Our Take: Finding the Right Fit for Renewables

Shell's recent restructuring has revived the thorny debate of how and where integrated energy companies should fit renewables and transition assets into portfolios. We see different solutions evolving as firms progress their transition strategies — and, in Shell's case, an effort by new CEO Wael Sawan to advance an existing "one-stop shop" energy solutions approach.

• Shell's decision to group renewables with conventional downstream instead of integrated gas — as it's been for the past seven years — may seem curious given the disparate nature of renewable electricity generation and oil refining and marketing. But rather than indicating a potential step back in transition commitments, we see the move as attempting to advance a customer-focused strategy that seeks to package energy solutions for large consumers to meet their own emissions reduction goals.

• While there is certainly an argument for grouping transition businesses with lower-carbon gas — the LNG markets of today have been touted as the hydrogen markets of tomorrow, for one — Shell's strategy is more dependent than those of other international oil companies (IOCs) on integrated marketing to tailor its energy offerings to the pace of its customers' needs.

• The move also mirrors how Shell envisions its downstream over time. Rebranded as ‘Energy and Chemical Parks,’ the company’s core refineries are expected to run on renewable natural gas and hydrogen in the future, increasingly incorporate biofuel and hydrogen production as oil refining is ultimately wound down, and potentially house renewable electricity generation. In other words, integration of new energy solutions will ultimately decarbonize its downstream.

• A look at Shell’s peers underscores that choosing where to put renewables is not an obvious — or universal — decision. BP and TotalEnergies still have similar structures to the one Shell is abandoning, with 'Gas and Low-Carbon’ and ‘Integrated Gas, Renewables and Power’ divisions, respectively. Exxon Mobil and Chevron, meanwhile, have low-carbon divisions that house their carbon capture, hydrogen and biofuels, and sit independent of oil and gas business lines, despite some operational overlap.

• Even more variation can be seen among Europe’s regional players. Italy’s Eni is evoking Shell in pairing renewables with retail, but within a standalone company (Plenitude) rather than an integrated operation that includes refining; Spain’s Repsol has a low-carbon generation division that has targeted external investment; and Austria’s OMV has grouped its low-carbon business with traditional E&P in an ‘Energy’ segment.

• We do not expect Shell’s shake-up to be the last restructuring move of its kind — for Shell, or IOCs at large. Significant uncertainties still surround the pace at which low-carbon businesses will emerge, as well as how customer preferences will evolve across different regions. Such considerations will impact when materiality can be reached for certain business lines and how companies should pull the levers in terms of growing or shrinking different operations. Investors may also yet signal a preferred route, forcing companies boasting alternate approaches to change tack.