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Energy majors grab blockchain “multi, multi-billion dollar opportunity”

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Energy majors grab blockchain "multi, multi-billion dollar opportunity"

by Gaurav Sharma

January 23, 2019

Shell CEO, Ben van Beurden announcing stake in Applied Blockchain

Blockchain is being used to optimise performance across all energy sectors where wholesale digitalisation of trading processes, asset management and demand response is now standard. Its adoption by sector operators is clearly visible but will its wide range of possible applications help deliver a leaner industry resulting in reduced costs and a more efficient transition or is everyone jumping on an untested bandwagon for fear of missing out? Gaurav Sharma reports…

Use cases for the deployment of blockchain in the energy sector seem to be growing by the day with practically every segment from natural gas trading to fuel procurement up for grabs. An entire industry, often deemed old fashioned by technologists, now appears smitten by blockchain in its quest for efficiencies in an era of relatively low oil prices and shifting consumer behaviour.

In simple terms, a blockchain is akin to a digitally distributed ledger that can be replicated and spread across many nodes in a peer-to-peer network, thereby minimising the need for oversight and governance of a single ledger. It is the platform underpinning cryptocurrency Bitcoin.

For a sector infamous for copious amounts of paperwork from bills of lading to tender submissions, a tool to securely digitize and save is an enticing one. Energy blockchain streams could be split three-ways: process applications (energy trading, grid management, payments and supply chain solutions), end-user deployment, and component (including service platform) solutions.

While many of the concepts are coming out of North American and Asian markets, unmistakably the UK and Germany are leading the way. London in particular is buzzing, with multiple technology incubation hubs or shared workspaces between Shoreditch and Moorgate – areas conventionally home to start-ups – counting several energy blockchain enthusiasts in their ranks.

It is difficult to pin a figure on the size of the global energy blockchain market. However, a five-year range can be projected in the region of $7 billion to $12 billion by 2024, based on industry forecasts, number of energy blockchain start-ups, implementation projects and confidential conversations. Whether it materializes or not, even a cursory glance at the market would warm up the most sceptical of industry watchers.

Cataloguing movers and shakers

The enthusiasts’ roster includes a veritable who’s-who of the energy business. For instance, London-based trading platform Vakt, created in 2017, includes oil majors BP, Royal Dutch Shell, Equinor, and trading firms Mercuria Energy, Koch and Gunvor. Furthermore, the New Year has started on a positive footing for Vakt having signed on Chevron, Total and Reliance Industries. It is already being used to trade North Sea oil.

To quote Total’s head of trading and shipping Thomas Waymel: “We have felt a need to digitize cargo post-trade processes for some time. We view blockchain as a major step forward towards safer, faster and cheaper logistical operations and are committed to contribute to Vakt’s roll out to various markets.”

Other members of the Vakt consortium include banks ABN Amro, ING and Societe Generale. If you thought streamlining oil trading was the only game in town, think again. Shell made a significant move into blockchain last year premised on “smart-contracts” by bagging a minority stake in Applied Blockchain, another London start-up.

“We did the first product derivative trade on blockchain together with our partner Applied Blockchain.” Ben van Beurden, CEO, Shell

A Shell spokesperson said: “Blockchain applications have huge potential to shake up how we do things in the energy industry from streamlining process, to simplifying how we work with our suppliers and serve our customers. Investing in Applied Blockchain is part of our commitment to use digitalization to create value in our core business and develop new business models.”

Total, Eni, Gazprom, Mercuria, Vattenfall, Petroineos and Freepoint are all part of Canadian group Interbit’s “OneOffice” proposition aimed at facilitating natural gas trading reconciliation through to settlement and delivery of trades using blockchain to bring about “cost savings across the trade life cycle.”

“The energy companies running blockchain pilot projects [are embracing] a fundamental change that is increasingly being demonstrated as viable at a time when concerns about torrents of newly- available data, the mass deployment of sensors, increasing machine-to-machine communication, and rising security threats demand a move from legacy processes and technical debt to a scalable, automatable, and trust-less solution” Interbit, Canada and UK

Elsewhere, ConsenSys and field data management firm Amalto have a blockchain joint venture to develop a platform to facilitate the automation of ticket-based order-to-cash processes in the industry. Abu Dhabi National Oil Company (ADNOC) and IBM have successfully piloted a blockchain-based automated system to integrate oil and gas production across the full value chain.

