Publication In-depth: Royal Dutch Shell plc (Shell) climate vote

Is Shell serious about its climate transition plan?

• Shell’s 2030 climate commitments. By 2030 Shell has committed to decrease the intensity of its emissions (energy business only) by 20%, and reposition its business away from oil, towards gas and chemicals, and renewables and marketing. It plans to achieve this by expanding gas production (20% by 2025), renewable electricity and EV infrastructure, increasing biofuels and hydrogen (blue and green), and with significant use of nature-based offsets (NbS) and carbon capture and storage (CCS).
• How feasible is Shell’s use of abatements? Shell plans to use 120 Mt NbS p.a by 2030 and 25Mt CCS p.a by 2035. This amount of NbS is greater than the size of voluntary offsets traded in 2019 (104Mt)^[1], and equates to a non-conifer forest the size of Washington State (which needs to be mature by 2030). Its CCS ambitions are similarly difficult, today there is 40Mt of CCS operational globally, and only 15% is stored geologically, most is attributable to Shell’s Gorgon JV where its CCS is not currently working.
• Abatements could get Shell halfway to its 2030 emission intensity target. Shell aims to reduce the carbon intensity of its business from 78 to 63g CO2e/ MJ from 2019 to 2030. If Shell had implemented its CCS and NbS goals in 2019, they would provide 50% of Shell’s required reduction (chart below).^[2] This highlights the vulnerability of Shell’s targets if it is unable to implement NbS and CCS in the timeframe it plans, and shows the actions to reposition Shell’s business (even in the current high level form) are not the predominant driver of 2030 targets.
• Is Shell’s 2030 target Paris-aligned? No. Shell will not reach the carbon intensity required under Transition Pathways Initiative’s below 2 °C pathway for oil and gas, missing the 2030 target by 32%. Carbon Tracker has found that at least 66% of Shell’s capex is outside a beyond 2 °C scenario.^[3]

Shell’s climate vote should assess the credibility of its plan in the next 10 years, and genuine action is lacking.

Contents

1. Why Shell’s emission reduction targets are not Paris-aligned
2. How to assess a credible use of carbon offsets and CCS?
3. Climate vote assessment - Shell’s Net Zero Company Benchmark
4. Climate vote assessment - Shell’s plan against the ACCR voting guidelines
5. Shell’s climate transition plan commitments

1. Why Shell’s emission reduction targets are not Paris-aligned

Oil and gas growth does not align with a 1.5 °C pathway

To follow a 1.5°C consistent pathway, the world needs to decrease oil production by 4% p.a, and gas production by 3% p.a^[4] between 2020 and 2030. This is in contrast to Shell’s commitment of a 1-2% p.a decline in oil production and implied 4% p.a increase in gas production^[5]. In addition, Shell makes no commitments to reduce the oil and gas it sells, which is ~3x^[6] more than its production and the key driver of its emissions (scope 3).

Shell’s intensity targets do not align with a 1.5 °C or Below 2°C pathway

Without an absolute emissions reduction target, investors must rely on existing tools that allow intercomparison between companies on their carbon intensity performance. One such tool is TPI’s sectoral decarbonisation benchmark, which provides a year-on-year transition target for oil and gas companies on an intensity basis. Though the benchmark is not 1.5 °C aligned (it is based on IEA’s below 2 degrees, B2DS, which roughly aligns with a global warming of 1.75 °C by 2100, i.e it is more lenient than 1.5°C), it is a way to measure whether companies meet the bare minimum of the Paris Agreement’s ambition of keeping global warming to less than 2°C.^[7]

Shell’s intensity target falls short of meeting even the lowest requirement of emissions reduction for keeping temperatures below 2°C. This is partially a result of its high emissions intensity baseline (set in 2016 close to the peak of its production) and partially due to its lack of ambition in reducing absolute emissions in the next 10 years.

Using the TPI below 2 °C pathway for oil and gas, by 2030 Shell would need to reach an emissions intensity of ~43g CO2e/MJ, this compares to Shell’s target intensity of ~57g CO2e/MJ^[8], implying Shell’s plan will miss a less than 2°C pathway by more than a third (32%). We have used TPI’s data on Shell’s intensity target as this aligns with TPI’s sector approach, and includes scope 3 emissions from Shell’s own products but not from third parties.

