a long time, and now it's one of the mainstays of our portfolio.

Q. How has the role of LNG in your portfolio and your outlook for LNG evolved in recent years?

For years we have been saying there will be growth in the LNG business if only because of climate change pressures. You will increasingly see, of course, economies switching from coal to something else and to just believe that you can switch 100% from coal to 100% renewable, again, is a little bit of a silly notion.

LNG will have a role to play in power but also in industrial energy demand and also in domestic energy demand in the large growing economies of the world.

So, we still believe that a growth picture of about 4% per year in LNG for many years to come is a credible assumption to work with, and so far we have been proven right on these assumptions.

Q. Shell jumped into shale when it was “the next big thing” but many of those early investments didn’t work out.  What did you learn from that experience that might inform how you approach your energy transition investments?

I think one very important focal point that I think the entire shale industry has learned is that value matters more than volume. In many cases, of course, the shale industry was rewarded for volume growth, even if it went at the expense of value growth.

Sometimes these anomalies can happen in markets that form bubbles or get sort of hyped etc. And it's probably fair to say that in the hype that exists in the early years of shale, we were not immune to that either.

So, in other words, if you have a strong mantra of value over volume, you better make sure that you repeat it every morning before you get into the office.

I think the same is probably going to be true for many of our energy transition investments. Whether this is power; this is biofuels; whether this is hydrogen.

Of course, sometimes you have to look at the materiality of a business, but in the end, if you pursue a strategy, that value is put on the second rung, I think it is going to be unsustainable in the long run. I think that's probably the most important learning to take away from it on the business side.

The other thing, this is the more general point: there is a lot of change in the last few decades. We have seen a tremendous amount of change, much more so perhaps than many decades before and therefore you have to be agile. You have to be nimble and you have to make sure that you continuously ask yourself, is my portfolio still the right portfolio? Never mind how much attached you are to it.

Therefore, you have to continuously also be prepared to take bold moves to perhaps concentrate in areas where you thought you were not going to, and that's exactly what you see us do. At this point in time, agility, I think, is the name of the game in a much more dynamic world that we are currently in.

Q. You've said that Shell is not going to chase higher oil and gas prices with additional upstream spending. So, if not oil and gas prices, what is it that's driving Shell’s long-term capital allocation decisions?

The overall philosophy, and this goes a little bit back to our empowering progress strategy of course, where we say we have to focus on the creation of shareholder value and we have to focus on net zero. It can go hand in hand but what it means is that we have to change over time the portfolio of our company to one that is much more in line with what we consider the future of energy, which is indeed, lower carbon.

So, therefore probably more power. Power is going to be a dominant factor in the energy picture, of course, in the decades to come, but also indeed biofuels, hydrogen and the mitigation solutions that we talked about.

Now of course, these are quite often still small positions, so if you want to really grow them into very large material positions you're going to be free cash flow negative for a long time to come.

In other words, investments are going to outpace the cash-generating potential from these businesses. So, our philosophy as a company is that, yes, we want to invest in that future of energy and if we are going to grow our business, that's where we will probably look first to grow more in these areas, including marketing because that provides the customer from which we have to work customer back.

But that doesn't mean that our upstream business is therefore irrelevant. It's incredibly relevant because we can only pursue that strategy if we have the cash flows to do so. So, upstream integrated gas and, of course also the mature businesses already like marketing and chemicals. They have to provide the cash for the future, and therefore investing in these businesses is going to be needed to keep them the strong cash engines that they currently are.

So, my view is upstream needs to be a strong cash engine into and probably through the 2030s, and we need to invest to keep it there. That's not a volume game. That is a money game. Integrated gas, same thing, maybe a little bit of growth. And then indeed the businesses of the future.

Q. First, what would you like to see emerge from the COP26 climate negotiations in terms of policy momentum? But then I would also like to know what you think is likely that we will see coming from that meeting.

Let me do it the other way around. I think what we are going to see and which is not a bad thing by the way, it's pledges of more ambition, and it's needed because, let's face it, the world at this point in time is nowhere near 2º, let alone 1.5º.

We need to have more ambition. We have to say we have to work harder. We need to do more. We need to set the bar higher, and indeed at this point in time, the best approach we have as a planet is to have sovereign governments to just say I'm going to up the ambition a little bit with my nationally determined contributions [NDCs].

But obviously, and this is your first point, it's not enough to just say I will do better if it doesn't get to real policy action and real results that actually depict progress. Because the problem is not so much only that our pledges were not enough. The problem is also that we didn't act on these pledges as a planet or as a society, so therefore we need to do more in terms of policy [to] implement action now.

What I believe is important is two things — I can think of a whole range by the way — but let me pick out two. First of all, that we have to have a much more granular approach to the more harder-to-abate sectors. It is somewhat pointless to just have everything done on NDCs.

How are we going to deal with industry? It has to be done globally. Steel has to be done globally. Aviation has to be done globally. Shipping has to be done globally.

If you add all these things up, very quickly you are going to find that the part that is best done sort of transnationally is a very significant part of the total emission cake.

I think a more sectorial approach where we have different pathways for different sectors that fit the challenges of that sector is probably the best way forward. And then, indeed, of course governments need to stand behind it.

Governments need to stand behind, say a biofuel mandate for aviation or they need to stand behind hydrogen support for heavy-duty transport or the need to stand behind other policies for decarbonizing steelmaking.

They will all be somewhat different, but unless we get that sectorial approach there, I believe it's going to be incredibly difficult to come up with really detailed effective policies that will deliver these NDCs.

That's point one. Point two, which is very important, is we have to have an international trading system for carbon.

Now we had what's called Article 6 in the Paris Agreement — was agreed in 2015, and here we are six years on, not operationalized. I think that is a big black mark on the credibility of the entire effort that we have around Paris.

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