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CORPORATE STRATEGY

New Shell Boss Faces Key Tests in Years Ahead

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Wael Sawan became CEO of Shell on Jan. 1, completing his rise to the top of the supermajor after 25 years of service. While analysts don't expect a dramatic change in direction under Sawan — who admitted in a video post last week he was “sometimes daunted” by the challenges that lie ahead — it will fall upon the 48-year-old to execute the strategy put in place by his predecessor, Ben van Beurden, including ambitious transition targets. Energy Intelligence takes a look at the key tests Sawan will face as he takes the reins at one of the world’s biggest energy firms.

  • Integrated Gas needs to be firing on all cylinders again.

Shell’s gas business should be the jewel in the crown of the world’s top LNG portfolio player, especially given current demand trends. But its Integrated Gas division has too often underperformed. This was evident mostly recently in the third quarter of 2022, when the company blamed price volatility and unsuccessful hedges for a major earning miss — and did not deny it made a loss in LNG trading itself. A fourth-quarter update pointed to a substantial improvement but liquefaction volumes in October-December are set to come in at their weakest in seven years, partly due to protracted outages at the Prelude and Queensland Curtis LNG projects in Australia. As a former head of the division, Sawan is well placed to turn the business around. He should be able to look forward to higher liquefaction volumes in Egypt, Trinidad and Tobago and, eventually, Qatar, thanks to Shell’s role in the North Field expansions that Sawan, who was previously based in Doha, helped to secure. But Australia remains a trouble spot. “One of the things he (Sawan) has talked about is delivering performance on a day-to-day basis, so fixing things like Prelude, Gorgon, and QCLNG, for example,” said Kim Fustier, head of European oil and gas equity research at HSBC. “Those three Australian LNG assets which have been underperforming I think will have to be a priority.” Sawan will have a chance to set out his plans for Integrated Gas when Shell hosts its annual LNG Outlook on Feb. 16.

  • Delivering on divestments means more than raising cash.

Shell has guided for average annual divestments of $4 billion on the road to net zero. While it is hardly in urgent need of the proceeds given bumper earnings and cash flow, offloading some assets that carry reputational risks and environmental baggage would certainly make Sawan sleep more soundly at night. These include its portfolio onshore Nigeria, which Shell considers “outside our risk appetite”. The sales process was paused last year after Nigeria’s Supreme Court said Shell had to wait for the outcome of an appeal over an oil spill in 2019. Divesting onshore Nigeria, however, will not be straightforward, since selling to a buyer whose operation of the assets may end up increasing emissions could be frowned upon. "It would be a ‘very nice to have’ — if he managed to get the right price, the right buyer,” Fustier said.

Shell's Q4'22 Guidance
Integrated Gas Production900,000-940,000 boe/d
Liquefaction Volumes6.6 million-7 million tons
Upstream Production1.825 million-1.925 million boe/d
Exploration Well Write-Offs$150 million-$550 million
Marketing Sales Volumes2.35 million-2.75 million b/d
Indicative Refining Margin$19/bbl
RES* Adjusted Earnings-$500 million-$100 million

Other planned divestments that have dragged on — and that Sawan would like to put to bed — include the sale of its 37.5% stake in the PCK Schwedt refinery in Germany, which has twice fallen through in the past two years. For Shell, PCK Schwedt is considered nonstrategic. Exiting the Salym oil joint venture in Russia, on the other hand, now looks very achievable after a Moscow court said a sale to partner Gazprom Neft could go ahead. This would leave Shell with no production in Russia, an important signal to investors and politicians as the Ukraine conflict rages on.

  • Investors need convincing that Shell has the right business models for clean energy.

Investors will be laser-focused on Shell’s energy transition businesses going forward, after the supermajor last year increased the transparency of its Renewables and Energy Solutions division, which had previously been tucked away inside its massive Integrated Gas unit. This will make any growing pains in its transition strategy harder to hide at a time when analysts are already concerned about the impacts of supply chain issues and higher interest rates, and questioning nascent business models for things like hydrogen production and carbon capture and storage. “It’s really about convincing investors that they are creating value in clean energy because there is a lot of skepticism in the market that oil majors are able to add value in these areas,” Fustier said. “It’s about executing and convincing the markets that they are on the right path and they are not destroying value in the process. It is quite a tall order.” These transition businesses are also the most logical place for additional acquisitions following on from Shell’s November $1.9 billion deal for Nature Energy, Europe’s largest renewable natural gas producer. Sawan must demonstrate that any acquisition targets meet Shell’s double-digit returns criteria.

Wael Sawan's 25-Year Career at Shell
2023-CEO
2021-22Director, Integrated Gas, Renewables and Energy Solutions
2019-21Director, Upstream
2015-19Executive Vice President, Deepwater
2012-15Chairman, Shell Qatar companies
2008-12Vice President Commercial, New Business and LNG
2007-08General Manager, Retail Portfolio, New Market Entries and Alliances
2005-06Project Manager, New LNG Project and Business Development for Gas
2003–04Deal Leader, Hydrocarbon Asset Farm-Down
2000-01Techno-Commercial Lead
1997-2000Project and Concept Engineer, Petroleum Development Oman (seconded)

  • Sawan will need to ensure Shell’s strategy fits with growing government intervention in energy.

Shell’s strategic overhaul undertaken by Van Beurden was done in a world where energy markets were increasingly liberalized and globalization was advancing rapidly. Russia’s war in Ukraine and the resulting mix of sanctions and energy shortages have upended that paradigm. Governments are playing a greater role in energy markets through windfall taxes and price caps and compliance with a growing web of sanctions. Sawan will need to understand what the age of intervention means for Shell’s existing investments and strategic goals. And he will need to diplomatically build relationships with leaders in producing and consuming nations that increasingly find themselves at odds with one another on policies around markets and the energy transition.

  • Shell's appeal against a landmark court ruling in The Hague needs to be carefully managed.

No date has yet been set for a Dutch court to hear Shell's appeal against a 2021 ruling that the company must cut its overall emissions by 45% from 2019 levels by 2030. Sawan will need to guide Shell deftly through a case that has the potential for significant negative publicity for the company and the industry as a whole. But a failure to win would mean Sawan has to significantly accelerate the company’s decarbonization efforts, which could require shifting its strategy away from fossil fuels at a much faster rate than society demands. Sawan must walk a fine line between acting in the interests of Shell — and its investors — and avoiding a backlash from the public at large.

Topics:
Corporate Strategy , M&A, LNG Trade, Capital Spending, CO2 Emissions
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