Exclusive: No Choice But to Invest in Oil, Shell CEO Says
Royal
Dutch Shell (RDSa.L) still sees abundant opportunity to make money from oil and
gas in coming decades even as investors and governments increase pressure on
energy companies over climate change, its chief executive said.
But
in an interview with Reuters, Ben van Beurden expressed concern that some
shareholders could abandon the world’s second-largest listed energy company due
partly to what he called the “demonisation” of oil and gas and “unjustified”
worries that its business model was unsustainable.
The
61-year-old Dutch executive in recent years became one of the sector’s most
prominent voices advocating action over global warming in the wake of the 2015
Paris climate agreement.
Shell,
which supplies around 3% of the world’s energy, set out in 2017 a plan to halve
the intensity of its greenhouse emissions by the middle of the century, based
in large part on building one of the world’s biggest power businesses.
Still,
the amount of carbon dioxide emitted from Shell’s operations and the products
it sells rose by 2.5% between 2017 and 2018.
A
defiant van Beurden rejected a rising chorus from climate activists and parts
of the investor community to transform radically the 112-year-old Anglo-Dutch
company’s traditional business model.
“Despite
what a lot of activists say, it is entirely legitimate to invest in oil and gas
because the world demands it,” van Beurden said.
“We
have no choice” but to invest in long-life projects, he added.
Shell
and its peers have long insisted that switching away from oil and gas to
cleaner sources of energy will take decades as demand for transport and
plastics continues to grow. Investors have warned, however, that oil companies
often rely on forecasts that underestimate the pace of change.
Shell
plans to greenlight more than 35 new oil and gas projects by 2025, according to
an investor presentation from June.
Oil
and gas remain the backbone of profits for Shell, the largest listed company on
London's main FTSE index .FTSE.
While
oil and gas account for the entirety of Shell’s free cashflow today, it
foresees a gradual diversification over the next two decades. Oil and gas are
each still expected to provide a third of free cashflow, however, with the rest
coming from power and chemicals.
Many
oil and gas projects such as gas-processing plants, deepwater platforms or
chemical plants take billions of dollars to develop and operate for decades.
“RED
HERRING”
Shell,
like many rivals, has become more selective in its investments as the outlook
for oil prices and demand remains unclear. It targets new projects that can be
profitable at oil prices of $20 to $30 a barrel and which emit relatively low
greenhouse emissions. Oil is trading at around $60 a barrel.
“We
can sustain an upstream portfolio all the way into the 2030s if there is an
economic rationale for doing that and a societal rationale for doing that,” van
Beurden said.
“Fortunately
enough, we have more of those than we have money to spend on them.”
Van
Beurden rejected as a “red herring” arguments that Shell’s oil and gas
reserves, which can sustain its current production for around eight years,
would be economically unviable, or stranded, in the future.
A
lack of investment in oil and gas projects could lead to a supply shortage and
result in price spikes, he said.
“One
of the bigger risks is not so much that we will become dinosaurs because we are
still investing in oil and gas when there is no need for it anymore. A bigger
risk is prematurely turning your back on oil and gas.”
Shell
plans to increase its annual spending to around $32 billion by 2025 from the
current $25 billion, with up to one tenth allocated to renewables and the power
business.
The
company, the world’s largest dividend payer, plans to return $125 billion to
shareholders in the five years to 2025.
On
liquefied natural gas, of which Shell is the world’s biggest trader, van
Beurden said the market would exhibit oversupply in the near term. “But (LNG)
demand will continue to grow at a pace that is roughly four times that of oil,”
he said.
Shell
has become a focal point of environmental protests, particularly in Europe,
with regular demonstrations outside its London headquarters and the British
National Theatre dropping Shell’s sponsorship in recent months.
At
the same time, investors have sharply increased their scrutiny of companies’
environmental performance.
Amid
growing uncertainty over future demand, the share prices of Shell and its peers
have underperformed relative to other sectors.
Van
Beurden expressed concern that some investors could ditch Shell, acknowledging
that shares in the company were trading at a discount partly due to “societal
risk”.
“I
am afraid of that, to be honest,” he said.
“But
I don’t think they will flee for the justified concern of stranded assets ...
(It is) the continued pressure on our sector, in some cases to the point of
demonisation, that scares asset managers.”
“It
is not at a scale that the alarm bells are ringing, but it is an unhealthy
trend.”
Van
Beurden put the onus for achieving a transformation to low-carbon economies on
governments, warning that not enough progress had been made to reach the Paris
climate goal of limiting global warming to “well below” 2 degrees Celsius above
pre-industrial levels by the end of the century.
“Can
that happen? I think it can ... Increasingly society is not putting up with the
fact we are not making enough progress.”
Delaying
implementation of the right climate policies could result in “knee-jerk”
political responses that might be very disruptive to society, he said.
“Let the air out of the balloon as soon as you can before the balloon actually bursts,” van Beurden said.