Completing the spectrum, even sector data and market information aggregator S&P Global Platts is deploying blockchain to “facilitate submissions of weekly oil storage and inventory data”, a move it revealed in the fuel storage hub of Fujairah, United Arab Emirates, last year.

Meanwhile, European utilities including Enel, RWE and Vattenfall are collaborating with Germany’s Ponton on using blockchain to bring peer-to-peer trading to the wholesale energy market via the Enerchain project.

Rival Iberdrola believes blockchain has a vital role to play in “energy resource verification.” In partnership with Kutxabank, the Spanish company is using blockchain technology to “guarantee the energy it supplies to its customers comes from 100% renewable sources.”

A spokesperson said the blockchain pilot will help Iberdrola figure out “which assets will supply energy to a specific point of consumption.”

Demand response and blockchain

Technical University Cluj Napoca investigated the use of decentralised blockchain mechanisms for delivering transparent, secure, reliable, and timely energy flexibility to all the stakeholders involved in the flexibility markets (Distribution System Operators primarily, retailers, aggregators, etc.). They found that “blockchain based distributed demand side management can be used for matching energy demand and production at smart grid level, the demand response signal being followed with high accuracy, while the amount of energy flexibility needed for convergence is reduced”

As the plethora of examples indicates – not a single facet of the energy sphere is considered beyond the scope of emerging blockchain technology. But is it too much, too soon?

A note of caution

While the industry is raving on about the money that is being pumped into blockchain, dialogues on return on investment and security concerns seem to be relatively muted. Much of it narrows down to the fear of losing out, which partially explains incremental sector moves on blockchain since 2015.

Blockchain enthusiasts point to its secure credentials and it helps to get people on the bandwagon. Many say bitcoin’s greatest gift is not the cryptocurrency itself but rather the blockchain technology that underpins it which has become commonplace.

But if bitcoin is blockchain’s poster deployment, then it is a very poor example of implied greater security. Just consider the number of colossal hacks in recent years. Mt Gox, Coincheck, Coinrail and another half dozen examples spring to mind in the last five years alone.

Of course, blockchain’s promising future in the energy industry cannot be negated as a result of events elsewhere but caution is merited, says Deborah Byers, US Industry and Energy Leader at EY. “A secure, distributed digital ledger blockchain might well be, but nothing is 100% hack proof. As a piece of software it always remains susceptible to hacking. That realism should not be discarded.”

Perhaps the reason there hasn’t been a fiasco on the scale of Mt. Gox in the energy sphere is because deployment is in its infancy, and few wish to talk on-record about a possible hack, opting instead to emphasise how blockchain could help eliminate transaction fraud via digital logs, and how energy specific hackathons (events where systems are tested for weaknesses) are becoming commonplace to mitigate risk.

Another issue is while no single party can tamper with a blockchain ledger without the consent of all parties, no one is particularly in charge of keeping it safe either. Yet, the unstoppable energy blockchain train powers on.

If $12 billion really gets pumped into blockchain by energy companies over the next five years, expectations of return on capital should at least be twice that with negligible security breaches to support it. Given that’s a tall order by any benchmark, there will be winners and sinners in equal measure. More to the point, an operational reckoning is on the horizon for better or worse.

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Why OPEC is losing its ability to dictate crude oil prices

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ENERGY WATCH #2 - December 20, 2018

Why OPEC is losing its ability to dictate crude oil prices

by Gaurav Sharma

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With the United States emerging as a ‘buffer’ crude oil producer and consumers marching towards energy efficiency, the cartel is struggling to rediscover its once powerful voice.

Talk of ‘Peak Oil’, or rapid depletion of crude reserves, was all the rage at the turn of the millennium. Oil producers’ underpinning of everything from human mobility to cosmetics, plastics to aviation, put them at the heart of the global economy.

But the theory made two flawed assumptions – first, that emerging technologies could not meaningfully enhance oil production and make hitherto difficult exploration prospects viable, and second, that humankind could not proactively seek alternatives to its crude addiction.

There also existed a feared crude cartel – the Organization of Petroleum Exporting Countries (OPEC) – whose member nations once controlled over 40% of global oil production, and held over 81% of proven global reserves, well capable of spooking the market.

