Shell attempts to push the envelope for its O&G peer group as it unveils its plan toward net-zero
Europe’s largest oil and gas producing company Shell has taken an important step forward toward materialising its net-zero ambition, as it laid out a comprehensive plan called Powering Progress to support its decarbonization goals announced in 2020. Apart from confirming that its carbon emissions peaked in 2018 (at 1.7 gigatonnes per year) and its oil production peaked in 2019 (at 627 million barrels per year), as part of this plan, Shell plans to work with Science Based Targets Initiative, Transition Pathway Initiative, and others to develop standards for the oil and gas industry for transition to net-zero and align with these standards. Also, going forward Shell will submit its Energy Transition Plan to its shareholders for an annual advisory vote. This is the first time that a major oil and gas company has taken such a progressive step toward transparency and stakeholder involvement in its net-zero journey.
Shell is planning to materialise its net-zero ambition through the execution of its Powering Progress plan
(courtesy: shell.com)
Social license to operate
Shell and other major oil and gas companies around the world have come under increasing pressure from shareholders, regulators, advocacy groups, and society at large in recent years for not responding urgently enough to the looming climate crisis. In the last couple of years, Shell and other European majors such as Total, and BP have responded to this pressure by taking incremental steps toward addressing the stakeholder concerns. For example, in 2020, all three European majors announced their ambition to achieve net zero emissions by 2050. The companies have also increasingly pulled back from lobbying pro-fossil legislations, particularly in the US, and have shown growing interest in building their renewables portfolio.
Despite its 2020 announcement of net zero ambition, shareholder confidence in Shell has remained relatively low over the past year. Our internal research team at ESG Base has pointed out that since the drop in global share prices in February 2020, shareholder views on Shell (as well as other major oil companies like BP, Total, Exxon) have continued to remain bearish, even though their views on the overall market (S&P-500) as well as on renewable shares such as Enel, Iberdola, NextEra have been more bullish.
Comparing the performance of Shell shares relative to S&P-500
(© ESG Base)
Furthermore, there are clear evidences that within the energy sector, market capitalisation of renewable energy companies has continued to grow, with the creation of new green majors in the sector with market capitalisation comparable to those of the traditional oil and gas companies. The market signals could not be clearer that the oil and gas majors need to pivot significantly to remain relevant. Shell’s announcement today is very much aimed toward rebuilding that confidence by demonstrating a strong commitment toward its net-zero ambition.
Market capitalisation of green energy majors versus traditional energy majors
(courtesy: The Wall Street Journal)
Shell’s plan
According to the Powering Progress plan, Shell aims to support the goals of the Paris Agreement on climate change by steadily reducing the carbon emissions from its operations as well as from that of the products it sells in the market in. Some of the key aspects of its plans are:
Reduction in net carbon intensity: 6 – 8% by 2023, 20% by 2030, 45% by 2035, and 100% by 2050.
Shell plans to reduce its carbon intensity by 2050
(data from: shell.com)
Increase in access to CCS (carbon, capture and storage) capacity by an additional 25 million tons per year by 2035, over the current planned capacity of 4.5 million tons per year.
Use of nature based solutions, such as afforestation, to offset about 120 million tons of carbon emissions by 2030, with a projected annual spend of about $100 million per year.
Growth in global electric vehicle charge points from the current 60,000 to 500,000 by 2025.
Increase in bioethanol production capacity by 1.8 billion litres per year through acquisition of Bioserv by its joint venture Raízen.
Doubling its power sales to 560 terrawatt-hours a year by 2030.
Developing hydrogen production capabilities to serve industrial applications and heavy-duty transport applications.
Reducing the number of refineries from 13 to 6 by 2030.
Producing circular chemicals by processing 1 million tons per year of waste plastic by 2025.
Increase in LNG (liquified natural gas) production by over 7 million tons per year.
Continued oil production with expected reduction of 1 – 2% per year until 2030.
Genuine pivot or re-branding
While Shell’s plan to grow its portfolio in power generation, carbon capture and storage, nature based solutions, biofuels and EV charging, circular chemicals, and reduction in refinery footprint, are highly desirable steps in the right direction, it is not unreasonable for critics to question whether this is a genuine pivot. Overall, Shell intends to invest $2-3 billion per year in renewables and energy transition, however this number is still small compared to the large investments in its core operations. Indeed, Shell’s plan is to continue to invest $16 – 17 billion per year on fossil fuels and chemicals businesses. Moreover, Shell’s plan to continue to increase its LNG production and maintain its oil production with only a small reduction of 1-2% per year are likely to lead to some scepticism regarding its commitment to energy transition.
In any case, through today’s announcement Shell has certainly out-competed many of its oil and gas peers in making its commitment to the Paris climate agreement more tangible. Shell’s plans to use science-based targets and to submit its net-zero transition plan to shareholders for an advisory vote are pushing the envelope for traditional oil and gas majors. It remains to be seen whether other oil and gas majors, particularly in Europe but also in North America and Asia, will follow suit.
About ESG Base
ESG Base is a London-based, global premium provider of technology and data solutions enabling ESG investments in real assets.
ESG Base Ltd.’s mission is to offer scalable technology solutions for fund managers and investors to identify the best ESG aligned investments and to enable performance monitoring of the assets through the investment lifecycle. Their SaaS technology powered by AI and advanced automation draws from a wide range of data sources and provides projections on future performance of investments subject to dynamic policy and technology scenarios.
ESG Base is supported by the Institute of Innovation and Entrepreneurship at London Business School and by Santander UK Universities.