Shell issued its 2021 energy transition progress this morning and the report contains a lot of detail about what Shell has done so far and what the company intends to do. The report is a record of progress and intent and is targeting both general stakeholders as well as the Shell board and annual meeting, where approval of the plan will be sought. When compared with other reports we have seen from other companies, this summary is comprehensive. It provides some concrete steps to achieving emission goals in 2030 – exhibit below - while remaining appropriately vague about getting to 2040 and 2050 targets. However, we would note how much portfolio changes likely added to the 2016 to 2021 progress – likely proportionately much more than they are expected to contribute from 2022 to 2030. Both renewable power and CCS figure in the 2030 projections below and Shell will need to get moving on the CCS front of it is to sequester 3-6 million tons of CO2 per annum by 2030. The expectations are likely based on the European offshore projects, as it may take longer than 8 years to get permits and investments in place in the US. The US could move faster but the EPA would likely need to grant primacy to at least Louisiana and Texas for things to speed up and we are not convinced that this will happen soon. Like many of the other company 2030 plans that we have seen, it is likely that much of Shell’s progress will come in the last couple of years of the decade – especially on CCS.
Source: Shell – Energy Transition Progress Report, April 20, April 2022
The chart on carbon intensity – below – provides more clues on CCS as it notes that Shell plans as much as 25 million tons per annum of CCS by 2035, which is a huge ramp from the 3-6 million tons target by 2030. This confirms our view that there is a bit of a waiting game with CCS, to see how carbon values evolve, to see how carbon capture technology evolves, and to better judge both the attitude towards CCS and the regulatory processes that will be required to get a project approved, which will be different country by country. We still believe that the US has a considerable potential competitive advantage with CCS costs and that this will be additive to the hydrocarbon advantage that already exists. The same opportunity sits in Canada, albeit with higher costs of getting to market. More investment will flow to Canada, especially Alberta, if Canada can show more consistency around carbon values and long-term carbon policy than the US. Shell has a major LNG investment in Canada and might look to expand that rather than invest in something new in the US if the Canadian regulatory landscape is easier to navigate than in the US.
Source: Shell – Energy Transition Progress Report, April 20, April 2022
Overall, this is a good report from Shell as it shows both progress and intent – with some of the pathways to intent identified and targeted. Whether this will be good enough for the activists is unlikely, as they are generally only focused on finding fault, and that is relatively easy to do, even if all you conclude is “not enough”, or “not fast enough”. The oil majors are very hamstrung by their legacy businesses and even more so today because of the mixed messages around balancing energy security with energy transition. The Europeans still appear to be less interesting investments than their US peers, despite generally having better and more joined-up energy transition plans. Perhaps the potential earnings dilution from these plans is discouraging investors on top of the anti-fossil fuel lobby in Europe, which is stronger than in the US. We still believe that Energy transition will drive a further round of consolidation in energy, and the valuation arbitrage between the European and US companies could lead to US majors buying a European counterpart.