66% of Shell capital expenditure is misaligned with climate transition

Carbon Tracker has conducted analysis on Shell’s oil and gas upstream projects to assess how much of its capital expenditure is aligned with the Paris Agreement budgets. To do this it maps capital expenditure projects to climate scenarios including IEA’s B2DS, Sustainable Development Scenario, and excludes projects that are outside of the Stated Policies Scenario (STEPS - business as usual scenario) as it assumes these projects would not be sanctioned.

Analysis released as part of the CA100+ Net Zero Company Benchmark identified that $3.94bn of projects had been sanctioned in 2019 that are outside of IEA B2DS and of Shell’s potential capital expenditure (2020 to 2040) 66% is inconsistent with IEA B2DS (only 34% is consistent). We note this number would be much larger if it were to include capital expenditure outside of STEPS, which was 30-40% as last reported by Carbon Tracker in October 2020^[9].

The ~US$4.2bn LNG Canada project (train 3 and 4), which is central to Shell’s gas expansion plans, is deemed incompatible with both the IEA B2DS and the higher warming Sustainable Development Scenario (SDS)^[10]. The other asset contributing to Shell’s gas expansion is Nigeria LNG (Final Investment Decision taken May 2020), which could be cheaper and therefore not outside of IEA B2DS.

2. How to assess a credible use of carbon offsets and CCS?

To keep within a 1.5 °C pathway the focus for credible climate transition plans must be on actual, permanent emission reductions. With this in mind, the significance of Shell’s intended use of offsets i.e. nature-based solutions (NbS) and Carbon Capture and Storage (CCS) raises a number of concerns.

As demonstrated in the chart below, under Shell’s target it plans to increase CCS by up to 25x by 2035 and offsets (including NbS) by 30x by 2030.

How offsets and CCS could contribute to Shell’s emission intensity targets

Shell aims to reduce the carbon intensity of its business by ~15g CO2e/ MJ from 2019 to 2030.  Given the large contribution of CCS (25Mt p.a by 2035) and NbS (120 Mt p.a by 2030) we have sought to quantify the importance of these abatement options to Shell’s emissions intensity reduction.

If we use Shell’s 2019 emission intensity of 78g CO2e/ MJ (prior to COVID-19) and assume that Shell implemented its CCS and NbS goals at that time, NbS would provide a ~6g CO2e/ MJ (~40%) reduction and CCS ~1g CO2e/ MJ (~10%) reduction. Shell would be halfway to its 2030 target. This highlights two things, the vulnerability of Shell’s targets if it is unable to implement NbS and CCS in the timeframe it plans, and, actions taken by Shell to reposition its business and operations are not the driving force in reaching its targets.

Shell has disclosed some of the activities it will be undertaking to contribute to our estimated 8g CO2e/ MJ  reduction (~50%) in its emissions intensity target - we have outlined them in our table summarising Shell’s climate transition plan commitments (section on Decarbonisation strategy 2030). Shell outlines its example energy transition milestones to get to 2030, identifying low-carbon power (renewable electricity and EV charge points) as the most significant contributor, followed by low-carbon fuels (blue and green hydrogen, biofuels). However, the details are very light and with no quantification it is very difficult to assess the credibility of these actions.

How do we assess the appropriate use of these NbS and CCS? Quality offsets and affordable, effective CCS have a role in reducing the carbon intensity of oil and gas extraction, processing and consumption as we phase-down the industry but they are not a mechanism to allow the industry’s expansion and prolong use of fossil-fuels. Due to the inherent limitations and risks, their use must start as soon as possible and have a clear end date. The following sections provide specific commentary on the considerations for nature-based solutions and CCS deployment for Shell.

Reliance on nature-based solutions

Nature-based solutions (NbS) rely on removal of CO2 from the atmosphere via redevelopment or protection of the natural environment. By 2030 Shell expects that its own portfolio of NbS will be sufficient to meet the carbon credit needs of its customers. The volume of voluntary carbon credits traded globally in 2019 is estimated to be 104 Mt, ~15 Mt less than Shell’s NbS target^[11].

For NbS, apart from requiring clear end dates on use, some of the key issues are the long lead times required to fully establish projects, ecosystem considerations, and the size and credibility of the schemes. Shell appears to be focused on addressing the credibility; how credible the schemes are will only become clear over time as any unintended impacts on ecosystems and communities eventuate.

