Shell employs about 80,000 people across 70 countries and reported profits of $15 billion last year due to operations ranging from exploring for oil and gas to petrol retailing, so it’s safe to say they’re one of the first names that come to mind when you think about oil and petrol. In fact, they’re the world’s second largest oil company. So why then, are they telling investors that they’re in the process of “transforming into a cleaner business centred on selling electricity?”
On the 3rd December last year Shell’s CEO, Ben Van Beurden, announced that Shell “are taking important steps towards turning our Net Carbon Footprint ambition into reality... This ambition positions the company well for the future and seeks to ensure we thrive as the world works to meet the goals of the Paris Agreement on climate change.”
Note: The Paris agreement is an agreement within the United Nations Framework Convention on Climate Change that set out to bring all nations together to undertake ambitious efforts to combat climate change.
This wasn’t Shell’s first step towards sustainability. In 2017, Shell was the first international oil and gas company to set the ambition to reduce their Carbon Footprint by about 50% by 2050 and around 20% by 2035, and there's a pretty big incentive for Shell’s CEO to make this happen!
Yes, Shell is also the first oil company to be linking these targets with executive remuneration - subject to a shareholder vote at the company’s 2020 AGM (Annual General Meeting). A step in the right direction towards sustainability!
So, a Greener Shell = a greener planet with richer executives and apparently richer investors. Shell’s CEO states this month to investors and the Wall Street Journal that it will return at least $125 billion to investors through dividends and share buybacks. With a market cap of about $250 billion, this means they’re giving back about 50% of the size of the company back to investors… Good thing they’re running out of oil!
Oil is a long-term business and so having 10 years of reserve life is traditionally considered a bare minimum for major oil companies like Shell. Back in 2016 Shell dropped below this minimum and on their current reserves, they have about 8.5 years left before they run out of oil.
It goes without saying that an oil company that doesn’t increase its reserves eventually runs out of product to sell.
Shell’s shown their commitment to adapting in line with where the world is already heading, and rather than increasing their oil reserves, they’re investing in a new energy division and their current natural gas business.
Shell execs hope these new investments could bring in an 8-12% return, as new energies like solar, wind power and batteries are newly affordable alternatives to oil and gas.
This shift has come at a good time with oil demand suspected and likely to peak and then decline between late 2020 -2040 as governments becoming stricter on emissions and consumer trends shift further towards greener, more sustainable alternatives.
“We believe we can be the largest electricity power company in the world in the early 2030s. We are not interested in the power business because we like what we saw in the last 20 years; we are interested because we think we like what we see in the next 20 years... With our brand, our global presence…and the adjacency to our gas business… we can get our hands on the cheapest gas anywhere… we should be able to win.”
An impactful statement from an oil company that’s purposely running out of oil and into the future.
It could be time to add Royal Dutch Shell to your watchlist.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
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