ENERGY WATCH #2 - December 7, 2018
Royal Dutch Shell has kicked off the annual round of announcements that accompany the UN climate conference with possibly the most consequential initiative of all. It has said it will set short-term, binding targets to cut emissions. Not only that, but it will link executive pay to meeting these targets.
One of the biggest producers of fossil fuels has, for the first time, agreed to cut its carbon emissions – by 20% by 2035, rising to around 50% by 2050. And it is doing this in absolute terms, not per unit of production as high emitters so often do.
This is not tree huggery. It is a hard-headed business decision to position the company for the “energy transition”. “This ambition positions the company well for the future and seeks to ensure we thrive as the world works to meet the goals of the Paris Agreement on climate change,” said CEO Ben van Beurden.
The company has now set the bar for the industry.
But will other oil majors follow?
While Shell is ahead of many of its rivals, it will not be the last company to do this. This is part of a bigger trend, although everyone will do things in their own way.
The other European majors seem likely to follow suit, although US companies may react slightly differently – for example, ExxonMobil announced last week that it’s going to use wind and solar power to produce shale gas in the Permian Basin. Most of the oil majors are stepping up their investments in renewable energy and electric transport. Following Shell’s announcement, expect a race to the top.
When your product is oil, your customers’ emissions matter too
The emissions Shell is planning to reduce include those of its customers. This is another huge development – big oil is starting to realise that it has to deal with end-use emissions as well as its own operations. This is the result of the increasing focus on “Scope 3” emissions – those in a company’s value chain rather than from its direct operations – that is embedded in initiatives such as the RE100, Science Based Targets, the Greenhouse Gas Protocol and CDP’s collection of carbon emissions data. For many products and companies, their key impacts lie not in their own facilities and production but in their supply chains (e.g. food producers) or their end users (e.g. oil and gas groups).
Shell needs to consider end user emissions because other companies are looking to reduce their own Scope 3 emissions to meet their own sustainability targets. If Shell wants to keep selling to them, it has to reduce the emissions from its products.
Shareholder activism is working
This move is the result of pressure from investors, which is both increasing and becoming increasingly targeted in its focus. Shell was asked to act by Climate Action 100+, a group of more than 300 investors representing $32 trillion of assets, which targets the 100 biggest global emitters, representing up to two thirds of global emissions (plus another 61 nominated by the investors as either having significant climate risks or a significant opportunity to drive the clean energy transition.) Three quarters of the companies are either fossil fuel providers or their major customers in utilities, transportation and chemicals.
So even if the sectors ignore investors, their customers are likely to ask them to act. Mindy Lubber, CEO of investor group Ceres, said Shell’s announcement was a critically important benchmark against which other oil and gas majors will be assessed. “Climate Action 100+ will now use this commitment to raise the bar for the oil and gas industry as a whole.”
It’s easy to criticise the sector for a combination of dragging its feet and greenwash announcements that amount to little (ExxonMobil’s algae adverts, for example). But this looks like an indicator of a real change in strategy. Last year, Shell made a load of acquisitions in clean energy, and a load of announcements around climate, that were all pretty small-scale compared to its investments in its core business, and non-binding. These targets are not only binding, they are linked to senior executives’ pay.
Against a geopolitical backdrop that looks really quite pessimistic for climate action, given the prominence of Trump, Bolsonaro, Putin, MBS and others, this sends a huge message to climate-sceptic leaders that the business at the heart of it all believes the science, sees the writing on the wall and thinks now is the time to act.
It also suggests that the sector is starting to see a way through the morass of climate action, which until recently must have looked potentially deadly. It sees healthy demand for years to come in chemicals (including plastics), shipping (where diesel or natural gas could be cleaner alternatives to bunker fuel), and aviation.
The renewable age is starting to make commercial sense
The industry may also be ready to embrace carbon capture, particularly if the carbon can be used rather than stored. I recall conferences over a decade ago where the majors said that CCS was all very well, but governments were going to have to pay. With renewables increasingly cost-competitive with fossil fuels for power, industrial operations and transport, that equation may be changing.
Of course, we need to be realistic about how much difference this will make. The same day as Shell’s announcement, Wood Mackenzie published a report saying that even with oil demand peaking some time in the 2030s, fossil fuels will still comprise 77% of global energy demand. The difference, apart from the growth in the amount of renewable electricity, is that a huge amount of coal is replaced by gas. This suits the majors just fine.
And yet, you only have to look at how consistently pessimistic the International Energy Agency’s annual predictions for the solar market have been to know that the market could move far quicker than the sector anticipates, for example if a cleaner alternative to shipping fuel comes on to the market (as I wrote that sentence, news arrived that Maersk plans to go zero emission by 2050).
In that light, Shell’s announcement not only makes perfect senses, but it could be the start of a momentous shift for energy sector.