Shell wind move reliant on continued oil slump


May 27, 2016

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This month saw Europe’s biggest oil company, Shell, setting up a New Energies division to invest renewables including wind. The business has announced the move to staff and is expected to formally unveil the division at a briefing in London on 7 June.

The move is not exactly surprising. We reported this month that the company is taking part in the Dutch government’s tender to build the 350MW Borssele 1 and 350MW Borssele 2 wind farms off the coast of the Netherlands. Shell is bidding in a joint venture with Dutch utility Eneco and contractor Van Oord, and so can learn from these experienced players. Eneco, for example, completed the 129MW Luchterduinen offshore wind farm last year.

So not surprising… but still significant. The new division is set to bring Shell’s activities in the biofuels, electrical and hydrogen sectors together in one place, while enabling it to grow in other renewable industries, especially wind.

This certainly makes the oil company one to watch, as we do not see many entrants coming into the wind sector with Shell’s financial power. The company has reported average annual sales of $416bn over the last ten years, though this has slumped to $265bn in 2015. Meanwhile, New Energies owns assets worth around $1.7bn and plans to invest $200m each year.

But let’s not get carried away. This move by Shell into wind is tentative. And that $200m a year is less than 1% of the $30bn capital expenditure that it invests in oil and gas annually.

It could well become a huge player in wind, but that looks unlikely in the next ten years. It sees this as a long-term plan, particularly if pain in the oil sector drags on and on.

Conversely, if oil picks up then Shell could easily turn off the investment tap for wind.

The main reason for our scepticism, other than the numbers, is that Shell is not making a big deal of the plan. If New Energies represented a major strategic shift then this week’s news would have come out in a full bells-and-whistles press event, not a leaked internal announcement. The firm clearly feels that it should look at renewable power, but it does not want to invest so much in the sector that it harms shareholder returns.

This muted launch also shows that Shell is being pragmatic. New Energies could become a very big part of its business, but Shell does not want to commit to specific investment plans while it does not know what will happen to oil prices after the current two-year slump. The company’s plans will be very different if oil continues under $50 a barrel or shoots back up.

Finally, we have seen this all before where large oil and gas firms are concerned. Shell owns stakes in nine wind farms after an investment push before 2009, but has not done anything since; and BP has previously announced a big move into renewables before winding it down again.

If Shell is serious about wind, it has to prove it.

Don’t get us wrong. We are not criticising Shell for basing future investment decisions on what happens in the oil sector. The health or otherwise of its company is entwined with the oil price, and it is simply good business sense for it to be guided by what happens over the next few years. But this also means we cannot yet get excited over any push into wind.

It will take years to know if Shell is really serious about wind. We will only be able to judge that based on the investments it makes and the projects it is involved with. Winning that 700MW Dutch tender would be a great start.

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