Oil and gas majors, like Royal Dutch Shell and Exxon Mobil, are often portrayed negatively in the media for polluting the Earth with oil production. Ultimately, these companies are just businesses, supplying a product (energy) for which there is a sustained and necessary demand. Without a – in this case, pronounced – market requirement for their product, oil and gas producers would not be in business. Further, it is not oil companies alone who burn fossil fuels and release carbon into the atmosphere, but ordinary civilians like you and me, who fly in airplanes and drive cars, as well as the majority of industries that impact our lives in one way or another; manufacturing, power generation, agriculture, and so on.
May 2017 was the second warmest month on record over the last 137 years. The first and third warmest months occurred last year, in 2016, and in 2014, respectively. Global warming is taking place at an alarming rate. While differences in the amount of solar energy absorbed by Earth over time has historically caused major shifts in weather patterns and topography, the overwhelming majority of the world’s scientific community agrees that present-day climate change is predominantly spurred by human activity.
Oil companies, and Royal Dutch Shell in particular, are not shying away from these facts. On the contrary, they are eager to be part of the conversation and the solution – which makes good business sense. Ignoring the realities of climate change will put oil and gas producers at risk of becoming obsolete over the next century, or at least reduce their market share dramatically, as the energy market transitions to a fragmented mix of renewables and fossil fuels.
Shell is proactively aligning its corporate strategy and technology development to compete in a lower carbon but energy intensive future. The current CEO, Ben van Beurden, has been vocal in acknowledging global warming as fact and consistently advocates in support of a comprehensive carbon tax framework. In 2015, Shell, along with five other oil and gas producers, co-authored an open letter to the UN and governments ahead of the Paris Conference on Climate Change, to express their support for an overdue comprehensive global carbon tax system that will fairly price emissions and help to accelerate their reduction.
Carbon tax is a proven and effective instrument. While a few countries have successfully implemented a form of tax, there is yet no global agreement on the matter. It is imperative that national governments are able to produce an integrated and cohesive framework, otherwise the market will simply shift from one geography to the next – as in the experience of B.C, in Canada, when the province independently introduced a carbon tax. Consumers simply drove over the border to Alberta to avoid paying higher prices at the pump, and – although successful in reducing emissions – the initiative was put on hold.
There are two main systems in circulation around carbon pricing, one is ‘cap and trade’, or Emissions Trading System (ETS) and the other a straight carbon tax, which is preferred by the both the climate change community and by Shell as it allows for more predictability in market prices. Carbon tax is a form of pollution tax whereupon a fee is levied on burning different fossil fuels in proportion to their carbon content. The cost would be passed as far up and down the supply chain as possible. For instance, an oil and gas company would pay the government, but transfer the cost to their customer – say, an electricity generator. The electrical company would then transfer the additional cost to their end users, who would then receive an equivalent tax reduction to ‘neutralize’ the higher costs of energy.
Shell was one of the first companies to implement CCS – an IEA-approved technology, with its Quest project in Canada. CCS systems gather CO2 emissions generated from a plant or other emissions-heavy facility, and inject the gas into a capped reservoir under the ground. While not a stand-alone solution for all GHG emissions, CCS is an important part of an ambitious initiative to keep the temperature rise at less than 2 degrees above pre-industrial levels, and would qualify for a rebate under some proposed carbon tax systems.
The Dutch company’s recent acquisition of and merger with British Gas (BG) strengthened its long-signaled position that cleaner-burning natural gas (CH4, or methane) will be a critical part of tomorrow’s energy resource. When burned to generate electricity, methane releases half the amount of carbon dioxide than coal does per kW. By increasing its gas reserves by almost 25% with the BG deal, and further strengthening its industry-dominant position in LNG, Shell will be able to capitalize on operational efficiencies in gas extraction, production, and distribution when the tables finally turn on coal. Replacing coal with gas in just the EU would reduce CO2 emissions by 450 million tons – representing only 0.1% of total global emissions, but still, a start (the real game changer would be China).
In 2016, Shell re-organized to incorporate ‘New Energies’ into its existing Integrated Gas (IG) business. While the IG business manages Shell’s natural gas operations, New Energies is tasked with ‘exploring and investing in low carbon opportunities’. Currently, the oil major plans to invest about US$1 billion, or roughly 4% of total annual spend, in renewables by 2020. An earlier investment in wind, solar and biofuels in the early 2000s came to market too soon. Shell was not able to make the business profitable and should learn from that experience. Growing competencies in renewables technology internally will be a challenge – Shell’s core expertise lies in hydrocarbon extraction and processing. Instead, we recommend prioritizing the New Energies efforts and working to stay in touch with leading ventures and abreast of relevant developments in the renewable energy space. Maintaining an active network and informed position in this sphere will ensure future opportunities for acquisition and diversification, and help to secure Shell’s seat at the table as a leading energy provider in the 21st century, and beyond.
Perhaps, rather than a global group of predominantly oil, gas, and petrochemical companies, the Shell of the future will look more like a diverse energy conglomerate, powering homes and vehicles with natural gas, and supplying solar, wind, and even nuclear or hydro-energy around the world.
By Lara Bekhazi, Adhika Nurul and Lisa Wei
Appendix:
- https://climate.nasa.gov/
- http://www.shell.com/sustainability/environment/climate-change.html
- https://www.nytimes.com/2017/04/11/opinion/guess-whos-for-a-carbon-tax-now.html?mcubz=2
- https://www.carbontax.org/whats-a-carbon-tax/
- http://newsroom.unfccc.int/unfccc-newsroom/major-oil-companies-letter-to-un/
- https://www.theguardian.com/commentisfree/2015/nov/27/cop-21-paris-climate-talks-low-carbon-oil-statoil
- http://www.independent.co.uk/environment/shell-oil-warn-fossil-fuel-industry-carbon-taxes-ben-van-beurden-renewable-energy-a7622211.html
- https://www.theguardian.com/environment/2015/may/17/shell-climate-change-rhetoric-the-real-story
The concept of CCS has existed since 1990, but the reason why the technology hasn’t taken off is lack of budgetary measures and political pressures. Carbon capturing technology is not regarded as the problem. Equipment to capture CO2 has been used for decades in chemical and oil industries, but figuring out how to adapt it for use is complicated, and building it is costly. A sizeable coal plant, without carbon capture, might cost $1.4bn to build but adding CCS adds about another $1bn. The downside is the resource allocated to CCS and trade off between the income and achieving efficiency.
How do you think we can improve the long-term sustainability of such projects? One way is to channelise the stored carbon into a source of energy for other industrial activities. Does Shell facilitate any such processes? What sort of government regulations and support do we require to encourage such practices?
This is a great article to give people outside the industry an overview of the development in the oil and gas to address climate change issue. I agree that transitioning into natural gas is a short-term solution as it is a cleaner energy source. Recently Chevron Australia has also implemented CCS for their $55billion Gorgon project. The CCS was only $2billion which is ~13% of total project cost (https://sequestration.mit.edu/tools/projects/gorgon.html). This cost seems reasonable for a big project. As mentioned in the article, the Australian government also provided $60million to support this effort of reducing carbon emission. There is definitely development in the industry however, there will need to be more aggressive movements to help the environment so major oil companies like Shell, Exxon, Chevron should definitely put more effort into developing renewable energy whether it is internally or by investing in other expertise companies in the renewable sector.