At Shell’s first capital markets day under new chief executive Wael Sawan this summer, the UK energy group drew the ire of environmentalists for its plans to hold oil output steady rather than allowing it to decline.
But the meeting also underlined the company’s greater dependence on another carbon-emitting fuel, liquefied natural gas, with executives telling investors that boosting output from LNG assets was a “top priority” and outlining plans to invest $4bn a year in LNG projects until 2025.
Gas has become Shell’s biggest money-spinner. Its integrated gas division, which is dominated by LNG activities, was the largest contributor to group profits in four of the past five years and accounted for just over half the company’s $14.7bn in earnings in the first half of 2023.
The question is whether the fuel remains the right focus for a company that Sawan insists is sticking to a strategy launched by his predecessor Ben van Beurden to achieve net zero emissions by 2050 through a ramp-up in clean energy investment.
“They are moving further and further away from me being comfortable that they have a genuinely compelling view for what this business should look like in 25 years’ time,” said one top 20 shareholder.
Increasing LNG volumes was a “pragmatic” strategy for the current environment, the shareholder said, noting that demand for natural gas in a decarbonising world was likely to outlast demand for other fossil fuels, particularly as Europe weans itself off Russian gas and Asia seeks alternatives to coal.
But in the longer term, prioritising LNG over clean energy could be a risk, the shareholder added. “We would like Shell to be doing a lot more around developing and articulating and then committing to a genuinely compelling energy transition strategy.”
Other shareholders, particularly those based in the US, are more positive about Shell’s commitment to its most lucrative business, according to Oswald Clint, an analyst at Bernstein.
“Investors can see that the demand is there, it is most likely multi-decade, and if you’re the biggest player in the market, you own the space, why not add to it,” he said.
Shell’s focus on LNG dates back to the very start of the industry. The company shipped the first ever commercial cargo of the fuel from Algeria to the UK in 1964 and later that decade was instrumental in developing the Asian LNG market as a partner in Brunei LNG.
Before then gas was largely considered an unwanted byproduct of oil production and was usually flared on site. Shell’s especially large portfolio of oil-producing assets gave it a particular “problem” of what to do with associated gas, according to one former senior executive in Shell’s gas business.
The solution was to liquefy the gas by cooling it to -162C, which shrinks it to one six-hundredth of its original volume and renders it economic to ship the fuel around the globe.
The trade has grown from 100mn tonnes per year in 2000 to almost 400mn tonnes in 2022, making the market worth $450bn.
Last year Shell moved 66mn tonnes of LNG — 16.5 per cent of the global total and second only to state-owned QatarEnergy.
“It is the only upstream business where Shell has a very clear lead over the rest of the industry,” the former senior executive said.
Its LNG sales represent about 23 per cent of cash flow from operations, according to Citibank — more than for any other western energy major. At the investor day in June, it said it would increase those volumes by 20-30 per cent by 2030.
“Fundamentally, Sawan believes that LNG produces better returns than renewables,” said one former Shell executive who worked with Sawan for more than two decades.
The new CEO, who rose to prominence at the company through his work on gas projects in Qatar, grew up “through the gas business”, the former executive added. “He is a big believer in the business and also a big believer in the trading model.”
Shell’s LNG dominance is partly a result of its $54bn acquisition in 2016 of gas specialist BG Group, a significant producer and trader of LNG that bought the fuel from a wide range of suppliers across the world for resale. In 2015, before the BG deal completed, Shell sold 44mn tonnes of the fuel.
The acquisition, following the purchase two years earlier of a smaller LNG business from Spain’s Repsol, also gave Shell the revenue stream it needed to give up parts of its oil portfolio. The divestments included its Canadian oil sands business and its exploration activities in the Arctic — both of which had attracted intense criticism from environmental campaigners.
Shortly before stepping down, Van Beurden told the Financial Times last year that the acquisitions allowed him to do the oil sands deal, which he said would otherwise have been “too good of a cash engine to give up on”.
“We could forget about betting on the Arctic because we had a whole new LNG business to work with,” he said.
Today, the UK group has stakes in LNG projects from Australia and Nigeria to Trinidad and Tobago, and also trades millions of tonnes a year from other producers. Last year it produced 30mn tonnes and traded a further 36mn tonnes from other producers.
Shell argues that LNG has a key role to play in the energy transition. When burnt, the gas produces half the carbon dioxide of coal for the same amount of energy. On the same basis, it generates 30 per cent less carbon dioxide than oil.
Still, the fuel emits carbon, meaning Shell is likely to have to soften its existing emission reduction targets to reflect the increased investment in LNG when it updates its energy transition strategy in March, the top 20 shareholder said.
“I don’t think it’s really possible for them to hit the current targets and to do all the things that they’ve said they’re going to do in terms of the way they’re going to spend their capex budget,” the shareholder said.
Asked whether Shell could keep boosting LNG volumes and still meet its net zero targets, the company said the world would need “more LNG to enable a balanced energy transition” but that work needed to be done to lower the emissions associated with the fuel, citing as an example a green, synthetic version of the gas that is under development.
“Until that happens, accurately measuring and reporting emissions across the LNG value chain and using quality carbon credits to compensate for them is an important step towards addressing emissions,” said Steve Hill, executive vice-president of Shell Energy.
Michael Coffin, a former BP geologist who is now the head of oil, gas and mining at the think-tank Carbon Tracker, believes Shell should be moving away from fossil fuels altogether.
“Global society needs to accelerate the investment in renewable power to displace coal directly, rather than developing assets that increase society’s lock-in to fossil fuels,” he said.
However, rather than abandoning LNG more companies are trying to follow Shell’s lead.
“There are people nibbling at their heels,” said Bernstein’s Clint, noting that Equinor, ExxonMobil and Chevron were signing new LNG offtake agreements with producers.
Frank Harris, head of global LNG consulting at Wood Mackenzie, stressed that the size and diversity of Shell’s portfolio meant it retained a powerful position in the market. The company is able to offer customers fuel from multiple sources — either from contracts with other producers or from its own facilities.
“For some of the buyers, whether you’re European or Asian, doing a deal with somebody like Shell is pretty appealing,” Harris said. “When it’s running a portfolio of this size, pretty much within reason it can give you what you want.”