Some in its corridors populated by producers with state-oil giants lapped up the Peak Oil theory, and their own inflated sense of self in a rapidly evolving world to the extent of being blind-sighted by an altering market dynamic. That failing is now being laid bare with the emergence of a major buffer producer, energy efficiencies and the quest for fossil fuel alternatives.

Crude tale of sheikhs versus shale

These days the ‘US Shale Revolution’ is only too visible, but it began in the late 1970s when private American exploration and production independents, set about finding viable methods to tap hydrocarbons trapped in shale rock formations.

Ridicule, failures, hardship and in some cases financial ruin followed, but in the end their ingenuity resulted in the practice of hydraulic fracturing or ‘fracking’, and the concept of horizontal drilling. Process viability and efficiency continued to improve as the industry emerged from a downturn caused by the global financial crisis (2009), all of it under OPEC’s eyes.

As US unconventional output started rising in 2012-13, OPEC first ignored and then dismissed it, before passively acknowledging the “alternative source.” By the summer of 2014, with American oil serving as a drag on three-figure oil prices, the cartel – at the insistence of its heavyweight de facto leader Saudi Arabia – decided to keep its taps open by ramping up production.

The thinking, of then Saudi Oil Minister Ali Al-Naimi, was to have OPEC’s barrels compete with shale barrels and let the market take its course, since US producers were banned from exporting crude oil; a restriction in place since 1975.

But President Barack Obama overturned the ban in 2015, at a time when Washington was importing fewer barrels of OPEC’s oil. By the first quarter of 2016, a full blown oil price slump was in place with the West Texas Intermediate falling below $30 per barrel at one point. Projects were cancelled, investment plummeted, and froth went out of an overheated shale market, yet it wasn’t fatally wounded.

There was hardship around the OPEC table too – especially for the likes of Iran, Venezuela and Nigeria – whose fiscal breakevens demanded $100-plus prices. Something had to give, and the Middle Eastern sheikdoms blinked. Riyadh’s new powerbroker Crown Prince Mohammed Bin Salman packed Al-Naimi off to retirement, replacing him Khalid Al-Falih whose first call at the OPEC table was to ring Moscow.

Dial M for Moscow

By 2016-17, the world’s three largest oil producers were Russia, Saudi Arabia and the US, who were collectively producing more than all OPEC’s 32.5 million barrels per day (bpd), with very divergent political agendas. Al-Falih’s only option was to go beyond OPEC and reach out to the Kremlin, and others.

Al-Naimi described the distrust in vivid detail, labelling cooperation as non-existent or “zero”, even if his successor Al-Falih and Russian counterpart Alexander Novak now appear all smiles on Twitter

Months of wrangling saw 10 non-OPEC producers led by Russia, join hands with OPEC’s then 12, and now 15 members, to announce a production cut of 1.8 million bpd in November 2016. Prices started rising gradually, benefitting among others, none other than the very US shale producers, OPEC was hoping to put out of business.

OPEC also ended up shaking hands with Moscow, striking a partnership with a rival producer, it had historically distrusted. Al-Naimi’s post-retirement autobiography described the distrust in vivid detail, labelling cooperation as non-existent or “zero”, even if his successor Al-Falih and Russian counterpart Alexander Novak now appear all smiles on Twitter.

While compliance with the quota cut averaged above 100% for a time, a very different Twitter account emerged to mess up the works; that of the current White House occupant Donald Trump.

The Donald, discord and Doha

US-Saudi relations mean Washington can always pressure Riyadh over oil. When President George W. Bush saw oil prices as too high in 2007, his preferred mantra was to write letters and call on OPEC to up production via a media sound-bite or two.

But under his watch, the US was the world’s largest importer of crude oil. In 2018, Washington relies less on the global market, and has regained the crown of being the world largest oil producer for the first time since 1973.

In such a setting, whenever the oil price causes even $5 per barrel of political inconvenience, Trump publicly chides OPEC via Twitter, and privately pressurises the Saudis in a way Bush never could.

In the last 12 months Trump has tweeted about OPEC 10 times (and counting) and often when oil ministers’ meetings are in full swing at their Secretariat in Vienna, Austria. While being dismissive in public, the Saudis and their allies do end up accommodating Trump.

In June when the oil price was rising, OPEC said it would put a ‘nominal’ 1 million bpd back into the market. At its recent December summit, while a cut of 1.2 million bpd was announced with Russian-led non-OPEC producers, several producers, including the Russians and Saudis, arrived in Vienna having ramped up their production levels to recent highs, according to data aggregator S&P Global Platts.

