I was in a meeting today held at the Centre for European Reform in which Shell’s Chief Financial Officer, Simon Henry, made two arguments to absolve the oil and gas industry of responsibility for climate change. He painted coal as the real enemy, and reiterated the longest hand-washing argument in politics – that Shell believes that a Cap and Trade system is the best way to suppress carbon dioxide emissions. In other words, it’s not up to Shell to do anything about carbon. He argued that for transportation and trade the world is going to continue to need highly energy-dense liquid fuels for some time, essentially arguing for the continuation of his company’s current product slate. He did mention proudly in comments after the meeting that Shell are the world’s largest bioethanol producers, in Brazil, but didn’t open up the book on the transition of his whole company to providing the world with low carbon fuels. He said that Shell wants to be a part of the global climate change treaty process, but he gave no indication of what Shell could bring to the table to the negotiations, apart from pushing for carbon trading. Mark Campanale of the Carbon Tracker Initiative was sufficiently convinced by the “we’re not coal” argument to attempt to seek common cause with Simon Henry after the main meeting. It would be useful to have allies in the oil and gas companies on climate change, but it always seems to be that the rest of the world has to adopt Shell’s and BP’s view on everything from policy to energy resources before they’ll play ball.
During the meeting, Mark Campanale pointed out in questions that Deutsche Bank and Goldman Sachs are going to bring Indian coal to trade on the London Stock Exchange and that billions of dollars of coal stocks are to be traded in London, and that this undermines all climate change action. He said he wanted to understand Shell’s position, as the same shareholders that hold coal (shares), hold Shell. I think he was trying to get Simon Henry to call for a separation in investment focus – to show that investment in oil and gas is not the same as investing in Big Bad Coal. But Simon Henry did not bite. According to the Carbon Tracker Initiative’s report of 2013, Unburnable Carbon, coal listed on the London Stock Exchange is equivalent to 49 gigatonnes of Carbon Dioxide (gtCO2), but oil and gas combined trade shares for stocks equivalent to 64 gtCO2, so there’s currently more emissions represented by oil and gas on the LSX than there is for coal. In the future, the emissions held in the coal traded in London have the potential to amount to 165 gtCO2, and oil and gas combined at 125 gtCO2. Despite the fact that the United Kingdom is only responsible for about 1.6% of direct country carbon dioxide emissions (excluding emissions embedded in traded goods and services), the London Stock Exchange is set to be perhaps the world’s third largest exchange for emissions-causing fuels.
Here’s a rough transcript of what Simon Henry said. There are no guarantees that this is verbatim, as my handwriting is worse than a GP’s.
[Simon Henry] I’m going to break the habit of a lifetime and use notes. Building a long-term sustainable energy system – certain forces shaping that. 7 billion people will become 9 billion people – [many] moving from off-grid to on-grid. That will be driven by economic growth. Urbanisation [could offer the possibility of] reducing demand for energy. Most economic growth will be in developing economies. New ways fo consuming energy. Our scenarios – in none do we see energy not growing materially – even with efficiencies. The current ~200 billion barrels of oil equivalent per day today of energy demand will rise to ~400 boe/d by 2050 – 50% higher than today. This will be demand-driven – nothing to do with supply…
[At least one positive-sounding grunt from the meeting – so there are some Peak Oil deniers in the room, then.]
[Simon Henry] …What is paramount for governments – if a threat, then it gets to the top of the agenda. I don’t think anybody seriously disputes climate change…
[A few raised eyebrows and quizzical looks around the table, including mine]
[Simon Henry] …in the absence of ways we change the use of energy […] Any approach to climate change has got to embrace science, policy and technology. All three levers must be pulled. Need a long-term stable policy that enables technology development. We think this is best in a market mechanism. […] Energy must be affordable at the point of use. What we call Triple A – available, acceptable and affordable. No silver bullet. Develop in a responsible way. Too much of it is soundbite – that simplifies what’s not a simple problem. It’s not gas versus coal. [Although, that appeared to be one of his chief arguments – that it is gas versus coal – and this is why we should play nice with Shell.]
