A Shell gas station in Turkey.
Anglo-Dutch oil giant Royal Dutch Shell’s plan to reach net zero emissions by 2050, unveiled last month, focuses heavily on selling low-carbon electricity, biofuels and hydrogen directly to households and electric vehicle owners.
The strategy marks a contrast with that of other European oil majors, who in their own plans to reach net-zero emissions have vowed to accumulate vast amounts of renewable power generation capacity in the form of wind and solar assets.
“Shell is a very big brand — that’s what more than 110 years of being a company does for you,” said Oswald Clint, a senior analyst at investment bank Sanford Bernstein, in an interview. “They can apply that in building out their network” of fuel stations.
At the same time, Shell does not foresee a hard pivot away from its traditional oil and gas business anytime soon. Shell’s annual oil production peaked in 2019 at about 1.7 million barrels per day, it said, adding that it expects this output to now decline by 1-2% per year. That could mean that by 2050 it is still producing around 1 million barrels per day, around 40 percent below current levels, according to quick calculations.
That would mean Shell’s oil output falls much slower than BP’s, which has said output will hit a 40 percent decline by as soon as 2030, but much further than Total’s, whose CEO said in October that the French oil giant will roughly maintain oil output.
“The company has to generate the cash it needs to reinvent itself and shift its mix towards renewables in preparation for a long-term net zero future,” said Russ Mould, Investment Director at financial services firm AJ Bell.
From retail gasoline to retail power, biofuels and hydrogen
To achieve net-zero emissions by 2050, including emissions from its own products, Shell has linked the salaries of 16,500 staff to a series of carbon reduction targets. It wants to reduce the carbon intensity of its energy products by 6-8% by 2023, 20% by 2030, 45% by 2035 and 100% by 2050, against a 2016 baseline.
Part of that plan relies heavily on carbon offsets, including spending an expected $100 million per year on “nature-based solutions” such as planting trees.
But the real substance of the plan involves bulking up its retail operations and overhauling them to focus on sales of renewable electricity directly to households and electric vehicle owners. “We aim to be a leading provider of clean Power-as-a-Service,” the company said.
Shell’s plan to focus on the retail side of the renewables business would build on its existing strength as a retail provider of gasoline and diesel. Shell already owns 46,000 retail sites and wants to increase that to 55,000. (“Retail sites” refer to gas stations, a spokesperson said when reached by phone, although the company didn’t respond to further questions.) In tandem, it wants to grow its electric vehicle charging network from 60,000 charge points currently to around 500,000 by 2025.
Together, the increased number of electric vehicle chargers plus expanded network of retail sites gives Shell a way to continue to bundle its products together, much as it currently sells its own gasoline at Shell-owned retail sites while also earning revenue from other businesses on the forecourt. Shell would also likely aim to sell biofuels and hydrogen at these retail sites: it plans to increase the amount of biofuels and hydrogen in the transport fuels it sells to 10%, from 3% currently.
“This is a forecourt [retail site] of the future, with electric vehicle charging, hydrogen will be there, liquefied natural gas, and then you’ve got a restaurant and a shopping area,” said Sanford Bernstein’s Clint. “Charging will look very different from how we think about it today.”
Shell’s plan does not focus solely on retail sites. It also wants to strengthen its sales of low-carbon electricity directly to households, businesses and commercial enterprises. In last month’s announcement Shell said that it expects to serve electricity to more than 15 million retail and business customers worldwide.
The power it intends to sell at these retail sites and to homeowners and businesses might not come from its own generation. Shell has said only that it intends to double its sales of electricity to 560 terawatt hours a year by 2030 — a target it could achieve not through generating its own power generation but by buying it from others on wholesale electricity markets. By contrast, Total, BP, and Eni have all laid down specific amounts of capacity they intend to achieve by certain dates, thus locking them into plans to build or acquire lots of physical wind and solar plants. (See table.)
Relying on its power trading team to simply buy lots of power generation in the market, rather than purchase the power plants themselves, could allow Shell to avoid paying exorbitant sums to scale up its generation portfolio. Total’s boss, Patrick Pouyanne, recently called the valuations of renewable energy assets “crazy”.
In spite of its detailed plans, Shell isn’t betting the farm on its retail-focused renewables drive just yet. Its near-term spending plans make clear that renewables of any form remain a small share of its overall capital outlays. Shell plans to invest just $2-3 billion in renewables and related spending categories, or only around 10% of its total. Meanwhile it will spend $8-9 billion on chemicals, products and integrated gas, and $8 billion on upstream.
In the long term, the company said, its capital spending will shift away from oil and gas and instead towards the part of the company focused on low-carbon fuels and its expanding retail network. These ventures will eventually attract "around half of the additional capital spend."
"Shell still needs to try and keep shareholders sweet with near-term profits and dividends while implementing its long-term strategy," said AJ Bell's Russ Mould.
