Shell just showed why Big Oil is reluctant to give up on fossil fuels
Ines Ferré
·Senior Business Reporter
Sat, March 16, 2024
Big Oil's appetite for fossil fuels isn't showing any signs of receding.
This week Shell (SHELL) dialed back its target for carbon emissions. The decision comes amid an energy transition that is decades away from full implementation as countries and industries around the world aim to reach net zero by 2050.
On Thursday the British energy giant said it aims to reduce customer emissions from the use of its oil products by 15% to 20% by 2030, versus a prior target of 20%.
The company also dropped its 2035 target of a 45% reduction in net carbon intensity citing "uncertainty in the pace of change" in the energy transition. Net carbon intensity measures emissions associated with each unit of energy sold.
The revised initiatives come on the heels of rapid-fire consolidation among the oil majors looking to expand acreage and insistence from shareholders that companies keep record profits flowing and stick to their core business. In November, the International Energy Agency, which advocates for green technologies, noted the oil and gas industry invested around $20 billion in clean energy in 2022, just 2.5% of its total capital spending.
That may be too much for investors. Earlier this year, BP (BP) received a letter from an activist hedge fund demanding that the British oil and gas producer scale back its "irrational" green energy strategy, arguing it has "quite understandably, depressed the value of BP’s share price."
BP dialed back its own carbon emissions targets about a year ago.
The pressure from shareholders comes at a time when renewable energy technologies have struggled to accelerate amid high interest rates. Last month, Shell sold off partial ownership of two US-based green energy projects.
The problem for oil companies is renewable projects that exceed return-on-investment hurdles "have been hard to find," Stewart Glickman, energy equity analyst at CFRA Research, told Yahoo Finance last month.
The Shell logo is displayed outside a petrol station in Radstock on Feb. 17, 2024, in Somerset, England. (Matt Cardy/Getty Images) (Matt Cardy via Getty Images)
As ESG initiatives and investing styles fall out of favor, energy companies have also become more emboldened to challenge some green measures.
Last month, two impact-oriented funds dropped a climate proposal intended to go to an ExxonMobil (XOM) shareholder vote after the Houston-based oil giant filed a lawsuit to remove the measure from its proxy ballot.
In the complaint, the oil producer said the activist investors Arjuna Capital and Follow This were driven by an "extreme agenda" with the goal of "diminishing the company's existing business."
Mark Kramer, a senior lecturer at Harvard Business who wrote a case study on ExxonMobil, says green advocates are losing the battle in their efforts to pressure the oil industry towards more aggressive energy transition initiatives.
"It's quite clear — it's not working," he told Yahoo Finance in February. "The profitability of oil and gas right now is so strong that it’s extremely hard for a company to walk away from that, or even to talk [of] walking away from it."
If anything, oil companies are betting that natural gas, seen as a cleaner fossil fuel, will be needed in order for the energy transition to happen.
"We believe natural gas and LNG [liquified natural gas] will play an important role in replacing coal in high-temperature heavy industry applications. They can help address both local air emissions and wider climate considerations," reads Shell's Energy Transition Strategy.
Oil executives argue that fossil fuels meet about 80% of global energy demand, with developing countries overwhelmingly reliant on them. Reducing those energy sources would set back those regions.
"We cannot replace overnight an energy system that took 150 years to build," said ExxonMobil CEO Darren Woods at the Asia-Pacific Economic Cooperation conference in San Francisco in November.
"The problem is not oil and gas. It’s emissions," he added. ExxonMobil says it has cut operated methane emissions in half since 2016, and among its measures, is targeting a 20-30% reduction in corporate-wide greenhouse gas intensity by 2030.
"The solutions to climate change have been too focused on reducing supply. That’s a recipe for human hardship and a poorer world," added Woods.
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on X at @ines_ferre.
WE CAN'T GET IT DONE TILL 2150
"We cannot replace overnight an energy system that took 150 years to build"
Ines Ferré
·Senior Business Reporter
Sat, March 16, 2024
Big Oil's appetite for fossil fuels isn't showing any signs of receding.