1. Economy : About $1.5 to $2 trillion of new money must be invested in the energy industry each year, and this must be sustained until 2035 and beyond. A [few percent] of the world economy. It’s going to take time to make [massive changes]. […] “Better Growth : Better Climate” a report on “The New Climate Economy” by the Global Commission on the Economy and Climate, the Calderon Report. [The world invested] $700 billion last year on oil and gas [or rather, $1 trillion] and $220 – $230 billion on wind power and solar power. The Calderon Report showed that 70% of energy is urban. $6 trillion is being spent on urban infrastructure [each year]. $90 trillion is available. [Urban settings are] more compact, more connected, there’s public transport, [can build in efficiencies] as well as reducing final energy need. Land Use is the other important area – huge impact on carbon emissions. Urbanisation enables efficiency in distributed generation [Combined Heat and Power (CHP)], [local grids]. Eye-popping costs, but the money will be spent anyway. If it’s done right it will [significantly] reduce [carbon emissions and energy demand]…
2. Technology Development : Governments are very bad at picking winners. Better to get the right incentives in and let the market players decide [optimisation]. They can intervene, for example by [supporting] Research and Development. But don’t specify the means to an end…The best solution is a strong predictable carbon price, at $40 a tonne or more or it won’t make any difference. We prefer Cap and Trade. Taxes don’t actually decrease carbon [emissions] but fundamentally add cost to the consumer. As oil prices rose [in 2008 – 2009] North Americans went to smaller cars…Drivers [set] their behaviour from [fuel] prices…
[An important point to note here : one of the reasons why Americans used less motor oil during the “Derivatives Bubble” recession between 2006 and 2010 was because the economy was shot, so people lost their employment, and/or their homes and there was mass migration, so of course there was less commuter driving, less salesman driving, less business driving. This wasn’t just a response to higher oil prices, because the peak in driving miles happened before the main spike in oil prices. In addition, not much of the American fleet of cars overturned in this period, so Americans didn’t go to smaller cars as an adaptation response to high oil prices. They probably turned to smaller cars when buying new cars because they were cheaper. I think Simon Henry is rather mistaken on this. ]
[Simon Henry] …As regards the Carbon Bubble : 65% of the Unburnable fossil fuels to meet the 2 degrees [Celsius] target is coal. People would stuggle to name the top five coal companies [although they find it easy to name the top five oil and gas companies]. Bearing in mind that you have to [continue to] transport stuff [you are going to need oil for some time to come.] Dealing with coal is the best way of moving forward. Coal is used for electricity – but there are better ways to make electricity – petcoke [petroleum coke – a residue from processing heavy and unconventional crude oil] for example…
[The climate change impact of burning (or gasifying) petroleum coke for power generation is possibly worse than burning (or gasifying) hard coal (anthracite), especially if the pet coke is sourced from tar sands, as emissions are made in the production of the pet coke before it even gets combusted.]
[Simon Henry] …It will take us 30 years to get away entirely from coal. Even if we used all the oil and gas, the 2 degrees [Celsius] target is still possible…
3. Policy : We tested this with the Dutch Government recently – need to create an honest dialogue for a long-term perspective. Demand for energy needs to change. It’s not about supply…
[Again, some “hear hears” from the room from the Peak Oil and Peak Natural Gas deniers]
[Simon Henry] …it’s about demand. Our personal wish for [private] transport. [Not good to be] pushing the cost onto the big bad energy companies and their shareholders. It’s taxes or prices. [Politicians] must start to think of their children and not the next election…
…On targets and subsidies : India, Indonesia, Brazil […] to move on fossil fuel subsidies – can’t break the Laws of Economics forever. If our American friends drove the same cars we do, they’d reduce their oil consumption equivalent to all of the shale [Shale Gas ? Or Shale Oil ?]… Targets are an emotive issue when trying to get agreement from 190 countries. Only a few players that really matter : USA, China, EU, India – close to 70% of current emissions and maybe more in future. The EPA [Environmental Protection Agency in the United States of America] [announcement] on power emissions. China responded in 24 hours. The EU target on 27% renewables is not [country-specific, uniform across-the-board]. Last week APEC US deal with China on emissions. They switched everything off [and banned traffic] and people saw blue sky. Coal with CCS [Carbon Capture and Storage] we see as a good idea. We would hope for a multi-party commitment [from the United Nations climate talks], but [shows doubt]… To close : a couple of words on Shell – have to do that. We have only 2% [of the energy market], but we [hope we] can punch above our weight [in policy discussions]. We’re now beginning to establish gas as a transport fuel. Brazil – low carbon [bio]fuels. Three large CCS projects in Canada, EU… We need to look at our own energy use – pretty trivial, but [also] look at helping our customers look at theirs. Working with the DRC [China]. Only by including companies such as ourselves in [climate and energy policy] debate can we get the [global deal] we aspire to…
[Question from the table, Ed Wells (?), HSBC] : Green Bonds : how can they provide some of the finance [for climate change mitigation and adaptation] ? The first Renminbi denominated Green Bond from [?]. China has committed to non-fossil fuels. The G20 has just agreed the structure on infrastructure – important – not just for jobs and growth – parallel needs on climate change. [Us at HSBC…] Are people as excited about Green Bonds as we are ?
