ALEX BRUMMER: Shell must speed up its path to net zero carbon emissions or face more activist challengers and end up among the ranks of pariah stocks
As Cop 26 powers into view, the oil majors risk being seen as the new tobacco. In the US, environmental activists at Engine No. 1 have breached the high defenses of Exxon Mobile, inserting green candidates onto the board.
Shell is under fire in the Netherlands. One of the world’s largest pension funds ABP has dumped its £17.7billion holding in Shell and other fossil fuel firms, and Europe’s largest energy group has been hung out to dry by the Dutch courts.
In place of ABP, it now has activist investor Daniel Loeb and hedge fund Third Point breathing down its neck demanding a breakup of the Anglo-Dutch colossus.
Pariah: As Cop 26 powers into view, the oil majors risk being seen as the new tobacco
Rival BP, scarred by the Deepwater Horizon explosion of 2010, has adopted a more radical approach to climate change under current chief executive Bernard Looney. It has injected a carbon-conscious agenda into everything that it does. It may so far have received little credit in the City but has made important friends in Whitehall.
The big difference between the oil and gas producers and tobacco is that without the exploration, production, refining, and logistics capacity of oil, the world economy would come to a shuddering halt. That would place the welfare of billions of people at risk.
There has been insight into this as the world has sought to emerge from the pandemic and has been blighted by energy shortages and surging prices. Simply disinvesting from fossil fuels is a dereliction of social responsibility to domestic and business consumers. It places growth and prosperity at risk.
Loeb’s proposal that Shell spin out its renewable and less-carbon-emitting natural gas facilities is gobbledegook. For climate change enthusiasts, gas is no less polluting than fracking in Texas’s Permian Basin. Liquid natural gas has to be transported across the globe in vast tankers and is often extracted from wilderness environments such as Alaska and the Sahara.
Shell chief executive Ben van Beurden, who doubled down on natural gas when he bought BG Group for £50bn six years ago, should tell Loeb to take a hike. Third Point is using climate change as an excuse to try and extort short-term value from Shell.
It makes little sense for big oil to go slow on change. New technologies from carbon capture to hydrogen power offer the opportunity to burn and refine oil and gas products in much cleaner ways.
The best response is to incorporate green and carbon emission goals into everything that they do. The unsatisfactory solution is to follow BHP’s example on coal and Shell in the Permian Basin and sell the most polluting assets.
The impact of such an approach to reducing carbon emissions is to make things worse. New, less prominent owners will continue to extract coal and hydrocarbons, but out of sight and mind of environmental, social, and governance reporting standards.
Incentives to reduce emissions will be non-existent.
There is a possibility that spinning out part of Shell, as Third Point wants, could create economic value. In the US, both ConocoPhillips and Marathon Oil did the splits, and refining and marketing have done better than rump extraction enterprises. Germany’s EON injected its fossil fuel arm into Uniper. Closer to home, SSE has sought to create shareholder value by separating its renewals enterprise.
If Shell truly wants to become more green, it is in a better place than most to engage in self-help. The company has generated cash at a rate of at least £ 15 billion annually since 2017. It, and the other oil majors, have huge financial capacity to change and that doesn’t just mean switching petrol forecourts to electric vehicle charging stations.
Moreover, if shareholders don’t want to be left holding stock in a company deemed to be poisoning the atmosphere then they should be prepared for dividend sacrifice during a capital-intensive transition.
It is a pity that van Beurden and his team were not more alert to the challenges earlier and not just seen as responding to the pressure of a get-rich-quick US hedge fund.
The blight of the oil majors has long been arrogance, bureaucracy, and a willingness to operate in the most politically polluted states. The choice now is stark. Shell must speed up the path to net zero carbon emissions. Otherwise, it will face more activist challengers and end up among the serried ranks of pariah stocks.