Prepare for more volatility: Shell CEO [Gas in Transition]

Conditions on the global energy market may have calmed somewhat since the unprecedented disruptions seen in recent years. First a global pandemic, which triggered a collapse in energy demand, and then Russia’s invasion of Ukraine, which removed a sizeable chunk of the world’s gas supply from the market, triggering prices to soar.

Though prices have since subsided, and a next wave of global LNG supply will soon arrive, Shell CEO Wael Sawan warns against complacency. In a discussion hosted by the Center for Strategic and International Studies (CSIS)’ Energy Security and Climate Change Program on June 4, he stressed that volatility on the market is not only here to stay, but will grow. Not only are there heightened geopolitical tensions to contend with, but as the energy transition progresses, the world will rely increasingly on renewables, making energy supply less stable.

“As you move to a more and more intermittent grid, you’re going to have volatility when the sun is shining versus when the sun is not shining, and when the wind is blowing versus when the wind is not blowing,” he said.

Battery technology is improving and this can help stabilise energy systems, “but we can still capture maybe two hours of storage and not a lot more,” he said.

What can help mitigate this volatility? Sawan’s solution is prudent, long-term energy planning, focused on diversified and secure supply that provides investors with policy certainty. Policymakers also need to have greater confidence in natural gas and specifically LNG. Not only can LNG provide stable and affordable energy supply to meet growing demand, but it can also help accelerate the energy transition by phasing out coal.

“This assumption that we’re out of the crisis is a dangerous one. We shouldn’t become complacent,” Sawan said. “We need to have energy policies that are looking not at the next three years or five years. You need to be looking at 20-30 years, and investments in the energy system cannot be looked at in the short-term government cycles. You need to look across multiple administrations to be able to achieve that security and confidence.”

Long-term planning is not an easy task, however. The moderator of the discussion, Joseph Majkut, director of CSIS’ Energy Security and Climate Change Program, noted that the various scenarios by credible organisations project very different outcomes for gas demand in 2050, with the range exceeding gas consumption today.

“One has to have the humility to recognise that it’s tough to predict two or three years’ time let alone 26 years,” Sawan said. “We need to have a forward looking view while also keeping resilience and optionality as different things evolve over time that we need to respond to.”

The value of LNG

In other words, planning should be long term but resilient and flexible to adapt to developments in the short term. And LNG can provide this resilience and flexibility.

“I think people underestimate how important LNG was in keeping the lights on and keeping industry going in Europe between 2022 and today,” Sawan said. “It was a massive lifesaver.”

In the wake of the energy crisis, many countries particularly in Europe have become more accepting of LNG. But for some like Germany, this is a “grudging acceptance.” They are reluctant to enter into supply contracts with too long a term, through fear or prolonging their dependence on natural gas.

“The risk is whether they will actually be able to attract the LNG, because the LNG is going to go to whoever is willing to pay the highest and whoever is willing to have the longest-term contract,” Sawan said.

Shell predicts that demand for LNG will grow by 50% by 2040, from 404mn tonnes last year, as industrial coal-to-gas switching gathers pace in China and South and Southeast Asian countries use more of the fuel to support their economic growth. Shell’s own strategy displays this confidence in LNG. Already the world’s biggest trader of the fuel, the company is looking to grow its LNG sales by 20-30% by 2030, from about 67mn t last year.

“If we are to truly move towards the lower carbon energy system of the future, we need to consider that the largest growth trajectory for energy demand is in Asia, and the fossil fuel that is underpinning that at the moment is coal,” he said. “Natural gas can fulfil coal’s role of providing grid stability, but with only half of the emissions.”

He added that a number of Asian countries have developed extensive gas infrastructure that relies on domestic supply which is now falling. They can turn to LNG to support their energy needs without having to invest massively in switching their energy systems to alternative fuels.

The Biden approval pause

On the need for policy certainty, the US Biden administration’s controversial pause on LNG approvals naturally came up in the discussion. The pause will remain in place pending an update of the department of energy’s analysis of the greenhouse gas footprint of US LNG. But that could all change if former US President Donald Trump retakes the White House in November’s election. He has vowed to begin reissuing permits for exports to non-FTA countries immediately if elected.

“Washington  is the capital of the energy world. Decisions being made here have massive impacts not just in the US but across the world,” Sawan said. “My message is one of pleading for stability and predictability in the energy system.”

The approval pause does not impact US LNG flow today or even over the next few years, but unless lifted it will affect investments that are made in projects that would come on stream in the late 2020s and early 2030s.

Demand for LNG will be there in the future, Sawan said, but it will be other suppliers that satisfy it rather than the US if approvals are not granted.

“What a shame not to be able to create that opportunity in the US, not to mention the ability from a broader energy security perspective for many of the US allies to be able to receive US LNG,” he said. 

In one sense, the damage has already been done as the pause has undermined confidence in US LNG, he said. But ultimately the momentum behind the US’ LNG growth cannot be held back.

“The train has already left the station there,” he said.

More value, less emissions

Sawan took on the reins of Shell in January last year, after long-standing CEO Ben van Beurden stepped down. Outlining the company’s strategy last year, he promised investors that the focus would be on “more value and less emissions.”

Whether it is conventional oil and gas development or energy transition projects, Shell ultimately needs to make a return on its investments. Investments in LNG achieve that while also reducing emissions by replacing coal, he said, but investments in renewables and other low-carbon technologies need the right incentives.

Shell notably watered down its Scope 1 and 2 emissions targets earlier this year, setting the carbon intensity reduction goal at 15-20% by 2030 instead of 20%. In 2023 it also abandoned plans to cut oil production each year for the rest of the decade – an aspiration that Sawan described at the time as “irresponsible” given robust demand for fossil fuels. It has also retired a goal to cut intensity by 45% by 2035.

Shell launched its appeal in April against a controversial Dutch court ruling made in 2021 that ordered it to nearly halve its greenhouse emissions by 2030, including Scope 3 emissions from the combustion of its products, which account for about 95% of the company’s overall emissions. It is the first time a court has ever ordered an oil and gas company to cut its emissions in line with 2014 Paris Agreement objectives, and so the outcome will have important implications for the industry at large.

Activist shareholder Follow This has also repeatedly filed resolutions for Shell to make deeper and faster cuts in its emissions. So far investors in Shell have overwhelmingly opposed these resolutions – with the most recent one being voted against at an annual general meeting in late May.

Sawan stressed that Shell was actively engaging with shareholders on its emissions targets but that it was not the right way to place such obligations and liability on an individual company. Instead, addressing emissions should be a collective effort by producers, customers and governments.

Justifying its appeal against the Dutch ruling, Shell told NGW in April that complying with the verdict would simply mean divestment of assets, and would do nothing to address global emissions.

“Unfortunately this becomes almost a zero sum game. Our hope is with time, both shareholders and those that are battling in the courts recognise that a company like Shell is truly wanting to be part of the solution, despite the narrative that sometimes people read,” Sawan said.