Your oil major needs you

James Murray
clock • 24 min read

Shell's Ben van Beurden recently declared the pursuit of a net zero economy was 'the only way to go', but how can the fossil fuel industry overcome the barriers that block the path to deep decarbonisation?

It was F Scott Fitzgerald who said the "test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function". The line has become famous, but it is not the most scientific of tests if you think about. After all, cognitive dissonance when faced with complex challenges is pretty universal trait. Perhaps Fitzgerald was trying to make the confused and indecisive among us feel good about ourselves.

That said, broadly agreeing with two opposed ideas is a pretty good test of a debate's complexity. As a good rule of thumb you know an issue is complicated when you find yourself agreeing with one side of a debate, only to then nod along as the other side make their case. It is a fair indication you are dealing with a debate at risk of deadlock, an intractable issue where progress has been hampered by the difficulty of hammering out a working consensus.

That was the abiding impression created by this month's Shell Energy Summit in Weybridge, where the oil giant's CEO Ben van Beurden set out a compelling vision for the net zero transition, offering a clear-eyed assessment of the challenges of engineering a quick fire industrial revolution. He was then followed by a similarly compelling critique of how the fossil fuel industry has so much more to do to ensure the necessary transition accelerates at sufficient pace.

The conference also provided confirmation that something significant, complicated, and not a little controversial is happening at one of the world's biggest oil majors. Van Beurden's keynote speech and subsequent question and answer session with Environmental Defense Fund (EDF) CEO Fred Krupp provided arguably the clearest evidence yet Shell is serious about the pursuit of a net zero emission economy.

Van Beurden repeatedly stressed that despite the many challenges it presented, the pursuit of net zero emissions was essentially non-negotiable. "It is a challenge that is… entirely consistent with the Paris Agreement goal of restricting the temperature rise to less than two degrees, and I think significantly less," he said. "Lowering emissions to the point that the world is no longer adding to the stock of greenhouse gases and the atmosphere is the only way to go."

Challenged by Krupp to support mid-century net zero targets for all industrialised economies - a live issue given the new European Commission President's plans for just such a target - Van Beurden said that if the "EU would support net zero by 2050 we would be wholeheartedly, vocally supporting it". Asked by BusinessGreen if the fact the world is nowhere near on track to deliver emissions cuts in line with the Paris Agreement should give investors pause for thought, the Shell boss stressed the Paris goals simply had to be delivered. "We can't deliver a world of 3C," he said. "As a matter of fact, I'm not quite a techno optimist, I'm more of a socio-realist. I do think the world would not go for it, would not stand for it… We may not be on track to get there at this point in time. But I do believe, whether it is through activism or through general mobilization of voters or society, the world will insist that governments and companies will take action to get us below 2C, and significantly below it."

The speech follows a hugely eventful 18 months for Shell during which it has snapped up a host of clean tech companies, set time-bound emissions goals, linked executive rewards to those targets, quit a lobbying group over its opposition to climate policies, earmarked $300m for a new ecosystem projects programme, and steadily strengthened its backing for the Paris Agreement, including through support for ambitious new methane standards.

Speaking to BusinessGreen later in the day, UK country chair Sinead Lynch explained that there had been a shift in thinking that dated back to the 2017 pledge to halve the carbon footprint of Shell products. "As soon as you say, you're going to reduce the carbon footprint of your products by half by mid-century, and you're going to move in line with society - so if they move faster, we'll move faster, and vice versa - then I think you do fundamentally change the way you look at the energy transition and what our strategy has to be," she said.

Great news, right? Well, yes and no. Because there is always that other side to the debate - one that refuses to blink in the face of still rising global emissions. The accusation put to Shell and its peers is that it is not changing anywhere near fast enough. It is a charge that has been levelled in the past month alone by speakers at Shell's own conference, by the Extinction Rebellion protestors who confronted Van Beurden at a European conference a few days later, and by UK asset manager Sarasin & Partners as it reportedly sold more than 20 per cent of its shares in the company and put the rest of the stake under review citing concerns over its performance against the goals of the Paris Agreement.

There is an uncompromising logic to much of this criticism. Just hours before Van Beurden took the stage in Weybridge a new paper was published in Nature warning the world has 420-580Gt of CO2 emissions left if it is to have a 50 per cent to 66 per cent chance of limiting warming to 1.5C. In contrast, operating existing infrastructure to the end of its lifetime would result in 658Gt CO2 of future emissions. Projects that are planned, permitted or under construction promise a further 188Gt of CO2 emissions.

