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Shell relies on its adaptability

Shell CEO Ben van Beurden

Printed below is an English translation of an article published today by the Dutch Financial Times, Financieele Dagblad.

 

 

Bert van Dijk • Entrepreneurship

‘Shell is stealthily getting a bit green’, ‘Shell is fully committed to shale oil and gas’, ‘Shell acquires a large supplier of charging stations’ and ‘Shell wants 11,000 filling stations and 5,000 stores.’ At first glance, these headlines in recent months seem to sketch a schizophrenic image of Shell. After all, is it not unnatural for a company that claims to have committed itself to the Paris Climate Agreement to continue to invest billions in oil and gas? Should not Shell be 100% sustainable?

Less complex projects, more short-term

No, Shell says. The ever increasing demand for oil and gas in the world justifies major investments in oil and gas extraction. Although wind farms and solar panels can make the global electricity supply greener, only 20% of the global energy system is sustainable. The remaining 80% consists of transport, heating of buildings, industry and chemistry. They are much more difficult to green.

And so Shell continues to spend billions every year on new oil permits and the purchase of existing concessions. But this does involve a major shift in investments: less in complex, expensive long-term projects, which only come into production for many years and remain in production for many decades and more in short-term projects such as shale gas and oil, which start up quickly and to stop again.

Cash flow

This trend is noticeable throughout the sector, but more at Shell than elsewhere. For example, the so-called reserve replacement ratio at Shell has dropped to below 9. This means that at the current production rate, Shell will have had all its reserves of oil and gas for nine years if no new fields are discovered.

This is a very short lifetime compared to competitors. With ExxonMobil, for example, that ratio is 14.

Shell CEO Van Beurden is not awake. ‘I am less obsessed with reserves and the lifespan thereof than others may be’, he said earlier this year. ‘For me, everything revolves around the long term and the space in the company for generating cash. [..]. A large part of our cash flow comes from elsewhere than oil and gas production, whether it concerns oil products or chemicals. And I hope that in ten years time we can say that a large part of the cash flow of New Energies has become important. That gives resilience. They are also very good cash flows with relatively limited capital and maintenance costs. And that’s what I like. ”

Addiction

From this point of view, the growth strategy for Shell’s refinery and chemical branch and the tightened earnings expectations for those components, as Shell announced earlier this week, is not a big surprise. That is why Shell is investing in wind farms, solar fields and also on infrastructure for charging electric cars, as shown by the acquisitions in recent months of NewMotion and First Utility, among others.

For many environmental organizations, however, the change at Shell is far too slow and Shell risks a Kodak moment in the future, if it turns out that the company has made the switch to new, more sustainable energy too late. Van Beurden does not believe that. That is why the world’s addiction to fossil fuels and the adaptability of Shell is too great.

Stable share of fossil energy

A report from the International Energy Agency published earlier this week confirms this sobering truth: despite the rapid growth of wind and solar energy in recent years, the share of fossil fuels in global energy demand is still 81%.

Even more sobering: according to the agency, that share has been completely stable for more than three decades.

SOURCE

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