The Sunday Telegraph: Sunday 7 February 2021. Business Section Page 6
Rival BP is powering ahead with it renewable future, but despite first-mover advantage the Anglo-Dutch giant is yet to map out a path to sustainable returns, finds Rachel Millard
Shell’s boss Ben van Beurden says he hopes he will travel less even after the pandemic is over, having found it “really valuable” to spend more time with his family during 2020.
“Life will be different – how big and how much is hard to say;” he told staff via the corporate website last month.
Travelling less might seem a strange benefit of the pandemic for the boss of a company whose business depends on fuelling transport. But after seven years in charge, Van Beurden knows that with or without coronavirus, Shell must abandon old attitudes.
Big Oil is under unprecedented pressure. Accelerating global action on climate change is forcing powerful companies to move into new and unfamiliar energy markets or risk being overtaken by nimble rivals.
Pressure has been growing due to the pandemic, which has hammered oil prices and catalysed the move towards renewable energy in many parts of the world.
Van Beurden made the “painful” decision in August to cut Shell’s dividend for the first time since the Second World War, by two thirds, and on Thursday he presented investors with a $20bn (£14.6bn) annual loss.
This week, he will set out details of a long-term strategy that will determine whether the 113-year-old company will make it through the next decade of rapidly evolving energy markets – and whether investors, accustomed to gushing returns from oil and gas, will stick around to find out.
“Shell were very good at being one of the first movers in targeting carbon reduction and limiting the environmental impact of the business;” says Iain Pyle, investment director for UK equities at Aberdeen Standard Investments. “But what they are yet to fully deliver is clarity on how they are going to grow a business from the good side of the equation – how they are going to maintain the returns and cash generation power of Shell from lower carbon activities as they move through the transition:”
One year ago, it was Shell’s rival BP that was seen as the laggard on climate change, with Shell having set out plans in 2017to invest $lbn-$2bn in its developing renewable energy and rein in its carbon emissions.
That changed in March last year when BP’s new boss Bernard Looney said the company would slash its oil and gas production by 40pc and build 50GW of renewable capacity by 2030 – more than the UK’s entire capacity.
Anyone expecting Van Beurden to try to outdo those targets is likely to be disappointed, however.
He is expected to focus less on targets of barrels to be ditched or gigawatts built,but instead to increase the company’s attention to and investment in renewable and low carbon energy, from which gigawatts will follow.
While change is a necessity, Shell’s evolutionary approach brings risks.
“We think this is the right thing to do; however, the risk is that investors and analysts may
perceive the company as being behind on the energy transition relative to peers;” says RBC analyst Biraj Borkhataria.
“Still, the challenge here is that the energy transition is complex, and we think investors and analysts may judge companies simply on gigawatts added, given it is a readily available metric for most companies.”
Shell, which in 2019 was directly responsible for 70m tons of greenhouse gas emissions, was praised in April for “raising the bar” when it strengthened its targets to reduce its own emissions and the net carbon footprint of its products, a figure based on intensity rather than emissions per se.
Shell expects to become one of the world’s top power producers as it tries to decarbonise while also growing, with new energies boss Maarten Wetselaar telling the CeraWeek conference in 2019 that the “amount of clean power we will need to be selling will make us by far the biggest power company in the world.”
Developing an energy business from power plants to household customers is a core part of Shell’s strategy as the electric cars and electric heating start to take the place of gas boilers and petrol cars.
To that end, it snapped up First Utility, the UK household energy supplier, in 2017and is forging ahead in the EV charging market including by buying Ubitricity this month. It is also developing a 759MW subsidy free offshore wind farm in Holland, and bought a 44pc stake in US solar producer Silicon Ranch in 2018.
Biofuels and hydrogen are to become a more important part of the business, while the company is selling off refineries and slimming down its oil drilling portfolio to nine groups that generate 80pc of the upstream division’s cash flow, including the UK and the Gulf of Mexico.
Those moves will form the building blocks of Thursday’s strategy update. Yet for a company whose dividends help pay the pensions of millions, the question for Shell has always been not only whether it can move into new markets but also whether it can do so while maintaining returns.