As environmental author and activist Mark Lynas observed, that means meeting the 1.5C goal requires the cancellation of every planned fossil fuel project in the world, as well as the early closure of a significant number of existing infrastructure assets. Faced with such a daunting challenge the world could revert to the Paris Agreement's more capacious 2C temperature goal and accept the increased climate risks, the dead coral reefs, and the resulting economic impacts that come with it. But the less ambitious temperature target only increases the available carbon budget to 1170-1500Gt CO2. As such, meeting the 2C goal would still require global emissions to fall five per cent every year from now - instead they rose last year.

Back at Shell's conference, Kevin Anderson, professor of energy and climate change at the University of Manchester, gave much the same calculations a slightly different spin. "Since 1990 and the first IPCC report, emissions are now 67 per cent higher," he said. "They went up last year by 1.6 per cent, they are probably going to go up by the same amount this year." At that rate the world has just 18 years left before it blows the 1.5C budget.

He characterised continued emissions growth aa a "choice to fail" that was already condemning poorer communities around the world to disastrous climate impacts. Such impacts are "an indirect repercussion of our choice to explicitly fail for 30 years on climate change", he said, adding that the pace of emission reduction now proposed by Van Beurden represented an "ongoing failure for another 20 or 30 years".

Lamenting the "dissonance in the room" that came with Shell's emissions projections, climate and energy analyst Mike Berners-Lee accused the company of some "glossing over [of] the need to leave the fuel in the ground". "We can have all the renewables we like, but if we don't leave the fuel in the ground it won't help us," he said, before offering a particularly sobering perspective. "When we look at the global carbon curve, there is not that faintest jot of evidence that humans have noticed climate change yet," he argued. "It is going up exactly - and I choose my words carefully - exactly as if humans had not noticed climate change was an issue." 

The EDF's Krupp was more broadly supportive of Shell's strategy, praising its support for the Paris Agreement and its lobbying for carbon pricing and methane emission reduction policies. But writing on Twitter following his appearance alongside Van Beurden he was similarly unequivocal in his call for the company to urgently accelerate its still relatively nascent clean energy plans. Describing oil major's balance sheets as a "critical tool" in the clean energy transition he warned "no O&G company, including Shell, is now making strategic capital investments at anything close to the scale we need". "That has to change," he added. "Shell's commitment to the energy transition needs to be visible on your balance sheet. Companies must walk the talk: Capex strategies across the industry must change. As the world moves away from coal, we cannot afford to lock in a permanent dependency on nat gas."

So the message is clear: Shell may have taken some welcome steps towards a net zero future, but it needs to move much further, much faster, and with far greater urgency if it is to play a full and productive role in a successful clean energy transition. And it should start by drastically ramping up clean energy investment, lobbying even more intensively for bolder climate policies, and explicitly acknowledging the need to keep "unburnable carbon" in the ground. Simple, right?

Well, again the answer is 'yes and no'. Many Shell executives would agree in principle with the calls for a more rapid emission reduction trajectory. Van Beurden himself declared that he wanted to step up investment in clean energy. "It is absolutely true that if you want to be a company that is relevant in the long run through the rest of this decade, we have to have an energy mix in the products that we sell, that reflects society on its way to meeting Paris - there is no doubt about it," he argued. "That means we need to invest more in low carbon energy, whether it is biofuels, renewable power, also hydrogen… I'm not contesting that."

But as Van Beurden explained there are complex reasons why ditching fossil fuel assets and chucking more money at clean energy projects is not as simple as it might look.

For example, pushed repeatedly by host Allegra Stratton as to why a company committed to the Paris Agreement would be investing just $3bn a year in renewables compared to $25bn in predominantly oil and gas assets across the rest of the business, Van Beurden explained there were significant financial and market barriers standing in the way of a faster transition, even as he conceded the need to move faster and invest more.