[Stephen Tindale] Yes.
[Question from the table, Anthony Cary, Commonwealth Scholarship Commission] …The key seems to be pricing carbon into the economy. You said you preferred Cap and Trade. I used to but despite reform the EU Emissions Trading Scheme (EU ETS) – [failures and] gaming the system. Tax seems to be a much more solid basis.
[Simon Henry] [The problem with the ETS] too many credits and too many exemptions. Get rid of the exemptions. Bank reserve of credits to push the price up. Degress the number of credits [traded]. Tax : if people can afford it, they pay the tax, doesn’t stop emissions. In the US, no consumption tax, they are very sensitive to the oil price going up and down – 2 to 3 million barrels a day [swing] on 16 million barrels a day. All the political impact on the US from shale could be done in the same way on efficiency [fuel standards and smaller cars]. Green Bonds are not something on top of – investment should be financed by Green Bonds, but investment is already being done today – better to get policy right and then all investment directed.
[Question from the table, Kirsten Gogan, Energy for Humanity] The role of nuclear power. By 2050, China will have 500 gigawatts (GW) of nuclear power. Electricity is key. Particularly coal. Germany is building new coal as removing nuclear…
[My internal response] It’s at this point that my ability to swallow myths was lost. I felt like shouting, politely, across the table : ACTUALLY KIRSTEN, YOU, AND A LOT OF OTHER PEOPLE IN THE ROOM ARE JUST PLAIN WRONG ON GERMANY AND COAL.
[Kirsten Gogan]…German minister saying in public that you can’t phase out nuclear and coal at the same time. Nuclear is not included in that conversation. Need to work on policy to scale up nuclear to replace coal. Would it be useful to have a clear sectoral target on decarbonising – 100% on electricity ?
[Stephen Tindale] Electricity is the least difficult of the energy sectors to decarbonise. Therefore the focus should be on electricity. If a target would help (I’m not a fan) nuclear certainly needs to be a part of the discussions. Angela Merkel post-Fukushima has been crazy, in my opinion. If want to boost renewable energy, nuclear power will take subsidies away from that. But targets for renewable energy is the wrong objective.. If the target is keeping the climate stable then it’s worth subsidising nuclear. Subsidising is the wrong word – “risk reduction”.
[Simon Henry] If carbon was properly priced, nuclear would become economic by definition…
[My internal response] NO IT WOULDN’T. A LOT OF NUCLEAR CONSTRUCTION AND DECOMMISSIONING AND SPENT FUEL PROCESSING REQUIRES CARBON-BASED ENERGY.
[Simon Henry] …Basically, all German coal is exempted (from the EU ETS). If you have a proper market-based system then the right things will happen. The EU – hypocrisy at country level. Only [a couple of percent] of global emissions. The EU would matter if it was less hypocritical. China are more rational – long-term thinking. We worked with the DRC. Six differing carbon Cap and Trade schemes in operation to find the one that works best. They are effectively supporting renewable energy – add 15 GW each of wind and solar last year. They don’t listen to NIMBYs [they also build in the desert]. NIMBYism [reserved for] coal – because coal was built close to cities. [Relationship to Russia] – gas replacing coal. Not an accident. Five year plan. They believe in all solutions. Preferably Made in China so we can export to the rest of the world. [Their plans are for a range of aims] not just climate.
[Simon Henry] [in answer to a question about the City of London] We don’t rely on them to support our activities [my job security depends on a good relationship with them]]. We have to be successful first and develop [technological opportunities] [versus being weakened by taxes]. They can support change in technology. Financing coal may well be new money. Why should the City fund new coal investments ?
