A new world in transition: How Shell tackles the changing energy landscape
What does it take to guide one of the biggest energy companies in the world through the most significant period of change for generations, in the world’s largest energy market?
It sounds like a daunting task, but as one of the people helping lead this shift points out, it isn’t a new one. “The world has been through energy transitions before,” says Jason Klein, Vice President U.S. Energy Transition Strategy at Shell. “In the 19th and 20th centuries, we saw significant growth in the use of fossil fuels, and as there was more global prosperity, there was increased use of energy around the world.”
The current transition, driven by the need to substantially reduce carbon dioxide emissions over the next century, only seems exceptional because energy consumption patterns have remained remarkably stable since the 1970s, after oil consolidated its position ahead of coal as the most important primary energy source. Since then, says Klein, “The mix of fuels used globally hasn’t changed much, even though we’ve seen a lot of further growth in the amount of energy used as global prosperity has reached more people around the world.”
That means that the transition underway today is, for most people, their first experience of significant changes in the way energy is produced, purchased and consumed. And importantly, adds Klein, the energy transition won’t be a simple, uniform process of change. “All of us around the world are experiencing some transition from our current energy system to one that’s lower carbon. But every country’s transition is different,” he says. “And, somewhat uniquely, here in the U.S. each region, state and city is undergoing a different transition.”
Scale and diversity
That complexity stems from a number of causes. In a country the size of the U.S., there is always going to be significant regional diversity in lifestyles and economic activity. People and companies in Texas, California or New York will each use energy in different ways. But while most countries are setting their carbon reduction targets at national or even supranational levels, the transition in the U.S. is being driven by a combination of economic opportunity, consumer choice and – currently – by policy decisions at state or city level.
In the U.S., however, even state-level decisions can have global significance. The U.S. is the largest economy globally, but California, Texas and New York are ranked 5th, 11th and 13th respectively for GDP. Their actions set examples that other economies can and will follow. The U.S. is the world’s second-largest energy consumer, after China. It is also the biggest oil market on Earth, consuming a fifth of global production, and the No. 1 consumer of natural gas. A ranking of individual U.S. states against other countries by their annual carbon emissions puts Texas between Germany and South Korea in the global top 10. California, on the same list, would sit just inside the top 20, between Australia and Italy.
The U.S. has global significance for Shell, too. While the company is headquartered in Europe, it employs around 17,000 people in the U.S., more than in any other single country – representing 20% of its total workforce.
“We have every single Shell line of business represented in the U.S. and we operate in all 50 states,” says Klein. His role, he explains, is to pull together the company’s outlook on how the energy transition will play out across the country; to understand what that means for all Shell’s lines of business; and to determine a strategy across the portfolio that will enable the company to thrive through the changes.
From today to net-zero
It is a role that spans a broad time horizon. Shell is already planning on the basis of scenarios stretching out to 2050 and beyond, but Klein notes that an important part of his job involves the organization’s response to regulatory and customer preference changes that are taking place today.
How does Shell plan to change over that time? First, says Klein, it expects to remain in the oil and gas business. “There are certain sectors that will continue to need dense liquid energy carriers for a significant time to come,” he says. “Commercial aviation, long-distance shipping or cement and steel are all long-cycle businesses that are very difficult to power with electricity.” Managing the emissions from those sectors in the near term will most likely require nature-based solutions (such as planting new forests) and carbon capture and storage technologies, he notes. “The goal of the Paris Climate agreement is not zero carbon, it’s net-zero carbon, and we embrace that,” says Klein, adding that Shell’s latest work modeling global energy scenarios – the Sky scenario, a technically possible, but challenging pathway for society to achieve the goals of the Paris Agreement – suggests that net-zero emissions could be achieved without eliminating fossil fuels from the energy mix.
Less, and more
Nevertheless, there’s still plenty of change coming. In broad terms, says Klein, there are two things Shell can do to meet its energy transition goals. “We can reduce the carbon intensity of the products we sell, and we can alter the mix of the products we sell.”
The company is active on both fronts. “We are continuing to grow our natural gas business, because gas is the lowest-emission fossil fuel, significantly better than coal when used for electricity generation. By the number, Shell is now more prominently a gas than an oil company. The second major action we’re taking is reducing emissions from our own operation and offsetting customers’ emissions when they use our products,” says Klein. “In addition, we’re increasing the proportion of renewable power in our portfolio and working with our customers to meet their demand for lower-carbon solutions.”
Right now, says Klein, Shell is investing up to $1 billion to $2 billion a year in new energy technologies across power and fuel spectrums. Those investments have included electric vehicle charging companies, solar generation, wind generation, energy storage, hydrogen and other low-carbon technologies. The company has plans to ramp up these activities significantly in the next five years. “We are currently spending up to $1 billion to $2 billion across our New Energies portfolio of businesses. We announced earlier this year that from 2021–2025 we could see ourselves investing on average of up to $2 billion to $3 billion dollars across our newly formed Emerging Power business,” says Klein.
While Shell hasn’t set revenue targets for these emerging business portfolios, it has established targets for overall carbon reduction. “We have a stated ambition to reduce our global net carbon footprint by 20% by 2035, and by around 50% by 2050, in step with society,” says Klein. “That’s looking at both our own emissions, which are around 15% of the total, and at the emissions our customers generate using our products, which are the other 85%.” Shell has also tied executive compensation to short-term carbon reduction targets. The most recent of these is an unconditional three-year target beginning in 2019 to reduce the company’s net carbon footprint by 2% to 3% compared to 2016.
The opportunity of complexity
Achieving such energy transition goals across a market as large and diverse as the U.S. is challenging, says Klein, but it also presents important opportunities. “The U.S. is home to an enormous amount of innovation, entrepreneurship and investment in renewables and new energies,” he says. “Look at all the venture capital and the academic research and the collaboration that is going on in this space.” Even the regulatory complexity of the U.S. market could be a strength, he suggests. “Because every state is exploring different ways to find solutions, the U.S. gives you a menu of regulatory options. That helps you to understand the approaches that work best in unique environments.”
The U.S. also gives Shell the opportunity to experiment with new products and new offerings to customers. Here, it hopes the strength of its brand will give it a head start. The energy transition, says Klein, will drive an evolution in the way the company interacts with its customers. “This is going to require an even more customer-facing approach than traditional investor-owned energy companies are used to,” he says.
In the U.K., Shell recently bought a retail electricity business, giving it a new way to reach consumers directly. It already has significant electricity interests in the U.S. through its power and gas trading arm, although that unit only deals directly with business customers today.
Ultimately, says Klein, the complexity of the energy transition will favor companies like Shell with the scale and financial strength to make big investments and solve difficult technical and business problems. “The energy transition is going to require enormous investment globally; it’s essentially a rewiring of the entire global energy system,” he concludes. “There are enormous possibilities to generate new commercial frameworks and offer new solutions to customers. And we really see the opportunity to offer integrated solutions to customers as being something Shell is uniquely positioned to do.” — Jonathan Ward
Published: October 2019
Images: Nathan Lindstorm for Delivered; Gpix/Alamy/mauritius images