Unsurprisingly, as recent oil price declines following the summit suggest, the market is just not convinced. In a matter of days, while promising cuts, the United Arab Emirates announced investment into its oil industry aimed at “boosting production”, while Russia indicated it won’t be able to start the promised cuts (tallying up to 200,000 bpd) before the end of January, and will only get there gradually.

Meanwhile internal discord is boiling up and few at OPEC like the new Saudi-Russian camaraderie. Iran also suspects Riyadh of siding with the US in Trump’s re-imposition of sanctions on Tehran. Timed for maximum impact, Qatar, an OPEC member since 1961, announced it would be quitting the cartel in 2019. Doha’s official line is that it intends to focus on its LNG industry.

Unofficially, a diplomatic boycott instigated against it in 2017 by Saudi Arabia and its allies is thought to be a major contributing factor. Qatar’s decision means it has become the first Middle Eastern nation to quit OPEC. This for an organization that has survived several vitriolic fissures such as the Iran-Iraq war, and Saddam Hussein’s invasion of Kuwait, with all three being OPEC members opting to stay put in their economic interest.

Mediocrity, if not irrelevance, beckons

So low is the market confidence in OPEC that a week before its December 6-7 meeting, the oil price plummeted thrice by over 7% in just 10 sessions.

When the so-called OPEC/non-OPEC cut was unveiled on December 7, the price uptick did not even last into the next week. At the time of writing, oil benchmarks are lurking near 14-month lows.

Traders see OPEC as a house divided and more reliant on non-OPEC producers such as Russia. In volume terms Qatar’s departure matters little. Even including condensates, Doha’s exports touch a mere 1 million bpd, but symbolism matters, as the market looks at internal discord, and strange calls to “institutionalize” its partnership with Russia.

Tectonic plates are shifting with the US tipped to cap 12 million bpd of production in 2019, and over two-thirds of it will come from shale producers. Its light crude exports are incrementally heading to Asia, an OPEC stronghold. The present situation is likely to last for the next 5-7 years, before shale decline rates kick-in. By that time oil demand dynamic might well have materially altered.

Currently, global demand is just shy of 100 million bpd, with growth expectations in 2019 of around 1.2-1.3 million bpd. That’s hardly the stuff of dreams for competing producers. According to the International Energy Agency (IEA), the future of automotive appears increasingly electric, even as internal combustion engines are getting ever more efficient. It means that by 2030, much of oil demand would be predicated on plastics, petrochemicals and aviation.

Demand will still grow, but all players including OPEC members, would be toughing it out in a cramped market. That would make OPEC’s most effective weapon – of upping or cutting production –redundant over the medium term. If it cuts too much, it would risk losing market share and supporting the competition, and if it turns up the volume – a real or perceived glut – would dent all parties.

OPEC still has Saudi Arabia – the world’s only swing producer on its team for comfort – but acknowledges its market share may shrink to 36%, while that of the US will “continue to rise into the late 2020s”. Hence, as the global demand dynamic evolves and supply-side permutations shift, the best OPEC can hope for, short of its dissolution, is mediocrity if not irrelevance.

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CCS – how can we make it happen?

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ENERGY WATCH #3 - December 20, 2018

CCS - how can we make it happen?

by Mike Scott

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CCS plant, Abu Dhabi

Carbon capture, utilisation and storage (CCS) has an important role to play in reducing GHG emissions as long as it is not seen as licence to withdraw from the common goal of pursuing a future based on clean fuel. The International Energy Agency (IEA), considers it essential if we are to limit the worst effects of climate change, and highlights it is a technology that has failed to live up to its potential over the years. The solution is there but how it should financed – and who pays the bill – is not clear but it needs to be rolled out as soon as possible so investors benefit from the cost-learning curve. Otherwise it will just get left behind.

chart: SDS

In May this year, it said that “with only two large-scale carbon capture, utilisation and storage power projects in operation at the end of 2017, with a combined capture capacity of 2.4 million tonnes of CO2 per year, CCUS in power remains well off track to reach the SDS target of 350 million tonnes per year by 2030.

And yet there is a palpable sense of optimism in the sector as 2018 comes to an end. Has the technology’s time finally come?