[Question from the table, asking about the “coal is 70% of the problem” message from Simon Henry] When you talk to the City investors, do you take the same message to the City ?
[Simon Henry] How much of 2.7 trillion tonnes of “Unburnable Carbon” is coal, oil and gas ? Two thirds of carbon reserves is coal. [For economic growth and] transport you need high density liquid fuels. Could make from coal [but the emissions impact would be high]. We need civil society to have a more serious [understanding] of the challenges.
After the discussion, I asked Simon Henry to clarify his words about the City of London.
[Simon Henry] We don’t use the City as a source of capital. 90% is equity finance. We don’t go to the market to raise equity. For every dollar of profit, we invest 75 cents, and pay out 25 cents as dividend to our shareholders. Reduces [problems] if we can show we can reinvest. [ $12 billion a year is dividend. ]
I asked if E&P [Exploration and Production] is working – if there are good returns on investment securing new reserves of fossil fuels – I know that the company aims for a 10 or 11 year Reserves to Production ratio (R/P) to ensure shareholder confidence.
Simon Henry mentioned the price of oil. I asked if the oil price was the only determinant on the return on investment in new E&P ?
[Simon Henry] If the oil price is $90 a barrel, that’s good. At $100 a barrel or $120 a barrel [there’s a much larger profit]. Our aim is to ensure we can survive at $70 a barrel. [On exploration] we still have a lot of things in play – not known if they are working yet… Going into the Arctic [At which point I said I hope we are not going into the Arctic]… [We are getting returns] Upstream is fine [supply of gas and oil]. Deepwater is fine. Big LNG [Liquefied Natural Gas] is fine. Shale is a challenge. Heavy Oil returns could be better – profitable, but… [On new E&P] Iraq, X-stan, [work in progress]. Downstream [refinery] has challenges on return. Future focus – gas and deepwater. [On profitability of investment – ] “Gas is fine. Deepwater is fine.”
[My summary] So, in summary, I think all of this means that Shell believes that Cap and Trade is the way to control carbon, and that the Cap and Trade cost would be borne by their customers (in the form of higher bills for energy because of the costs of buying carbon credits), so their business will not be affected. Although a Cap and Trade market could possibly cap their own market and growth as the sales envelope for carbon would be fixed, since Shell are moving into lower carbon fuels – principally Natural Gas, their own business still has room for growth. They therefore support Cap and Trade because they believe it will not affect them. WHAT THEY DON’T APPEAR TO WANT PEOPLE TO ASK IS IF A CAP AND TRADE SYSTEM WILL ACTUALLY BE EFFECTIVE IN CURBING CARBON DIOXIDE EMISSIONS. They want to be at the negotiating table. They believe that they’re not the problem – coal is. They believe that the world will continue to need high energy-dense oil for transport for some time to come. It doesn’t matter if the oil market gets constrained by natural limits to expansion because they have gas to expand with. They don’t see a problem with E&P so they believe they can keep up their R/P and stay profitable and share prices can continue to rise. As long as the oil price stays above $70 a barrel, they’re OK.
However, there was a hint in what Simon Henry talked about that all is not completely well in Petro-land.
a. Downstream profit warning
Almost in passing, Simon Henry admitted that downstream is potentially a challenge for maintaining returns on investment and profits. Downstream is petrorefinery and sales of the products. He didn’t say which end of the downstream was the issue, but oil consumption has recovered from the recent Big Dip recession, so that can’t be his problem – it must be in petrorefinery. There are a number of new regulations about fuel standards that are going to be more expensive to meet in terms of petroleum refinery – and the chemistry profiles of crude oils are changing over time – so that could also impact refinery costs.
b. Carbon disposal problem
The changing profile of crude oils being used for petrorefinery is bound to cause an excess of carbon to appear in material flows – and Simon Henry’s brief mention of petcoke is more significant than it may first appear. In future there may be way too much carbon to dispose of (petcoke is mostly carbon rejected by thermal processes to make fuels), and if Shell’s plan is to burn petcoke to make power as a solution to dispose of this carbon, then the carbon dioxide emissions profile of refineries is going to rise significantly… where’s the carbon responsiblity in that ?