The future of Shell in an electric era

Do I want the world to slow down its progress towards a lower-carbon energy system to protect Shell’s core oil and gas business? No, I want it to speed up. Here's why…

Did you see an electric car this morning? Quite possibly. Wind turbines and solar panels are easy to find these days too. Most of the world appears set on achieving the goal of the Paris agreement: restricting global warming to well under 2° Celsius.

As CEO of Shell I’d say this: yes, electric cars are becoming increasingly common and renewables are growing fast… but progress on both is nowhere near fast enough to hit Paris. And yes, I want Paris to succeed too.

Why? Because it is the right thing for the planet and because Shell is not only resilient to all this change but ready to take the opportunities that come with it.

For a start Shell does a lot more than sell petrol and diesel for cars. We fuel planes, trucks and ships too and none of these can yet be powered by batteries.

We make the basic chemicals that go into everything from printer ink to washing powder. We supply gas for heating, cooking, industry and power. It is increasingly being used to back up intermittent renewable generation. And even wind turbines need lubricants.

When it comes to renewables… they chiefly produce electricity. Electricity is less than 20 per cent of the world’s energy use today with the rest mainly oil, gas and coal. That balance has to change if the world is to meet Paris, with electricity reaching 50 per cent by around 2060.

This growth in electricity is one of the opportunities Shell plans to take. Our purchase of First Utility earlier this year, which supplies energy to more than 800,000 British homes, is just one move in a wider push into the power sector.

That is all significant, but there is much more to my confidence in Shell’s resilience.

Diverse portfolio

Shell has a diverse portfolio, both geographically and in its product range, which we change to mitigate risks and seize opportunities. The risks include higher regulatory costs linked to carbon emissions and, eventually, lower demand for oil and gas.

The opportunities include the growth expected in the chemicals sector, in which we are investing.

Our tight rein on costs and close focus on the projects we sanction also contribute to our resilience. We have stress-tested Shell’s portfolio at oil prices ranging from $40 to $100 through to 2027 and the details are published in the Shell Energy Transition Report. The company is confident in its ability to adapt to all likely outcomes.

Investors sometimes ask me about the risk of so-called stranded assets. But we expect oil and gas demand to be higher in 2030 than today, even in a rapidly changing energy system. And Shell estimates that around 80 per cent of our proved oil and gas reserves (as of December 2017) will have been produced by 2030… so, far from having stranded assets, Shell must continue to seek out new oil and gas fields.

With liquefied natural gas the danger is not over supply but a supply crunch. Our current projections show a potential shortage in the middle of the 2020s, unless companies commit to new projects soon.

So, I am confident Shell’s portfolio is resilient in the short to medium term, that is to 2030. To look further forward the company uses scenario modelling to examine possible future paths the world might take.

Looking ahead

We recently published our latest scenario, called Sky. This looks at what the world would have to do in order to achieve the Paris goal.

The pathway it lays out would, according to an analysis by the Massachusetts Institute of Technology, hold global warming to around 1.75°C.

It is a technically possible path, but a challenging one. For example, Sky requires transport to electrify more quickly than many expect: more than half of global new car sales will have to be electric by 2030. By 2050 it is assumed that it will be virtually impossible to buy a petrol or diesel car.

But the world’s population is growing and, as living standards improve, it can be expected to use more energy. Even if the world manages to triple its energy efficiency in many areas, the amount of energy being used in the world by 2070 is likely to be almost double that used today. And alternatives to oil and gas in some sectors, like shipping, are stubbornly hard to find.

Such dynamics mean that, even under Sky with all the rapid change it lays out, the world will need 85 per cent of today’s oil and gas production by 2050. By the end of the century it is still using 30 to 40 per cent. The world will need oil and gas for a very long time to come.

In step with society

And a company like Shell does not have to stand still. In fact, we have no intention of doing so. We aim to change our product mix in step with society’s progress to meeting Paris.

Shell aims to walk the same path as our customers whether that means more biofuels, more electricity or more hydrogen. Or, most probably, all of that and many other things too: charging points for cars, for example.

This translates into an ambition to halve what we call the net carbon footprint of our energy products by the middle of the century. This includes our customers’ emissions from their use of the energy products we sell. 

Of course, a scenario like Sky is neither a business plan nor a map of the future. It is impossible to see how policy, technology and consumer choice will unfold.

But I know Shell has a portfolio and a strategy that is flexible enough to handle whatever is coming. We see both the risks and the opportunities, and we are ready for both.

Electric cars? Renewables? Paris? Bring them on. Because, as the world goes low-carbon, Shell doesn’t just expect to survive, but thrive.