The Global Carbon Capture and Storage Institute argues that the case for CCS is now “irrefutable” and a vital lifeline to beat climate change, in a new report, The Global Status of CCS, 2018. The world cannot meet its climate targets without CCS, it says. “It has become increasingly clear that the world will need all the technologies, mechanisms and approaches available,” says CEO Brad Page.

He adds that for the first time in many years, the past year has seen significant developments on CCS from a number of governments, including the US, the UK, the Netherlands, Norway and China. Many of them are reviving CCS programmes that were abandoned a number of years ago.

There are currently 18 large-scale CCS facilities operating around the world, with another five under construction and 20 more at various stage of development, he points out.

In 2018, more and more people started to recognise CCS for its cumulative capacity to mitigate climate change, the report says. “In the past year, countries have been incentivising investment, industry has accelerated deployment, new innovations have been unveiled, and new energy economies have emerged. CCS has proven itself as real, happening and here to stay.”

At the same time, the IPCC’s 1.5C report highlights the importance of the technology in helping to meet our climate targets. And that’s all great, up to a point.

But these same arguments were being made over a decade ago and nothing happened because governments and industry couldn’t agree on who should pay for it. Governments cancelled CCS projects because of the cost as the financial crisis started to bite, and the sector entered the doldrums.

There remains a certain amount of ambivalence about CCS, in part because in the past fossil fuel industry analysts have suggested it would obviate the need to roll out renewable energy. CCS technology should not be used to justify less effort elsewhere. It is needed as part of the solution.

Carbon Tracker says that CCS is important, but not a get out of jail free card, not least because to limit temperature rises to 2C, we would have to open one CCS plant every other day, and to get to 1.75C, it would have to be five a week – something that is patently not going to happen in the near term.

DNV GL agrees that “scale projects are needed now if CCS is to stand any chance of benefiting from the cost-learning curve rates enjoyed by other rapidly-advancing elements of the low carbon economy, like renewables and storage.”

But it adds that “our projection is that CCS will capture only 1.5% of emissions in 2050. That is another way of saying that CCS will not advance meaningfully without an extraordinary shift in commercial incentives”.

One of the main reasons for the lack of progress in CCS is that it is more expensive and more difficult than energy efficiency initiatives and renewable generation.

The failure of CCS to advance to date has been enormously frustrating. CCS is the only mitigation technology able to decarbonise large industrial sectors, particularly the steel, cement, fertiliser and petrochemical industries.

The scaling up of CCS needs to happen but progress remains glacial. For things to change meaningfully now requires a significant change in attitude and urgency from both governments and carbon emitters. It’s possible that fossil fuel producers will see a case to act in the existential threat from the rapidly falling costs of renewables and EVs – but most of them seem focused on investing in the latter technologies rather than CCS. Governments may be reviving projects, but they don’t seem much more prepared to incentivise the technology than they were a decade ago.

CCS won’t gain scale until costs come down, and costs won’t come down until more projects are built. But it won’t happen until governments commit to the technology. “Sufficient investment in CCS simply will not happen without strong and sustained government policy,” says the Global CCS Institute.

CCS requires investment in long-lived capital-intensive assets, and that won’t happen unless companies and investors are sufficiently confident in current and future policy to be prepared to commit to investing in the technology.

As the Institute says: “Policy must not only support the business case for investment in CCS, it must win the confidence of investors. Once policy confidence is in place, long-term capital investments can be made and the virtuous cycle of investment and cost reduction will accelerate.”

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Better risk data is catalyst for transition

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ENERGY WATCH #3 - December 13, 2018

Better risk data is catalyst for transition

by Mike Scott

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Investors are becoming increasingly pivotal in the climate change debate as the risk data available improves in quality and quantity. That data points towards growing risks to high-carbon companies they are invested in and therefore to their returns. It provides an important counterpoint to the efforts by some of the world’s largest fossil fuel producers – the US, Russia, Saudi Arabia and Kuwait – to water down climate commitments. The reality is, these companies must either plan in the risk arising from climate policies or see the money go elsewhere.

On many issues, business bends with the political wind because it knows that opinion will swing one way or the other depending on who is in power. On climate change, though, they know it’s happening, and that action is needed. If it doesn’t happen now, it will have to happen later, and it will likely cost more and be more disruptive.