"Investing $1-2bn or $2-3bn a year, ultimately, will not be enough to get us where we need to be," he accepted. "Having said that there's a lot of people out there who say, 'yeah, sure, do more, because you need to do more', but there is probably a larger amount of people - they are quite often called our shareholders - who say, 'don't do anything at all, because we don't trust you to get it right'. We have to therefore meet that balance and we have to prove that if we are going to be a large player in electricity, which a lot of people think is a major step up for a company like us, that we can do that in a way that adds shareholder value. That we are not going to lose our shirt on it."

Van Beurden insisted he did not want to "hide behind shareholders", but it is clear that while some investors are publicly calling on fossil fuel companies to deliver more ambitious climate strategies - something the Shell boss said he welcomed - there are still plenty of investors behind the scenes counselling a more cautious approach. As such, for Van Beurden there is a significant risk attached to investing too much, too early in clean energy infrastructure. "My biggest concern about our investment level, is that we get ahead of ourselves, and at some point in time, we have to say, 'whoops, we have to write off a few billion dollars, because we got a few things wrong'," he said. "And then a very significant set of stakeholders in our company will say, 'well, that's enough. You guys stick to your knitting and do oil and gas because you can do that'."

The challenge from Stratton and others was why not take that risk? Why not respond more aggressively to the epic climate-related risks of transitioning too slowly? Well, the fear at Shell appears to be that if shareholders can't be convinced of the financial viability of the transition they will simply find a management team that is happy to revert back fully to a fossil fuel only approach, dealing a further blow to wider efforts to switch away from high carbon infrastructure.

"In the end, what we have to do is to tell people, there is value in this, the energy transition is a huge value opportunities, a huge investment opportunity," Van Beurden said. "And as a matter of fact, we do believe we have very relevant competencies that will allow us to be winners in that new energy world as well. So trust us a little bit to show and to demonstrate that we can make good business out of the energy transition, that we can be a major player when it comes to power, but also biofuels."

If that is the case, Stratton asked, what would happen if Shell suddenly said it was going to invest not $3bn, but $10bn in alternative forms of clean energy? Would society and shareholders really not welcome such a move? "I wouldn't have to worry about my job anymore," joked Van Beurden, although he wasn't really joking. "I think in the end, this whole energy transition is only going to happen, of course if we have fantastic collaboration between all segments of society, but also if there are real business models behind it driving this investment," he continued. "We will have to invest trillions of dollars in this energy transition, that's only going to come forward if there is actually a profit model accompanying it. So we will have to find out how to do that investing."

Renewables investors would no doubt counter that there are already attractive returns on offer across the clean energy industry. But Van Beurden argued the pay back is not typically at the level oil industry shareholders have, rightly or wrongly, grown used to. Moreover, the renewables sector will face new and complex technical challenges as it scales up. "[Investing] into more renewables in countries like the UK or in the Netherlands or where there is an open market at this point in time still comes with a lot of challenges, [because] nobody knows what is going to happen to the wholesale price," Van Beurden argued. "As a matter of fact, the more renewables you stick into the system, the lower the prices. So at some point in time, regulators, governments will have to do something about it to make the missing money come forward. And of course, we can say, 'we are going to wait for that and when everything is fine we will step in', or we can play a role and try to make it happen, work with government, point out what is going to be needed in reconfiguring the market to make these investments a viable proposition. And then we can actually invest our way into this. But just taking a big bump and a big risk, put the money in there and see what happens is just not an option for business."

How quickly will clean energy become a more viable proposition? Given Shell's recognition deep emissions cuts are non-negotiable, how quickly can it step up its renewables investments? Asked by Stratton how much the company was likely to be investing in renewables by 2025, Van Beurden suggested a lot depended on those crucial market dynamics. 

"We need to step up [investment], ideally before 2025," he explained. "We expect to have a business model that can create an eight to 12 per cent return in the power [sector]. And we have to show the pathway to getting there. At the moment there are not too many companies in that sector that make that kind of return and that's why it sounds a little bit too ambitious. But I think if you can get there before 2025 we will be stepping up investment." He added that while there are not many companies in the sector investing more than Shell's $3bn a year, he could envisage the firm investing "north of $5bn in the renewable space" by 2025.

It is a sum that is unlikely to impress those who insist capital-rich energy companies such as Shell should, in Krupp's words, "put the pedal to the floor" in pursuit of a faster net zero transition. But Van Beurden was adamant that as long as the current market frameworks remain in place and carbon prices remain relatively low the risk of a shareholder backlash that could derail the entire enterprise is too credible to ignore.