Shell has said it will return to shareholders 20pc to 30pc of cash flow from operations once it cuts net debt – which rose to $75.4bn over the latest quarter – down to $65bn, implying a return of 8pc-10pc for shareholders, or higher if commodities prices rise. As it tries to restore investor trust following August’s dividend cut to 16 cents, Shell has also restarted a progressive dividend policy, increasing it to 16.65 cents in October and to 17.35 cents this week.
Investors will be scrutinising Thursday’s strategy update against those promises. “We know they like retail exposure, the trading business and building out some exposure to renewable capacity;’ says Pyle.
“But we don’t quite know what that will look like: what returns they will target and how much cash they will generate from New Energies in five years time, for example.”
As Shell starts to turn its large ship, the market around it is rapidly evolving. BP’s boss Bernard Looney last week described a “heated” renewables market in which it is trying to compete.
Auditors are also increasingly pushing companies to make sure their oil and gas price assumptions – fundamental to their balance sheets – are consistent with the Paris climate accords, under pressure from investors including Sarasin and Partners.
In August BP slashed its long-term price assumptions for Brent crude to $55 per barrel and $2.90 per mmbtu for Henry Hub gas, amid expectations that the pandemic will accelerate the shift to a lower carbon economy, triggering massive writedowns in the value of its portfolio. Shell is sticking to its post-2023 assumption of $60and $3 for gas. Auditors said it’s gas price assumptions in 2019 were towards the high end.
Still, Shell’s supporters argue it can only go as fast as its customers, and it needs to work with them to increase demand for lower-carbon energy sources, while also raising supply.
It is not an argument that silences all their critics – nor an easy story to sell to investors as Van Beurden makes his case this week.
“Of course it depends on their customers but it is Shell’s decision to provide for those customers;” says Natasha Landell-Mills, head of stewardship for Sarasin.
“Shell is leading and definitely engaging and these are the kinds of tensions you would inevitably find with a huge oil and gas company trying to reinvent itself.
“But the problem is, in the end, they have to get to net zero. It’s one of those hard facts they can’t wriggle out of.”
The ban on petrol and diesel cars in the UK poses a major threat to oil majors’ businesses, but they have been steadily making sure they are in prime position for what comes next.
BP and Shell have been snapping up and installing electric car charging points at pace, and now own at least a quarter of the UK’s public charging points between them, with ambitions to go much further.
It marks a significant consolidation for a network that began with small companies often battling scepticism and low demand, creating a hodgepodge network that users sometimes found frustrating.
Other big players have been muscling in, too, with the French, state, power giant EDF buying Pod Point, which has 11.6pc of the market, last February.
Shell bought Ubitricoty, which has 2,700 public charging points, last month, while BP owns more than 8,500 UK charge points after buying Chargemaster in 2018.
Though its BP Pulse division, the company, under relatively new boss Bernard Looney, wants to more than double its charge-points in the UK to 16,000 by 2030, when the government ban on the sale of new combustion engines is due to come into force.
“We back the ban on new petrol and diesel cars/vans in 2030 – despite the impact on our fuels business,” Looney wrote in November.
Margins on electricity are thinner than petrol, however, and both BP and Shell need to find ways to continue to sell coffee, snacks and newspapers to drivers while they charge, following the model that has made their petrol stations, where they are also installing fast-chargers, such a success.
Murray Auchincloss, BP’s finance chief, told analysts this week that with the latest five-minute chargers “if you get to l8pc occupancy, you start making money.”
“If you’re sitting here in the UK, you can drive by the Hammersmith site and you’ll see that it’s pretty hard to get in, because they’re almost always occupied.
“So I think that gives you a sense of what’s valuable inside the electrons. Of course, the margin now comes more from the convenience side than the electric charging.”
How long does it take to drink a cup of coffee and charge a car, however?
Making sure there isn’t too much of a difference between the two might end up being the key. BP’s boss Mr Looney said: “Murray is encouraging them not to make the charging too fast, so that you still have to go and get your cup of coffee.”
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