This week Shell (SHELL) dialed back its target for carbon emissions. The decision comes amid an energy transition that is decades away from full implementation as countries and industries around the world aim to reach net zero by 2050.
On Thursday the British energy giant said it aims to reduce customer emissions from the use of its oil products by 15% to 20% by 2030, versus a prior target of 20%.
The company also dropped its 2035 target of a 45% reduction in net carbon intensity citing "uncertainty in the pace of change" in the energy transition. Net carbon intensity measures emissions associated with each unit of energy sold.
The revised initiatives come on the heels of rapid-fire consolidation among the oil majors looking to expand acreage and insistence from shareholders that companies keep record profits flowing and stick to their core business. In November, the International Energy Agency, which advocates for green technologies, noted the oil and gas industry invested around $20 billion in clean energy in 2022, just 2.5% of its total capital spending.
That may be too much for investors. Earlier this year, BP (BP) received a letter from an activist hedge fund demanding that the British oil and gas producer scale back its "irrational" green energy strategy, arguing it has "quite understandably, depressed the value of BP’s share price."
BP dialed back its own carbon emissions targets about a year ago.
The pressure from shareholders comes at a time when renewable energy technologies have struggled to accelerate amid high interest rates. Last month, Shell sold off partial ownership of two US-based green energy projects.
The problem for oil companies is renewable projects that exceed return-on-investment hurdles "have been hard to find," Stewart Glickman, energy equity analyst at CFRA Research, told Yahoo Finance last month.
The Shell logo is displayed outside a petrol station in Radstock on Feb. 17, 2024, in Somerset, England. (Matt Cardy/Getty Images) (Matt Cardy via Getty Images)
As ESG initiatives and investing styles fall out of favor, energy companies have also become more emboldened to challenge some green measures.
Last month, two impact-oriented funds dropped a climate proposal intended to go to an ExxonMobil (XOM) shareholder vote after the Houston-based oil giant filed a lawsuit to remove the measure from its proxy ballot.
In the complaint, the oil producer said the activist investors Arjuna Capital and Follow This were driven by an "extreme agenda" with the goal of "diminishing the company's existing business."
Mark Kramer, a senior lecturer at Harvard Business who wrote a case study on ExxonMobil, says green advocates are losing the battle in their efforts to pressure the oil industry towards more aggressive energy transition initiatives.
"It's quite clear — it's not working," he told Yahoo Finance in February. "The profitability of oil and gas right now is so strong that it’s extremely hard for a company to walk away from that, or even to talk [of] walking away from it."
If anything, oil companies are betting that natural gas, seen as a cleaner fossil fuel, will be needed in order for the energy transition to happen.
"We believe natural gas and LNG [liquified natural gas] will play an important role in replacing coal in high-temperature heavy industry applications. They can help address both local air emissions and wider climate considerations," reads Shell's Energy Transition Strategy.
Oil executives argue that fossil fuels meet about 80% of global energy demand, with developing countries overwhelmingly reliant on them. Reducing those energy sources would set back those regions.
"We cannot replace overnight an energy system that took 150 years to build," said ExxonMobil CEO Darren Woods at the Asia-Pacific Economic Cooperation conference in San Francisco in November.
"The problem is not oil and gas. It’s emissions," he added. ExxonMobil says it has cut operated methane emissions in half since 2016, and among its measures, is targeting a 20-30% reduction in corporate-wide greenhouse gas intensity by 2030.
"The solutions to climate change have been too focused on reducing supply. That’s a recipe for human hardship and a poorer world," added Woods.
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on X at @ines_ferre.
Rhodri Morgan
Sat, 16 March 2024
Shell altered or dropped several green commitments in an energy transition update last week
The energy transition is proving both a win-win and can’t win situation for Shell.
On the one hand, the £164bn company has such a broad remit across all imaginable facets of the world’s energy mix that it is almost uniquely positioned to succeed in any permutation of the energy transition.
But despite that, it seemingly won’t quit the fossil fuel game or the profits that come with it, no matter the volume of social justice campaigning.