And if the commercial dynamics for renewables are challenging, they are genuinely appalling for similarly essential carbon capture and storage (CCS) projects. Van Beurden said Shell had "lower bars" for investing in emerging clean technology projects, such as CCS deployments, and is already involved in a number of initiatives around the world. But the fact remains that an industry that has proven carbon capture technology works is still stuck at an embryonic stage in its development.

"The technology is there," Van Beurden insisted. "A lot of people would say, 'well it hasn't been proven'. But of course it has; there are a number of very large scale storage projects, here in Europe, in Canada, in Australia, they are working. The technology is not the issue, it is the commerciality that needs to work, to bring costs down, etc. All of these things need to happen like they also needed to happen for solar. But in the end, [the question] is how to make this a commercial value proposition when there is no business model at this point in time to support it?"

He added that "putting a price on carbon will significantly help and having regulation will significantly help", while direct government support is also going to be needed. But ultimately something needs to change, and fast, because the world "will need to have 10s of thousands of carbon capture and storage projects, and the world today has a few 10s".

Taken in conjunction with the unyielding logic of the global carbon budget outlined by Berners-Lee and others, the various structural barriers to clean energy investment can present a dispiriting picture that begs a simple question: what, then, can be done? How can the world break a deadlock that means that even when one of the planet's most powerful companies publicly says it wants to move faster in pursuit of a net zero transition it feels its hands are tied by commercial realities and market demands?

One theory put forward by some of the fossil fuel industry's many critics is that oil majors should shift into 'wind down' mode, drastically scale back exploration, focus on maximising returns from existing assets, and return capital to shareholders. Van Beurden did not allude to the proposal directly, but he did defend the right of the oil industry to continue to exist, even in a decarbonising world. "I like to correct the perception that somehow investing in oil and gas is evil, because it isn't," he said. "We are going to need oil and gas for a long time to come. Even if we meet the Paris Agreement and get to 1.5C, which I sincerely hope we will - there will still be oil and gas... So you could have a perfectly legitimate business just investing in oil and gas and doing it in a way that is compatible with Paris: so make sure that it is low carbon intensity, that you do not deploy resources that strictly speaking the world doesn't need." But he also ruled out such an approach for Shell, reiterating his view that the firm has the competencies to reinvent itself as "a broad spectrum energy company".

A still more drastic proposition put forward by the likes of Extinction Rebellion is to target a net zero transition so rapid that fossil fuel companies are simply required to shut up shop, to stop exploiting resources that they regard as "unburnable". But the problem here is that unless such changes are made at a global level and enforced by governments around the world, the shuttering of a single company or even a single country's oil industry would have negligible impact. As Lynch told BusinessGreen, "you've got to go hand in glove, you've got to go in step together with supply and demand". "We could walk away from fossil fuels tomorrow, it wouldn't make the blindest difference to anything," she observed. "Our retail sites would be taken over by somebody else. Somebody else would pick up our fields."

Instead, the answer for Shell lies in a theme Van Beurden has returned to repeatedly since the company beefed up its decarbonisation targets: the need to tackle emission from both the supply and demand for oil and gas, and to do so through changes in both consumer behaviour and the market frameworks and regulatory structures that continue to drive the high carbon economy. Speaking at this month's conference, he announced plans to try and practically deliver on this vision by reaching out to Shell's customers and partners to try and engineer a wider step change in the pace of decarbonisation.

"Shell wants to establish a coalition of businesses which work together within sectors to enable the decarbonisation of those sectors," he explained. "Shell is already working together with many businesses, of course, but I'm talking about an entirely different level of ambition, a form of action that all business sectors can take… I believe it is by cooperating through transformative collaboration, by bringing together the supply side with the demand side that we can help to bring the low carbon advances that the world needs as quickly and as cheaply as possible."

Van Beurden framed this new initiative as an attempt to replicate the national climate action plans delivered through the Paris Agreement - known as Nationally Determined Contributions in the UN jargon - with a "coalition of Industry Determined Contributions". The hope is that the new groupings can initially focus on hard to decarbonise sectors, such as aviation, shipping, haulage, and heavy industry where it remains unclear how net zero emission compatible technologies and infrastructure can be deployed at pace and scale. Significantly, Van Beurden said the goal had to be to end up with specific and detailed policy and technology measures that can deliver real change. Everyone can agree that stronger carbon pricing signals would be helpful, but the aim is to propose detailed and workable frameworks for governments and regulators that can significantly scale up the clean energy transition.

