In the Netherlands and England, Shell released its most definitive statement yet on its low-carbon future and committed to 50% lower emissions by 2050 and net zero by 2070 in its operations and emissions from its fuels. The road, to Shell, is apparently paved with good intentions.
In its analysis of future energy demand, Shell noted that the global energy demand is set to increase from 570 exajoules to 1000 by 2070 and it will take extraordinary measures to meet the stringent carbon-reduction goals set in the Paris Agreement, while the world is increasing energy usage at the same time. But Shell reaffirmed its support for the Paris Agreement, while noting certain extraordinary consequences of the required re-shaping of energy supply, including biofuels supply exceeding petroleum by 2100 in the company’s “Sky” scenario.
In the new Shell Energy Transition Report, available here for download, the company updated what it calls its Mountains and Oceans scenarios and introduces a third, Sky. The company was at pains to present scenarios rather than projections about the long-term future.
As Shell notes:
For example, in Mountains, strong governments and powerful economic actors work together to create stability and maintain their own interests. This enables big initiatives like the deployment of carbon capture and storage (CCS) at scale or the building of widespread gas and hydrogen infrastructure. In contrast, in Oceans, competitive markets and a strong private sector are the main engines of change. There is major technology innovation, but big coordinated initiatives are more difficult to achieve. Energy needs are increasingly delivered through a patchwork of initiatives.
Both Mountains and Oceans deliver net-zero emissions (NZE) from the energy system by the end of the century. But they fall short of the temperature goal of the Paris Agreement. Sky builds on this earlier work and assumes that society takes actions so as to meet the Paris goal. It requires unprecedented and sustained collaboration across all sectors of society, supported by highly effective government policy.
Shell acknowledges a global economy in sharp transition on carbon:
We believe society will have to achieve net zero additional CO2 equivalent emissions from energy by 2070. That will likely require the world to reduce the amount of CO2e produced for each unit of energy consumed from today’s level of around 74 grams to around 43 grams of CO2e per megajoule by 2050
By 2050 we intend to match the Net Carbon Footprint of the global energy system. To achieve this we need to go even faster than society because our starting point is higher. It will likely mean we need to reduce the Net Carbon Footprint of our portfolio of energy products by around half from its current value of around 83 grams of CO2e per megajoule, to around 43 grams of CO2e per megajoule by the middle of the century. We plan to reduce our Net Carbon Footprint by around 20% by 2035 as an interim measure.
25X increase in biofuels production by 2050
Given the gigantic and global nature of Shells’s business, they note how dramatic the energy transition would have to be at Shell “to match the energy system by 2050”. They illustrate with six examples and note that meeting the Sky scenario could mean achieving not some, but all of them:
■ Selling the fuel produced by 25 biofuel companies the size of our joint venture Raízen in Brazil.
■ Selling the output from 200 large offshore wind farms the size of our planned Borssele wind farm in the North Sea.
■ Changing the proportion of gas in the total amount of oil and gas we produce, so that natural gas increases from 50% to 75%.
■ Selling enough electricity on our forecourts around the world to meet three times the total demand for power in the Netherlands.
■ Developing the capacity of 20 CCS plants the size of our Quest CCS plant in Canada.
■ Planting forests the size of Spain to act a carbon sink for emissions that still exist.
Today’s energy system is the result of many decades of choices by consumers, energy suppliers and governments. Societies want energy that is reliable, widely available and affordable. As a result, hydrocarbons account for more than 80% of the energy mix.
Capital investment in the trillions; solutions vary by sector
Shell noted that “capital investment measured in trillions of dollars over decades will be necessary to finance both new sources of energy, and to adjust existing infrastructure. It will also be necessary to change how energy is consumed, as a vast range of capital assets that consume energy – from homes, domestic appliances, vehicles, machinery and entire industries – will need to be adapted or replaced.”
The investment will vary by sector. “Some, like clothes and food manufacturing, require low temperature processes and mechanical activities, which electricity is well suited to deliver,” the report found. But electrification is not universally easy to achieve. “Other sectors, such as the iron, steel, cement, plastic and chemical industries, and certain types of transport, currently rely on the unique ability of hydrocarbons to provide extremely high temperatures, chemical reactions or dense energy storage. Today, many of these cannot be electrified at all, or only at a prohibitively high cost.”
Shell’s Sky scenario
Turning to more specific actions and consequences, the company went deep into the changes that would come from meeting the net-zero CO2 emission goals of the Paris Agreement, as contemplated in the Sky scenario. The five highlights were:
Mobility: The percentage of internal combustion engines (ICE)in passenger cars falls from 100% in 2010 to around 75% by 2030. By 2050, it is impossible to buy a new passenger vehicle powered by an ICE anywhere in the world.