With regard to size, the amount of nature-based solutions Shell plans to use would equate to a non-conifer forest the size of Washington State (which needs to be mature by 2030)^[12]. If all oil and gas companies adopted this approach, the land size required would become continental. Instead of placing so much weight on offsets to address scope 3 emissions, more investment is required to work with customers to establish the infrastructure to transition to zero carbon energy sources.

Shell’s investment: In 2020 Shell invested US$90m in development and purchase of NbS and expects to invest US$100m each year.

Shell’s projects:

Projects currently generating carbon credits for Shell include:

• Select Carbon in Australia which runs carbon farming projects on 10M hectares (acquired in 2020).
• Conservation projects in Indonesia, Cambodia, Peru, Guatemala and Kenya.
• Reforestation projects in Mississippi Delta (USA), Ghana and Kenya.
• Afforestation (creating forests) in China .

Future projects expected to contribute to Shell’s target:

• Partnership with Staatsbosbeheer, the independent Dutch state forestry service, to plant 5M+ trees over the next 12 years.
• 300 hectare reforestation project in Spain (Castilla y Leon region).
• 800 hectare reforestation project (Queensland, Australia).

Carbon Capture and Storage (CCS) and Carbon Capture Utilisation and Storage (CCUS)

Carbon Capture and Storage is the process of capturing CO2 from industrial production or the atmosphere for permanent storage, most commonly in underground reservoirs. Carbon Capture Utilisation and Storage (CCUS), also involves capturing carbon from industrial processes but it is used for industrial purposes, most commonly injection into oil wells for enhanced oil recovery (EOR). Unfortunately use of captured carbon for EOR can result in significant re-emission of the CO2 into the atmosphere, with some CCS/EOR projects having retention rates below 30%^[13].

Currently CCS facilities have the potential to capture and permanently store around 40 Mt of CO2 every year^[14]. The table below shows the top 6 operational CCS facilities globally (this includes Shell’s Gorgon CCS project JV), highlighting that 76% of CO2 captured from these projects is used for EOR rather than permanent geological storage.

In FY20 Shell stored ~1Mt of CO2 via CCS and states it currently has ~4.5 Mt of capacity. It is proposing to have an additional 25Mt p.a in capacity of CCS by 2035 but it does not yet have the CCS assets that will be able to store the carbon and has not disclosed which facilities or in what part of the value chain it plans to use CCS. Disclosure of these details will better enable the assessment of how effective CCS could be in assisting Shell’s GHG reduction efforts.

A 2030 target should only include the CCS facilities that are operational and working today (or in the next year) with clear disclosure of assets and addressable emissions. The rationale for this is that nine years does not allow a lot of time to effectively deploy a new CCS facility and the risk of projects not progressing or working is high.

Investment: In 2020 Shell invested US$70 million in CCS.

Shell’s current CCS projects include:

• Quest in Canada (~1Mt capacity), Shell has a 10% interest and this facility.
• Northern Lights in Norway (JV Total and Equinor). Final Investment Decision was in 2020.
• Gorgon CCS project in Australia.

Case Study: The Gorgon CCS Project

As shown in the table above the use of CCS to permanently store carbon is limited. Shell’s Gorgon JV CCS project is the largest facility designed to permanently store CO2 however the project has been plagued with issues^[15]. See the box below for further detail.

3. Climate vote assessment - Shell’s Net Zero Company Benchmark

We have reviewed Shell’s February disclosure to see how it may impact the CA100+ Net Zero Company benchmark assessments that were completed earlier this year, relying on Dec-2020 data.

We have set our view of Shell’s current climate commitments against the key disclosure areas included in the CA100+ Net Zero Company Benchmark.

4. Climate vote assessment - Shell’s plan against the ACCR voting guidelines

We review how Shell would be assessed against our draft ACCR 2021 climate vote guidelines for high carbon emitting sectors. As can be seen from the table below Shell would not be able to meet the key criteria, particularly Shell would need clear absolute emission reduction plans in the short (2025) and medium-term (2035).

5. Shell’s climate transition plan commitments

Royal Dutch Shell key climate commitments (changes from February).

Apr 2021 values are those in the Energy Transition report.

Publication information

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Author

Shu Ling Liauw

Published on

30th April 2021

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