The chief executive has changed at Shell but the song remains the same. The energy transition will be “balanced” and “we intend to remain disciplined while delivering compelling shareholder returns,” declared Wael Sawan. Translation: the company will not use the sudden arrival of spectacular financial riches to boost spending on renewables.
Being “disciplined” is, of course, an admirable ambition when presented starkly and without context. No chief executive of any company is ever likely to tell investors that the plan is to take wild punts on projects with little prospect of a decent return. But there is a world of nuance between the extremes.
The infuriating thing about Shell, after a year in which profits reached almost $40bn (£32bn), is the refusal to contemplate even a modest course-correction in favour of a faster energy transition. Distributions to shareholders via dividends and buy-backs were cranked up to $26bn last year, but spending on the renewables and energy solutions division was just $3.5bn within the overall capital expenditure outlay of $24.8bn.
The bald capex figures are misleading, argued Shell, because much of the low- and zero-carbon spending falls under operating expenditure or within other divisions. OK, but even on the company’s broader metric, the greener stuff came out at only one-third of the whole – and, critically, exactly the same ratio is pencilled in for this year.
The disinclination to pick up the pace on low-carbon is a stronger complaint than the one about the rate of windfall tax on North Sea oil and gas profits. On the tax front, there is a fair argument that the UK government, at its second attempt, landed in roughly the right zone. An effective headline tax rate of 75% is one of the highest in the world and Norway – the example usually cited by those arguing for a “proper” formula – is only slightly higher at 78%.
Yes, Shell’s $134m UK tax liability for 2022 was tiny in the context of its worldwide tax bill of $13bn and even the projected $500m-plus for the UK in 2023 is modest. But, even if the investment allowances within the North Sea energy profits levy were scrapped overnight (which would not be a risk-free policy given the need for secure supplies, particularly of gas, for some time yet), the Treasury would not suddenly be swimming in extra billions courtesy of Shell. The hard fact is that the company generates less than 5% of its revenues in the UK.
Thus the lack of greater ambition of renewables is the maddening bit. The company can – and did – point to things it is doing: $2bn spent on a Danish biofuels business; an acquisition in India; a solar expansion in the US; a big windfarm in Scotland. But one still comes back to the unchanged ratio of one-third of overall expenditure.
One shouldn’t be naive about the pressures on Sawan from shareholders. Even as they trot out their ESG (environment, social and governance) marketing spiel, many investors are delighted that they can tick the “transition” box at Shell while collecting bumper distributions. They wouldn’t change a thing. Indeed, the grumble from a few City analysts was that the current quarter’s buy-back wasn’t more than $4bn. When Sawan talks about being a “compelling” investment, he’s nodding to that audience – the one that points out that the shares of true transition laggards such as ExxonMobil are more highly rated.
Even so, it was striking that Sawan sounded only mildly excited by the green subsidies on offer in the US under President Biden’s Inflation Reduction Act. Some potential projects may become more attractive, he said, and it was “definitely an interesting stimulus”. Only interesting? The rest of the world sees the subsidies as lavish and an open goal for ambitious companies.
Sawan is obviously right that governments also need to move faster in practical ways. His grumble about the slowness of planning and permitting processes on renewables infrastructure is echoed by others. But it is also fair to expect companies that claim to be in the “transition” business to raise their own sights when given the financial resources to do so. The world has changed. Shell could move faster.