The dangers, increasingly evident in extreme events such as this summer’s global heatwave, including in the Arctic Circle, are backed up by the Intergovernmental Panel on Climate Change’s most recent report, which shows that there are huge benefits, socially and economically, from keeping average temperature rises as low as possible.

That’s why more than 400 global investors with assets under management of $32 trillion – Boston Consulting Group calculated that the global total at the end of 2017 was $79.2 trillion – have called on governments around the world to address the “ambition gap” and step up action to address climate change, in particular by phasing out thermal coal power, putting a meaningful price on carbon and phasing out fossil fuel subsidies.

Investors are starting to take their own action to minimise their risks, in part by divesting from high-carbon companies and investing in lower-carbon alternatives. New York State Comptroller Thomas P. DiNapoli, who runs the $207 billion New York State Common Retirement Fund, says: “Despite the misguided policies of the Trump Administration, global efforts to address the very real threat climate risk presents to the economy, financial markets and investment returns are ongoing. Investors who ignore the changing world do so at their own peril.”

But while the world’s largest emitters are firmly in the spotlight thanks to initiatives such as Climate Action 100+, and are starting to respond (see last week’s story about Shell’s new climate targets), investors have been warned that they may be missing risks in many ‘overlooked’ industries, which are indirectly affected by the transitional risk of climate change, but not being recognised – and that means that companies in these sectors will soon come under increasing pressure to change.

MSCI says these ‘overlooked’ carbon-dependent industries are those which have low direct carbon emissions, but high revenue dependence on companies with carbon intensive operations and/or products. These industries include oil & gas equipment and services, heavy electrical equipment e.g. steam turbine manufacturers, and auto-parts and equipment.

One of the most striking illustrations of this is the recent reversal of fortunes at GE, which has had to write off billions of dollars and has cut thousands of jobs, including that of its CEO, after its bet on fossil fuel power generation – purchasing the power assets of Alstom – went bad as demand for steam turbines plummeted. Its rival Siemens, despite facing many of the same issues, has fared much better because it recognised much earlier that there would be a switch away from fossil fuels.

Remy Briand, head of ESG at MSCI comments: “Companies in these overlooked industries could pose an equally high risk to investors as those from the more traditional high carbon industries. Climate change risk is no longer simply determined by assessing historical carbon footprints.”

However, part of the problem for companies is that the signals from investors are inconsistent, with Influencemap pointing out that the world’s largest asset management groups – with a combined $40 trillion in capital market assets – have actually increased the holdings of thermal coal reserves in their funds by more than 20% (with fund inflows accounted for) since the Paris Agreement. They include investors that have very publicly called on companies to reduce their impacts, such as Blackrock and State Street.

A lot of this is to do with the rise of passive investing, where “universal” investors buy into entire benchmarks, regardless of companies’ carbon commitments. But Influencemap found that even some funds marketed as low-carbon have significant amounts of fossil fuel assets in them.

“Both index providers such as MSCI and S&P and the asset managers that use them to market climate themed funds are likely to be more carefully scrutinized on these funds and fossil fuel reserves contained within them in light of the IPCC’s latest statements on thermal coal,” the research group says.

Michael Liebreich, founder of Bloomberg New Energy Finance, says that what’s going on in Katowice is just a sideshow. “Climate economics precede climate diplomacy, not the other way around, and the economics keep looking better and better…shareholders and lenders are becoming increasingly uncomfortable with high-carbon business models,”

The signals from investors may be unclear for the moment, but with improved data bringing greater clarity on who is investing in fossil fuels and what the risks are, energy companies will face tough questions from their shareholders about how they are tackling climate change.

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Shell links executive pay to emissions goals – now follow that!

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ENERGY WATCH #2 - December 7, 2018

Shell links executive pay to emissions goals - now follow that!

by Mike Scott

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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.

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Oil majors gently embrace clean energy

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ENERGY WATCH #2 - November 29, 2018

Oil majors gently embrace clean energy

by Mike Scott

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Shell New Energy Challenge finalists get their cheques

For many years, oil and gas companies downplayed or outright denied the dangers of climate change and worked on the assumption that they would be able to continue with business as usual for the foreseeable future.

Going into this year’s COP24 climate conference, they have changed their tune.

This year has seen a slew of investments by the oil majors into renewable energy and electric vehicle infrastructure – Shell has announced it plans to invest $1bn-$2bn a year in its New Energies division in areas including wind and solar power, charging points for electric vehicles and biofuels, while BP has returned to solar with the purchase of Lightsource Energy.