Van Beurden's speech ended with an open invitation for other industries to work with the company to help bring the goals of the Paris Agreement into reach. In short, your oil major needs you.

Inevitably, Shell's plea to work with others to deliver the structural changes required to enable low carbon investment will spark plenty of criticism from its opponents, who will characterise it as 'greenwash' from a company that continues to invest in fossil fuel exploration. Calls will continue for the company to do more internally to accelerate its own transformation and shift more investment towards clean energy sources. Critics will continue to question whether the oil industry's considerable lobbying muscle is really being deployed as forcefully as it might be in support of Paris Agreement compatible policies.

But at the same time, Van Beurden's diagnosis of the market dynamics that continue to undermine clean energy investment is similar in many respects to that offered by plenty of green business leaders and environmental campaigners. Given the broad agreement on the need for structural reform across the energy sector, can two seemingly intractable sides of the net zero debate be reconciled? Can the emission curve be bent downwards and the pace of decarbonisation rapidly accelerated? Can the circle be squared?

A few weeks ago Bloomberg's David Fickling published two fascinating Twitter threads suggesting that the answers to these questions might be closer than we think. The first suggested that if you look closely at the International Energy Agency's figures you find that "Fossil-fuel investments are running at terminal-decline levels" and if a carbon intensive infrastructure boom does not start soon the world will have quietly shifted onto a surprisingly steep decarbonisation curve. The second thread looked at Shell specifically, and argued the company's reserve replacement ratio is one of the lowest in the industry. Instead of panicking and talking up its exploration activity, as investors might expect, management is "emphasising their great cash generation, returns to shareholders, positive free cash flow, and role in the energy transition", he observed.

There was a moment during Van Beurden's debate with Krupp when the head of the Environmental Defense Fund called on the Shell boss to not just support a net zero emission target, but pull all capital expenditure into line with such a goal. Van Beurden did not immediately respond to the challenge, but as it was issued he pulled a face, halfway between a grimace and a smile, as if to say "I'm not so sure that's fair". Was he thinking that the company's investment strategy is already closer to a net zero trajectory than people give it credit for?

Later in the day BusinessGreen asked Lynch if there was merit in Fickling's analysis, if there is more flexibility in the oil industry's ability to respond to an accelerating net zero transition than most people think? She insisted a large number of factors were informing exploration strategies, but they certainly included a range of future carbon price and demand scenarios. "Ben used a good example once," she recalled. "It was along the lines of, we have a balance sheet which has around $250bn to $300bn of assets on it. We spend $25bn a year. In 10 years of capital activity you have effectively rebuilt your balance sheet. Oil and gas fields decline quite quickly. So we don't make decisions lightly, we don't look at investing in a large oil field now without looking at what the resilience of that would be to a range of carbon prices and a range of demand."

It is a fascinating analysis, even if it fails to fully counter the accusation from climate hawks that it has come too late, that the vanishing carbon budget and the need to keep fossil fuel in the ground means a greater sense of urgency is required.  

Inevitably, only time will tell if the debate surrounding the pace of the net zero transition can be resolved fast enough to minimise the global climate crisis. Shell will continue to argue that if industries, policymakers, and the public work together to curb fossil fuel demand as swiftly as possible, it stands ready to help drive an ever faster low carbon transition - to "power progress together" as the strap line goes. It will be fascinating to see if Van Beurden's mooted Industry Determined Contributions deliver on their promise in the coming years. 

At the same time, Shell's critics - including several of the speakers at its own conference - will counter that until the company drastically ups the scale of its own clean energy investments it will continue to face accusations of 'greenwash'. All the while, some others in the oil industry will continue to question whether a deep and rapid decarbonisation trajectory is required at all.

Only one thing is certain: if the goals of the Paris Agreement are to be met and the daunting barriers to investment that continue to hamper the net zero transition are to be torn down, then every sector will have to play its part. We are going to need all the first rate intelligence we can muster from every available industry and all corners of the economy.

The BusinessGreen Powering Progress Together Hub is supported by Shell. All the hub's content is editorially independent, unless stated otherwise.

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