Analysis: The oil emperors’ new clothes?

Shell has effectively built a case for being the world’s leading oil and gas firm in terms of climate and it is, far from being part of the problem, part of the solution. But does the emperor have no clothes?

It was the only oil major that spoke and engaged with stakeholders at a conference organised recently in London by green shareholder group Follow This.  

According to Tjerk Huysinga, Executive Vice-president Investor Relations, the debate needs to move from the supply side to the demand side. 

“Just stopping production of oil and gas tomorrow, Shell is not going to change anything, and I know that sounds defensive: it’s not the idea. We produce 3% of the world’s energy, we want to work with investors, customers and governments to change [demand] patterns, and then things can change quickly.”

Huysinga explained that Shell’s response to support the Paris Agreement is based on four levers: reducing overall demand, improving energy efficiency, minimising carbon intensity of its products (i.e. Scope 3 emissions) and exploring negative emissions (e.g. carbon capture and storage, CCS, and nature-based solutions, NBS, for offsetting such as reforestation).

That’s the core of Shell’s Net Carbon Footprint ambition launched in December 2017: halve emissions intensity of its products by 2050. The NCF ambition already cautioned that its success is contingent on society making progress to meet the Paris Agreement.  

Huysinga’s comments mirror the NCF ambition, which states: “If society changes its energy demands more quickly, we intend to aid that acceleration. If it changes more slowly, we will not be able to move as quickly as we would like.” 

One of the panels at the conference discussed precisely whether Shell’s NCF ambition is good enough to meet Paris goals. But the discussion was preceded by a key nuance: is carbon intensity an adequate metric to measure Paris alignment?

In this context, carbon intensity targets are those that measure emissions reduction in relative terms per unit of energy produced – or per unit of GDP in the case of countries. So if energy production or GDP increases, so do emissions. That’s in contrast to a reduction in total or absolute emissions.

Both Huysinga and Follow This founder Mark van Baal showed support for carbon intensity targets. Andrew Grant, Senior Analyst at Carbon Tracker, brought a dissenting voice to the discussion.

Grant said that in order to comply with Paris there needs to be some sort of absolute basis. 

“To be successful with Paris, we need to reduce emissions in absolute terms. That’s not to say that an intensity target can’t lead you in the right direction. There needs to have that absolute basis that underpins it, before you can say ‘that’s Paris aligned’.” 

Grant offered an example: an oil and gas company can acquire renewable operations which would lower its overall carbon intensity, while at the same time maintaining or increasing fossil fuel production – and with it absolute emissions. 

This was explained in Carbon Tracker’s recent report (Balancing the Budget. Why deflating the carbon Bubble requires oil and gas companies to shrink), which Grant co-authored. 

He said: “If you really want to claim to be Paris aligned, it comes down to sanctioning only those projects that fit with a Paris aligned [carbon] budget.”

The report stated that, otherwise, oil and gas companies will have to return “capital to investors or redeploy it to other sectors” although for most of them “this will mean getting smaller in terms of what is currently the core business”.

The Carbon Tracker report found that all of the oil firms will have to reduce oil and gas production by 2040, although Shell and BP are impacted the least (by 10% and 25% respectively).

Van Baal agreed with Huysinga regarding the convenience of carbon intensity targets, adding however that “every intensity target should be immediately translated into an absolute target”.

Based on that conversion to absolute terms, van Baal challenged the alignment of Shell’s NCF ambition with Paris – arguing that a 50% intensity reduction in relative terms, translated into 30% in absolute terms.

Van Baal said: “Shell’s promises are industry leading, more than any other oil major, but it is unfortunately not enough. A reduction of 30% in absolute terms, is far beyond the 70% reduction we need, that's the key metric there.”

Huysinga explained that according to the NCF ambition, Shell’s emissions intensity is measured as 79 grams of CO2 equivalent per megajoule consumed (CO2e/MJ), which is slightly higher than the global energy system's 75 CO2e/MJ. 

Halving those to 40 CO2e/MJ is the “Paris compliance angle we have set,” he said. 

Huysinga added: “You’ve all heard that about ‘you need to have your reduction of CO2 at 60 or 70%’. The difference is the reduction in demand, the efficiency, the CCS and the NBS, and the things we need to do differently. We will look at this on a continuous basis. It is not cast in stone. It is an ambition and as the world moves on, we will move on, we already are faster than people in some cases were expecting.”

Van Baal asked whether this meant Shell was telling investors that you want to make profits in a 4-degrees world, regardless of the ambition for Paris.

“I think that’s the problem we all have, that’s the elephant in the room, it’s not only Shell’s problem but a worldwide problem,” Huysinga said. 

Van Baal also took issue with Shell’s Sky Scenario (a projected pathway for society to achieve Paris goals). He labelled it a “very risky scenario” according to which carbon capture needs to happen on a massive scale between 2070 and 2100 to keep the world under 2 degrees: “The world needs to remove 10 gigatons of CO2 per year, that's three times what the EU is emitting today. So that's what you have to do year after year to compensate for the overshoot that we are causing today.”

Carbon Tracker’s Grant highlighted two things. First, the overall challenge of decarbonising the planet. Second, what does it mean for an individual company which is part of the bigger picture? 

At the company level, Grant said, more than picking a particular scenario for the future and then trying to match it, “it is really about doing something reasonable and sensible”.

He added: “Mark made the point that Shell's Sky Scenario is reliant on a lot of negative emissions later on in the future. But you can as a company make the argument that is better to be conservative, assuming that there isn't a huge development in things like CCS and so on; and then be pleasantly surprised if that's happened.”

The panel discussion also touched upon Sarasin’s letter to the board of Shell this summer. The letter explained Sarasin’s partial divestment based on its concerns about meeting Paris if Shell continues to raise oil and gas production to the tune of 90% of the capital expenditure budget over the next five years. [5]  

Huysinga said that Shell wants to grow and reminded the audience that it is one of the biggest dividend payers in the world.  

He said: “Yes, we will keep investing in areas like oil and gas, but also into new energies, which can change in quite short periods but in all of our investment decisions we take CO2 price into account.”

In a final plea, Van Baal told Huysinga that Shell is being too modest. “You can influence governments and get policies in place. You can influence customers. You are good at [managing] multi-billion projects. Apparently, we shareholders, have more trust in you than you have in yourselves. You can and need to do this.”

Huysinga reiterated the point that this is not just a supply, but a demand problem: “We are talking to customers, we are changing customer behaviour. You as investors need to move into discussing with quite a lot of the other oil and gas companies, also those that are not quoted. And also into other sectors. This is not just an oil and gas problem.”