Shell Needs to Change

Ben van Beurden, CEO of Europe’s biggest oil concern, talks about a turn towards renewable power, the hypocrisy at the stock market and the burning rainforests.

Shell is Europes biggest oil and gas company. But now you have the ambition to become the largest supplier of renewable power in the world. Critics say that’s just Greenwashing. What´s your response to that?

This is a very easy accusation to make. But the point is: We see the energy system changing. When society wants to consume energy products in a different way we as a company need to change with it, if we want to maintain our long-term relevance. The way society consumes energy might not change next year. It might take ten years. But when it gets there we want to be ahead of the curve.

You don´t want to be an oil company anymore?

We will remain in the oil business for many years to come. But at the moment about two thirds of the free cash flow in Shell is somehow oil-related. My view is that this is not the right cash flow profile for the second half of this century . I would like to have a company that is less dependent on oil. On the other hand we can’t get ahead of society, because that’s the fastest way to get out of business. You have to be able to make money with the business that you do.

You are even supporting plans to ban combustion engine cars in Europe in the longer term. Quite surprising given that Shell owns the largest network of petrol stations in the world.

Sometimes it is going to be a difficult journey, where you have advocate for things that are seemingly somewhat against your vested interests. I have embraced that to be a very important part of my mission as CEO of Shell, because we happen to be in a very critical phase of the energy transition where very important decisions need to be made for the future. We at Shell are trying to chart a course in a changing environment to adapt our business model so that we maintain a strong and relevant company as things change around us. In other words: it is driven by business logic, by business imperative. And it’s not driven by, you know, ‘I need to be liked’. The point is: we need to be mindful what is happening in the world around us. We need to be responding to it.

And you have decided that Shell needs radical change?

We have decided that it is not going to be our strategy to keep  ‘stick-to-your-knitting’, excellent-in-oil-and-gas company for as long as the world demands oil and gas products. We are going to be a company that wants to have an energy portfolio that is reflective of society’s needs.

However Shell is still investing 30 billion dollars a year in its oil and gas business and just 2 billion in green energy.

By investing up to two billion dollars on average each year —and we said for next decade we will be doing two to three billion dollars a year on average —we will be in the top three investors in renewable energy in the world. So it’s not exactly chicken feed that we are playing with. This is a very significant investment programme. But more importantly: It´s a red herring to focus just on how much we invest in oil and gas production.


The most important point is the carbon footprint of the energy products that we sell – and that it will be consistently lowered. Shell typically sells four times as much oil as we produce ourselves. Because much of the fuel we sell at our petrol stations we buy on the market.

And that`s why Shell has become the first mayor oil company with a target for lowering the carbon content of the energy it supplies to customers?

Yes. We have set a target of halving the carbon intensity of our products by 2050. Because if you really want to measure the impact that we have on greenhouse gases you have to look at the footprint of the energy that we put in people’s homes or cars or into the world. And we have to make sure that the energy that we sell is of ever lower carbon intensity.

But halving the carbon intensity doesn’t necessarily mean that your absolute carbon footprint will be halved. It could even grow theoretically. Is your target just window dressing?

No it´s not. Absolute reduction targets don´t make sense for us. Suppose we would say: We are going to reduce the amount of carbon that we put into the market. How are we going to do that? Will we start shutting down part of our retail network, so that people are maybe forced to not buy petrol cars any more because they can’t fill up at Shell any more? Or shall we only fill up freight planes and not planes with holidaymakers because holidaymakers don’t deserve to emit carbon? That´s not for Shell to decide.

What is then the role for Shell?

Our role as an energy company is to deliver the fuel with the lowest carbon footprint. Our contribution is not to ration airlines and to just say ‘I’m sorry guys, this is all you get, good luck with it’. Yeah? Our contribution is to say, you know, ‘at the moment jet fuel has a carbon intensity of 80 g of CO2 per MJ of energy. We are going to bring that down to 30’. But we can only do that if engine manufacturers will work with us, if airlines will work with us.

Will Shell in ten years time produce less barrels of oil than today?

We never really have set ourselves a barrel target. But I would guess our oil production in the next decade will stay where it is roughly. We need to radically change our energy system. But we need to approach that from the demand side. There are quite a few people out there who think you can approach it from the supply side. They basically think if you just ration the energy supply or if you just get companies like Shell to somehow stop doing their business, the world has no option but to somehow reduce demand. Is not a practical way of doing it.

Why are you still spending billions of dollars every year on finding new hydrocarbon reserves – when we can´t burn all the oil and gas which is still in the ground anyway because this would ruin the climate?

Because we are going to need very significant amounts of oil for decades to come. We will definitely need a lot of oil and gas for all the materials that we are going to need. Where do you think lightweight cars are going to come from? Not from a windmill. It’s going to come from hydrocarbons. The whole idea that somehow the world will continue to function, but somehow without the use of hydrocarbons in it, from a certain date onwards – I find that too naïve to even contemplate.

You have called for a massive reafforestation to offset unavoidable carbon emissions …

Yes, without a significant reafforestation the Paris climate targets can´t be reached. That´s why Shell grows its own forests – or we work together with partners who do this for us …

… But Shell is also a huge player in biofuels in Brazil and there are constant accusations that the sugar cane production for biofuels leads to deforestation.

We operate predominantly in São Paulo state, and in two other states as well. This is land that has been agricultural land and has been used as agricultural land for a long time.

Yes but your critics are arguing that if you are starting to grow sugar cane where something else has been grown, then this other production has to move somewhere else, and it might move into the rainforest.

We have done quite a bit of work to understand how much land use you would need for agriculture for energy crops. And how much land use you then need also for agriculture for food crops.

