Oil & Gas is Dead, Long-live Oil & Gas

December 27, 2019

In this week's newsletter, I highlighted Shell's plight in the media when it comes to their position on climate change.

Written just 6 weeks apart, these headlines represent two entirely different takes on Shell's current position on the path to clean energy adoption.

Amongst the clickbait in the headlines lies a lot of truth:

  • Shell is one of the most proactive big oil & gas firms when it comes to investing in cleantech both internally and through their venture arm
  • Shell should continue investing in oil and gas as a core business
  • Shell is a naturally large contributor to emissions given its core business
  • Shell should invest in reducing emissions significantly

Investing in Cleaner Energy

In May, Shell announced its intention to be the largest power producer in the world and that it would spend $2B annually building a new-energies division that it believes can deliver 8-12% margins.

Additionally, Shell ranks 4th in low-carbon energy spend according to the Financial Times, contributing about 2% of capital spend to clean energy over the last 8 years. I'd argue that the number is low, but do see it accelerating over the next few years as the market continues to demand change.

Shell also has a corporate venture capital arm that invests in energy technology with a significant portion of its portfolio operating in cleantech, storage, or energy efficiency.

Natural Gas' Stronghold on Power Generation

Despite all of the public pressure and positive sentiment toward renewables, consultancy Wood Mackenzie forecasts that oil, gas, and coal will still contribute 85% of the global energy supply by 2040, even if we accept that technology evolves much more rapidly than we can predict, it's clear that oil and gas will have a role.

In BP's 2019 Energy Outlook, BP projects that even in the most aggressive energy transition forecasts coal, oil and gas will still make up ~50% of primary energy consumption.

The fact remains that we still need a baseload for power generation and without significant improvements in battery or grid technologies or a 180-degree pivot on nuclear, natural gas is still our best option.

2019 BP Energy Outlook

Emissions Must Be Reduced

Lastly, emissions are rising and something must be done about it. Yet, the headline is a little misleading in that the largest emitting sectors are actually transportation (29%) and power (28%) which are the end consumers for Shell's core products. If Shell doesn't answer our demand for these fuels, other firms ultimately will.

Forcing the largest energy capital allocators in the world to give up profitable businesses overnight for the sake of fitting a narrative that makes us feel better but ultimately doesn't move the emissions needle isn't good for the energy ecosystem.

Moving Forward

Funding the energy transition is a multi-trillion dollar proposition. We'll need every dollar we can get, and companies like Shell have a lot of capital to contribute. They can only do so if they are still running healthy businesses.

Instead, I think the approach is more pragmatic, which is often unpopular. If we encourage these giants to participate in the transition, celebrate when they do, and continue to push the boundaries of what is possible with technology, we'll eventually make clean energies the core business every major oil company wants to own.

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