Total, ExxonMobil and Chevron, along with Repsol, Enel and Eni, have all made significant investments in clean energy, charging points or energy storage, and even the US oil majors, in a market where the President openly doubts the existence of climate change, have started making changes.

In September, Occidental, Chevron and ExxonMobil, long the most outspoken climate-sceptic company in the sector, announced they would join the Oil and Gas Climate Initiative (OGCI), a group of global oil and gas groups that has committed to invest $1 billion initiatives.

Why change

There are a number of reasons for the change in heart. Firstly, since 195 countries signed up to the Paris Agreement on climate change in 2015, it has simply not been credible to deny or downplay the existence of man-made climate change, while a host of natural disasters around the world – from multi-year droughts to more intense hurricanes and heatwaves in the Arctic – have reinforced anecdotally the increasingly certain science behind climate change warnings.

Another impact of Paris was that governments – currently with the notable exception of the US, where Donald Trump has pledged to withdraw the country from the agreement (something he cannot do until 2020, after the next presidential election) – agreed to put in place policies to decarbonise their economies.

This has led to moves such as the UK, Canada, Denmark and Spain, as well as the European Union, considering the introduction of a net-zero emissions target by 2050, Germany committing to phase out coal power and China meeting its target to cut its energy intensity by 45% in 2017, three years ahead of schedule.

One reason governments are making these pledges is that they have become increasingly possible because the cost of renewable energy has fallen so quickly. The latest report on the levelized cost of energy from Bloomberg New Energy Finance says that “solar and/or wind are now the cheapest new source of generation in all major economies, except Japan. This includes China and India, where not long ago coal was king. In India, best-in-class solar and wind plants are now half the cost of new coal plants.”

In India, best-in-class solar and wind plants are now half the cost of new coal plants

In markets as far apart, in every sense, as India and Texas, onshore wind is now as cheap as $27/MWh, without subsidy. “In most locations in the US today, wind outcompetes combined-cycle gas plants (CCGT) supplied by cheap shale gas as a source of new bulk generation,” BNEF adds, cutting off one way that the energy giants hoped to compensate for lower oil sales.

Corporate responsibility

This fall in costs has led to another development – through initiatives such as RE100 and the Science Based Targets, companies are driving demand for more renewable energy so they can meet their own climate targets and show customers that they are acting. In markets where corporate procurement of clean energy is difficult or impossible, such as China and Japan, the business community is forcefully lobbying governments to reform markets.

Meanwhile, the rapid development of the battery storage sector is further undermining the business case for using fossil fuels in power generation and also making rapid progress in making electric vehicles (EVs) more economical.

Pollution concerns

If the move towards EVs were based on cost competitiveness alone, the sector could afford to be reasonably complacent about the trajectory of the transition away from petrol and diesel. But much of the pressure is not climate-related at all – rather cities around the world have proposed banning fossil fuelled cars in response to growing levels of air pollution caused in large part by vehicles.

The industry increasingly recognises that this will hit demand – Shell predicts that demand for oil will start falling as early as 2025, with demand for gas following suit by 2030.

Finally, there is increasing pressure on the oil companies as a result of a number of legal challenges. New York recently sued Chevron, BP, ConocoPhillips, ExxonMobil and Shell, and while that suit was dismissed, a group of Oregon crab fishermen have followed suit while a number of states have launched fraud investigations against ExxonMobil saying that it misled citizens and investors over the impacts of climate change. Other cases are likely in future.

Conditions set

All of this is making it clear that some oil and gas investments could be stranded assets as climate regulations tighten further, the cost of renewables and storage continue to fall and governments increase their decarbonisation ambitions.

So, there are plenty of incentives for oil companies to change their business models, and they have started to do so. Shell may be investing up to $2bn a year in clean energy, but that is only a fraction of its total spending. It aims to spend $25bn-$30bn a year in total. All the majors could do far more given the stakes and the conditions.

The future of power, transportation and heating will be increasingly electric. The oil majors dominated energy in the 20th century, but it is far from guaranteed that they will do so in future with such a long way to go.

Mike Scott is a freelance journalist who has written for the Financial Times, Forbes, Bloomberg and a range of other titles. He specialises in writing about energy, investment and business.

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