Shell puts dividends before clean energy shift


November 14, 2016

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“Growth of renewables has been remarkable, but the capacity of industry to make money in that segment has been remarkably absent.” So says Ben van Beurden, chief executive of Shell.

He warned this month that he did not see enough profitability in the renewables industry as he discussed the oil and gas giant’s plans to invest in renewables by 2050. And he made his statement in a rather unusual place: the Energy for Tomorrow conference in Paris.

Van Beurden warned that big oil companies such as Shell could not make enough profit from investments in renewable energies and, for this reason, the time has not yet come for the oil giant to make a major switch. He sees it as a risk to dividend payments.

He emphasised the need for big companies to invest in renewables to adhere to the Paris climate deal that came into force this month. But he said the lack of long-term certainty for renewables on a global scale and the low profits made this a very tough industry for Shell to succeed in. This is surely no easier with President Trump.

For Shell, he said the most acceptable compromise would be to invest in large-scale clean energy systems in a hybrid system with gas. This would be the only way he sees to enable renewables to make profit. It is a markedly different approach from firms like Danish utility Dong Energy, which last week announced it was set to exit the oil and gas sector so it could focus more on its operations in offshore wind and other clean energy technologies.

Van Beurden added that Shell is interested in renewables. In fact, he considers Shell the largest renewable power trader in the US, thanks to significant wind and hydro businesses, which allow the company to trade renewable electricity. It has also set up a New Energies division this year to bolster its operations in clean energy.

And Shell is one of the world’s seven major oil companies that are going to be part of a new green energy investment fund, revealed last week. The others are BP, Eni, Repsol, Saudi Aramco, Statoil and Total; and the group unveiled details of the fund at an event in London to coincide with the Paris agreement coming into force.

The fund is a good idea but it has rightly been criticised for its tiny size. Greenpeace pointed out that the fund would amount to just $10m (£8m) a year for each of the ten members of the fund – which is smaller even than BP’s Bob Dudley’s £14m salary.

Also, the fund aims to mainly focus on ways to cut carbon emissions, rather than actively invest in renewables.

So, in short, van Beurden sees potential for renewables – but expects the oil sector to remain more profitable in the coming years. For giants like Shell it is still the comfortable choice.

And latest forecasts coming from the oil market suggest there is some merit in that strategy in the short-term.

The Organization of Petroleum Exporting Companies has recently raised its forecast for global oil demand next year and through to the end of the decade, as cheaper crude oil will spur consumption, even if global economic growth might slow further.

Shell itself predicts that demand for oil crude could peak in as little as five years. This might explain why in the short- to medium-term the Anglo-Dutch giant is not focused on huge investments in renewables, and instead favours instead its ‘old’ oil business.

That does not mean the strategy will be viable in the longer term. The Paris agreement has just come into force and, with it, the commitment of governments to fight climate change is set to grow, even if Trump seeks to scrap the agreement.

With more support coming from governments, the renewables industry will become fiercely competitive, even more than now. This might have two consequences for oil giants like Shell.

First, increasing competitiveness could lower the cost of wind and other renewables even further and affect profitability, pushing away firms like Shell that are thinking mainly of shareholder dividends.

And second, more support from governments and more pressure coming from growing awareness among the general public, might force Shell to review its investment strategy.

This is a decision that only Shell can make.

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