This summer, at Shell’s first capital markets day under new chief executive Wael Sawan, the British energy group attracted the attention of environmentalists over its plans to keep oil output steady rather than letting it fall. of anger.
But the meeting also highlighted the company’s greater reliance on another carbon-emitting fuel, liquefied natural gas, with executives telling investors that boosting production from LNG assets is a “top priority” and outlining investments of $4 billion a year through 2025. Plans for LNG projects.
Natural gas has become Shell’s biggest source of money. Its integrated natural gas unit, dominated by its LNG business, has been the largest contributor to group profits in four of the past five years, accounting for just over half of the company’s $14.7 billion profit in the first half of 2023.
The question is whether fuels are still the right focus for the company, which Mr Sawan insists is sticking to the strategy launched by his predecessor Ben van Beurden by increasing investment in clean energy by 2050 Net zero emissions.
“They’re getting further and further away from me because they have a really compelling vision of what the company will look like in 25 years,” one top 20 shareholder said.
The shareholder said increasing LNG production was a “pragmatic” strategy in the current environment, noting that demand for natural gas in a decarbonized world could exceed demand for other fossil fuels, especially as Europe transitions away from Russian gas. Dependence is well on the way as Asia seeks alternative energy sources to coal.
But prioritizing LNG over clean energy could be risky in the long term, the shareholder added. “We want Shell to do more to develop and articulate and commit to a truly compelling energy transition strategy.”
Bernstein analyst Oswald Clint said other shareholders, particularly U.S. shareholders, were more positive about Shell’s commitment to its most profitable business.
“Investors can see that the demand is there and it’s likely to be there for decades, and if you’re the largest player in the market and you own the space, why not add to it,” he said.
Shell’s focus on LNG dates back to the industry’s inception. The company shipped the first commercial fuel cargo from Algeria to the UK in 1964 and played a major role in developing the Asian LNG market a decade later as a partner of Brunei LNG.
Until then, natural gas was largely considered an unwanted byproduct of oil production and was typically burned on site. A former executive in Shell’s natural gas business said Shell’s particularly large portfolio of oil-producing assets presented it with special “problems” in how to deal with associated gas.
The solution is to liquefy the gas by cooling it to -162°C, shrinking it to one-sixth of its original volume, allowing the fuel to be economically transported around the world.
Trade volumes have increased from 100 million tons per year in 2000 to nearly 400 million tons in 2022, bringing the market value to US$450 billion.
Last year, Shell transported 66 million tons of LNG, accounting for 16.5% of the global total and second only to state-owned Qatar Energy.
“This is Shell’s only upstream business where it clearly leads the industry,” the former executive said.
Its LNG sales account for about 23% of operating cash flow, more than any other Western energy giant, according to Citibank. At its investor day in June, the company said it would increase these transaction volumes by 20-30% by 2030.
“Fundamentally, Saavan believes that LNG provides a better return than renewable energy,” said a former Shell executive who worked with Saavan for more than two decades.
The new CEO, who came to the company through his work on the Qatari gas project, came up “through the gas business,” the former executive added. “He’s a true believer in the industry and a true believer in the transaction model.”
Shell’s dominance in LNG is partly due to its $54 billion acquisition of natural gas major BG Group in 2016, a significant producer and trader of LNG that buys from a wide range of suppliers around the world. fuel for resale. In 2015, before the BG deal was completed, Shell sold 44 million tonnes of fuel.
The acquisition also provides Shell with the revenue stream it needs to divest part of its oil portfolio, following the acquisition of a smaller LNG business from Spain’s Repsol two years ago. The divestments include Canadian oil sands operations and Arctic exploration activities – both of which have drawn strong criticism from environmentalists.
Shortly before leaving office, van Beurden told the Financial Times last year that the acquisitions allowed him to pursue an oil sands deal that he said would otherwise be “too good a cash engine to pass up”.
“We can forget about betting on the Arctic because we have a whole new LNG business to work with,” he said.
Today, the British group has stakes in LNG projects from Australia and Nigeria to Trinidad and Tobago, and also trades millions of tonnes a year with other producers. Last year it produced 30 million tonnes and traded 36 million tonnes from other producers.
Shell sees LNG playing a key role in the energy transition. When burned, natural gas produces only half the carbon dioxide of coal with the same energy. On the same basis, it produces 30% less carbon dioxide than oil.
The 20 largest shareholders said the fuel would nonetheless emit carbon, meaning Shell may have to soften existing emissions reduction targets to reflect increased investment in LNG when it updates its energy transition strategy in March.
“I don’t think it’s really possible for them to achieve their current goals and do all the things they say they’re going to do with the capex budget they’re going to spend,” the shareholder said.
Asked whether Shell could continue to increase LNG production and still meet its net zero target, the company said the world would need “more LNG to achieve a balanced energy transition” but that work would be needed to reduce fuel-related emissions, citing, for example, the green synthetic gases being developed.
“Until then, accurately measuring and reporting emissions across the entire LNG value chain and using high-quality carbon credits to offset emissions is an important step in solving the emissions problem,” said Steve Hill, Executive Vice President, Shell Energy.
Michael Coffin, a former BP geologist and now head of oil, gas and mining at think tank Carbon Tracker, believes Shell should ditch fossil fuels altogether.
“The global community needs to accelerate investment in renewable energy to directly replace coal, rather than developing assets that increase society’s dependence on fossil fuels,” he said.
However, instead of abandoning LNG, more companies are trying to follow Shell’s lead.
“There are people following,” Bernstein’s Clint said, noting that Equinor, ExxonMobil and Chevron are signing new LNG offtake deals with producers.
Frank Harris, global head of LNG consulting at Wood Mackenzie, stressed that the size and diversity of Shell’s portfolio meant it maintained a strong position in the market. The company is able to provide customers with fuel from multiple sources – either from contracts with other producers or from its own facilities.
“For some buyers, whether European or Asian, doing a deal with a company like Shell is very attractive,” Harris said. “When it runs a portfolio of this size, it pretty much gives you what you want within reason.”
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