Electricity: The share of electricity in final energy consumption rises from 18% today to 26% by 2030 and grows to as much as 50% by 2060. Renewable energy overtakes fossil fuels such as oil, gas and coal as the primary source of energy in the 2050s. The world uses hardly any fossil fuels in the power sector after 2060. The share of nuclear in the global electricity mix remains steady at around 10% to 2070. A new addition to the sector is generation from biomass combustion, which is linked with CCS to offer an important carbon sink.
Industry: Sky assumes that industrial applications are electrified where possible. To provide the negative emissions required to achieve net-zero emissions from the energy system, Sky requires the construction of around 10,000 large CCS plants by 2070, compared to fewer than 50 in operation in 2020.
Land use: Sky achieves net-zero global deforestation by 2070. In addition, an area the size of Brazil being reforested offers the possibility of limiting warming to 1.5°C, the ultimate ambition of the Paris Agreement.
Hydrogen: The share of hydrogen in total final energy consumption rises from less than 1% before 2040, to 6% by 2070. It is used as a high-density and storable energy source in transport and industry. Importantly in Sky, it is produced from water electrolysis using mainly renewable power.
Reshaping the Shell portfolio: Shell New Energies
The Shell portfolio is, thereby, on the verge of a major shift. The “New Energies business is exploring new fuels for transport, where our activities range from developing advanced biofuels, made from waste and non-food plants, to launching hydrogen refueling stations and recharging for electric vehicles,” the company said. So, a sort of “All of the Above” ambition.
Primarily, expect a ramping up in Shell’s gas and electricity businesses — and to a lesser extent investment in biofuels and hydrogen. And they foresee “a range of between $40 and $100 dollars per barrel of oil to 2030 to be likely.”
The surprising attraction is renewable power. As Shell notes, “The decline in costs of solar and wind generation, along with the electrification of the energy system, make the development of renewable energy resources increasingly attractive for society, and an attractive investment opportunity for Shell. “ But for the time present, the investment will be relatively limited for Shell compared to the ongoing investment in convention fossil fuels. “We expect our capital investment in New Energies to be between $1 billion to $2 billion a year, on average, until 2020,” they noted. “ We expect the largest part of our investments to be in power, where we will invest to gain access to customers, and in generation powered by solar, wind and gas.”
Establishing a higher ROI hurdle for new fuels than power
As we have seen elsewhere, the world is turning toward a double standard on investment in renewables, and Shell is no exception. In committing the bulk of its investment attention to power, it frankly confesses that it is seeking “equity returns of between 8% and 12%” from power projects. However, for new fuels, the company only noted in its forecast that it would “expect returns on capital similar to those in the Downstream business.”
It’s Shell’s disingenuous moment, because only three weeks ago they updated financial markets on those Downstream return ambitions. As NASDAQ.com reported here, “Shell plans to make a yearly investment of around $7-$9 billion in its downstream segment, forecasting a return on average capital employed (ROACE) of more than 15%.”
One is left to imagine how the investment options and decisions would look if the company decided that it needed only the same returns in advanced liquid fuels that it expects from new power investments, instead of expecting advanced fuel projects to be 100% competitive with established fossil fuel technologies from the get-go.
Developing conventional and advanced biofuels
As Shell notes:
“Biofuels today make up around 3% of global transport fuels and we expect their share to grow as the world shifts to lower-carbon energy. Shell is one of the world’s largest producers of biofuels made from sugar cane, through our joint venture in Brazil called Raízen. Raízen (Shell interest 50%) produces low-carbon biofuel from sugar cane. This Brazilian sugar cane ethanol can emit around 70% less CO2 compared with gasoline, from cultivation of the sugar cane to using the ethanol as fuel. In 2017, Raízen produced around 2 billion liters of low-carbon ethanol from Brazilian sugar cane. Shell is also one of the largest blenders and distributors of biofuels worldwide. We purchase biofuels to blend into our fuels to comply with country regulations and mandates.
“We are active in the development of advanced biofuels made from alternative feedstocks such as waste and cellulosic biomass from non-food plants. In 2015, Raízen opened its first advanced biofuels plant at its Costa Pinto mill in Brazil. In 2017, the plant produced 10 million liters of cellulosic ethanol from sugar-cane residues. It is expected to produce 40 million liters per year once fully operational.
“In Bangalore, India, we have built a demonstration plant that will turn waste – including food, cardboard, plastics and paper – into petrol or diesel that can power cars. This provides the final stage of the R&D process we will need to see if it is successful to scale up and support the commercialization of this waste-to-fuel process. The process has been developed by a USA-based research centre, the Gas Technology Institute, and is called IH2. The IH2 process uses heat, hydrogen and catalysts to convert large molecules of the sort found in waste into smaller fragments. Oxygen and other contaminants are removed to create two pure elements: hydrogen and carbon. The two are then combined to create hydrocarbon molecules: petrol, diesel and jet fuel.”