The disconnect between Shell and its many detractors is that for the oil giant, it’s ‘can’t’, but the rest say it ‘won’t’.
“While the world still relies on oil, we will supply it – but – with lower emissions,” said Shell chief Wael Sawan this past week as the firm published its energy transition update, prompting a minor share price gain.
The company has chosen to focus on altering the “carbon intensity”, i.e. the emissions produced by each unit of energy that Shell sells, by 15 to 20 per cent by 2030 compared to 2016 levels – previously, it had committed to a 20 per cent reduction.
Theoretically, this means it could produce more gas at a lower emissions intensity but still raise its total emissions if production is increased.
It also dropped a plan to reduce net carbon intensity by 45 per cent by 2035 due to “uncertainty in the pace of change in the energy transition.”
And therein lies the company line on why it’s not slowing down on oil and gas.
It said that current renewable investment is around £1-2 trillion behind where it needs to be to reach net zero by 2050 and that “significant investment will be required to keep supplying oil and gas while low-carbon alternatives are developed and made commercially available.”
“This continued investment is needed because demand for oil and gas is expected to drop at a slower rate than the natural decline of the world’s oil and gas fields, which is at 4 per cent to 5 per cent a year,” the company added.
While the recent strategy update includes a new target to reduce the scope three emissions from its oil business by between 15-20 per cent by 2030, compared with 2021 levels, it has not set a similar target for its gas business, which is expected to grow by 50 per cent by 2040.
The group added the equivalent of 200,000 barrels of oil and gas production, and it plans to start enough new fossil fuel projects to add half a million barrels a day to its oil and gas production by 2025.
These commitments to gas growth and diluting of emissions targets provoked criticism from environmental campaigners last week.
“With this backtrack, Shell bets on the failure of the Paris climate agreement, which requires almost halving emissions this decade,” Mark van Baal, founder of Follow This, an activist shareholder group, said.
“This backtracking removes any doubt about Shell’s intentions. The company wants to stay in fossil fuels as long as possible.”
Jonathan Noronha-Gant, a senior campaigner for non-profit organisation Global Witness, concurred, saying that Sawan’s pay packet was a “cynical distraction” from the watering down of the targets.
“Shell cannot be trusted on targets – it will put profit first every time,” he said.
Global Witness analysed data from energy research specialist Rystad Energy and claimed that in 2030, Shell’s oil and gas projects are projected to emit 487m tonnes of carbon, more than the UK and the Netherlands – the company’s two corporate hubs – together produce in a year.
Customer emissions from the use of Shell’s oil products were 517m tonnes equivalent of CO2 in 2023 and 569m tonnes in 2021, so though still high, 487m tonnes in 2030 would represent exponential reductions.
When Shell reports results, the easy criticism to make is that it should spend more of its massive purse on renewable energy projects.
However, earnings from the firm’s Renewable and Energy Solutions division fell drastically over 2023 compared to 2022 levels, with adjusted earnings falling 60 per cent and adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) dropping 43 per cent.
In November of last year, Sawan said the firm would be returns-focused and more litigious on renewable investments, given the volatility of the sector’s current infrastructure in regards to its ability to return for shareholders.
Viktor Katona, the lead crude analyst for trade intelligence firm Kpler, told City A.M. that the “lambasting” of the firm’s latest green commitment alteration is unfounded and unfair, and investors should be thankful for Sawan’s approach.
“Shell being brave enough to admit that some offshore wind projects might not be worth it, some solar projects need a higher market maturity for an oil major to enter, that is all a reflection of a new kind of constructive behaviour on behalf of Shell,” he said.
“Sawan isn’t cutting the company’s ambition per se. He’s dovetailing it with the idea that Shell should still be generating enough cash to be an attractive investment,” he added.
Such is the fraught nature of current geopolitics that investors don’t see a cut in oil production or a move to renewables as a wise move, and it’s likely to stay that way while the stock remains strong.
It’s still possible that Shell will end up showing a green thumb in allyship to the green energy sector in the future.
But for now, and in the foreseeable future, it’s not quitting what’s working for investors.
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