So there’s no direct and no indirect negative effect on the rainforest in Brazil through your sugar cane production?

That ultimately comes down to government policy and how government wants to allocate land and everything else. The point is, where we operate is in traditional agricultural areas where sugar cane has been growing for decades.

How do investors see the oil industry? Do you think there’s already a climate discount on big oil?

There is definitely a discount on our sector. And some of it is well deserved. I think the well-deserved part is that, in the early 2000s the sector lost its capital discipline. We have spent too much money.

And is there also a climate element in that discount?

I’m sure there is. It’s kind of hard to precisely put a number on it, but I think what you see at the moment is that the sector is very tough for investors to allocate capital to. There is partly the notion of that this is a sector with a limited future. I do think also capital markets are subject to sentiment. There is maybe appetite of clients to have somehow lower carbon exposure in their portfolio. So all these things indeed do weigh down on the sector, absolutely.

The Norwegian sovereign wealth fund, the largest in the world, has started to divest from some oil and gas stocks. Will Shell be next in line?

I think at some point in time you also have to start looking at the fundamental facts: The world is going to need a lot of energy and a lot of that energy is still going to be oil and gas. And if you look at a company like us that can deliver, let’s say over the last twelve months, 25 billion dollars in shareholder returns in dividends and share buybacks, somebody is going to pay attention to that. And if it won’t be Fund A, it will be Fund B. I don’t think Shell will run out of investors.

Will big oil companies remain investable in the longer term – without green energy and  just as pure-play oil and gas companies?

That’s a very good question. It’s very hard to answer. And the way we have answered it for ourselves is that we don’t want to find out.

Is this the most radical reshaping in the history of Shell that you have in mind?

In the recent decades, yes, but not in the history of the company.  But I think it was probably even more radical in the early days, in the late 1890ies  when we were just a lamp oil company, and then lamp oil disappeared because electricity was invented. And then all of a sudden we had to figure out that actually we need to be a gasoline company. Fortunately, people started making cars. And so in those days, I think, the change was more radical.

Is there also an element of hypocrisy among investors?  Do they really put the money where their mouth is? Because if you look at the price-earnings ratio, oil companies who take less interest in green energy like Exxon-Mobil and Chevron, their multiples are a lot higher than yours.

No, I see no reason at this point in time to say ‘our valuation in the market is lower because we are investing one to two billion dollars in green energy’. But having said that, it is absolutely true that many of our investors are critical. And rightly so. They want to understand whether the things that we are doing are sensible, whether they are driven by business imperative, or whether they are driven by reputation, or even worse, vanity … which I can definitely tell you is not the case. We have to demonstrate that this all makes good business sense.

Why is it so difficult to explain your plan to some investors?

The problem with it is that the model we have in mind, for our power business is a business model that is not really in existence in the world at the momentSo what people typically say is:  Why do you want to become like RWE or Centrica? And we say:  ‘no, no, you don’t get it…’

What are they getting wrong?

We have a different model in mind, which should give eight to twelve percent return on equity. If we can’t get decent returns in building a power business, I have real concerns whether we as a planet will actually be able to meet the 1.5 to 2 degrees targets, because to decarbonise the energy system over the next 50 years, we will have to build an electricity system on this planet that is six times as big as what it is today.

So if Shell can’t make it no one can?

No, that´s not what I am saying. The point is simply: if there’s no money in it, it won’t happen. Is it going to be done by start-ups? I don’t think so. Is it going to be done by old-fashioned, worn-out, semi-bankrupt utilities? I don’t think so either. So, this is going to be done by companies like Shell who have strong balance sheets, who have global business models, who have strong brands, who have access to technology, have the best possible talent, are very disciplined, and can actually make this happen.

Can Shell really become the biggest electricity company in the world?

Let me be very clear: That is not an objective in its own right. We don’t have volumetric objectives. But the point we would like to illustrate is an important point: We’re not in the power business because it’s, sort of, nice to play around with or we have nice cuddly type of business that we can showcase to people. We want this to be one of the main four businesses that we have: oil, gas, petrochemicals and power. We have aspirations to be really big in this. By 2035 about a third of our total business can be power.

When one of your big US competitors was asked about venturing out into green energy he said:  ‘Well, we don’t think we have a lot to offer there with our expertise, we’re an oil and gas company’.

I agree. But we have! We are different.

Why are you different from Exxon-Mobil?

Shell has been consistently in the top three power traders in North America. So we have very significant power trading competency and capability. So we have an established competency, which is not something that we just started since January. No, we have done that for decades.

Shell-Managers have described the business models of traditional utilities as useless and outdated. Why do you think you are so much better than those?

Why would we be able to succeed where people who have been doing this for their living for decades are perhaps not succeeding? Partly because the business model of old, where these companies have succeeded with, are dramatically changing. They are disrupted. And you have to ask yourself: are the incumbents that grew up on a much more lazy business model, are they the people who are going to quickly make everything happen that is now possible in the new world? Some of them will, absolutely. Some of them won’t, because they lumbered with legacy assets,  and they suffer from a weakened balance sheet. And, moreover, they are not global. You cannot, at this point in time, a priori say: the future of power is going to be owned by the current incumbents.

You are sounding very self confident.

Don’t get me wrong. We are approaching this with humility. Because in the past we have made our fair share of mistakes when we invested outside oil and gas. But we also have conviction: There is disruption in the power market and this is a big opportunity for Shell. Does that mean we are preordained to succeed? No, of course not. But I’m going to give it my damnest best to try, and we have a pretty good idea on what things might work and what things might not work. And if it doesn’t work out, I won’t pull the plug. I’ll try to find a different way.

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