The Digest noted the absence of any specific mention of VIrent technology — although Virent’s approach certainly fits under “advanced biofuels made from alternative feedstocks such as waste and cellulosic biomass from non-food plants.” But we also wonder whether there will be emphasis on technologies like Virent to deliver renewable chemicals, because Shell’s ambitions in chemicals are increasing substantially even as it looks to reduce its petrochemical dependencies.
“We plan to increase earnings in our Chemicals business from $2.6 billion in 2017 to between $3.5 billion and $4.0 billion per year by 2025. We expect strong demand growth for chemicals in the medium term, mostly because of economic growth and demand for the everyday products that petrochemicals help produce. Chemicals can also help deliver some of the materials that will help the energy transition – such as high-performance insulation for homes and light plastic parts in cars and planes that can help save energy. Petrochemicals are also ingredients for components in energy-efficient lighting and low-temperature detergents.”
“By 2050, consumers in this scenario will not be able to buy an internal combustion engine (ICE) anywhere in the world”
The various Shell scenarios each show “a rise in demand for electric vehicles in the next few decades,” but it gets dramatic in the Sky scenario, which foresees that “more than half of global new passenger car sales are electric by 2030. 100% of new car sales will be electric by 2030 in places such as China and Western Europe, and by 2035 in North America and some other parts of the Asia Pacific region.”
By 2050, consumers in this scenario will not be able to buy an internal combustion engine (ICE) anywhere in the world. The result? In the Sky scenario, “global consumption of liquid hydrocarbon fuels in the passenger segment falls by 1.5-2 million barrels per day by 2030 compared with today.”
Hydrogen Council and the Energy Transitions Commission
There are two global collaborations that Shell highlighted in the Energy Transition Report that merit special attention, and they are the Hydrogen Council and the Energy Transitions Commission. As Shell describes them:
Hydrogen Council In January 2017, Shell and other companies launched the Hydrogen Council, a global coalition of chief executives working to raise the profile of hydrogen’s role in the transition to a low-carbon energy system. The council seeks to accelerate investment in the development and commercialization of the hydrogen and fuel-cell sectors. It provides recommendations to ensure appropriate conditions are in place to facilitate the deployment of hydrogen technologies. The council comprises 18 CEOs of energy, transport and industrial multinationals. In January 2017, the council published a report: “How hydrogen empowers the energy transition“ which further details hydrogen’s potential. In November 2017, the group launched a second report, called “Hydrogen, scaling up,” outlining a path to greater hydrogen deployment and its role in the energy transition.
Energy Transitions Commission. In 2015, Shell helped establish the Energy Transitions Commission which aims to accelerate change towards low-carbon energy systems that enable robust economic development and limit the rise in global temperature to well below 2°C. The ETC brings together leaders representing a wide range of sectors and interests: investors, energy companies, innovators, industrial energy users, nonprofit organizations and research institutes. As of October 2017, the ETC had 29 members. It is chaired by Lord Adair Turner and Dr Ajay Mathur. Chad Holliday serves as Shell’s Commissioner.
The Bottom Line
There are scenarios, Scarenarios, and there is the real world to come that will likely be neither. Let’s put that into perspective, these are not projections, these are estimates of likely situations and Shell is making business decisions based on them.
In the long-term, these are striking changes but they are evolutionary. In some ways, this is an attempt to put Shell’s investments into context for potential critics adopting a “hurry up” posture. The biggest changes in Shell’s business come between 2030 and 2050, in which it turns sharply towards renewables as hydrocarbon demand slows. For those welcoming a low-carbon future, it’s good news. For those looking for energy companies to maintain earnings, it’s good news. But not tomorrow.
We note the appetite for power projects with an 8-12% return while requiring 15% for advanced fuels. That clearly reflects the hurry-up in this document, which is less about Paris and more about a desire to get into the business of producing and delivering electricity as a world-scale replacement for producing and delivering fuels. Lower returns for strategically vital projects — that’s been accepted at big companies for a long time.
Advanced fuels? To the extent that they compete head-to-head with conventional fuels, Shell will be delighted to do them, and is investing in technologies that it believes will achieve that.
But Shell hardly needed an Energy Transition report to justify fuel projects that meet current investment hurdles — that’s energy-as-usual, not energy transition. The Energy Transition that is leading to this report comes in the form of electrons. The company is advising regulators that electricity will lead Shell towards meeting its Paris Agreement goals. Meanwhile, the company is advising shareholders that it sees not only “freedom to operate” in a future dominated by electric power, it sees good business too.