Climate activists are missing the point on big oil companies

We're better off with these assets in the hands of Shell

(Image credit: © Karen Ducey/Getty Images)

published 15 June 2021

If you’re looking for an “ESG” investment, why not try oil stocks?

Shell has one of the most full-on emissions strategies of the big fossil fuel companies – a target of cutting the carbon intensity of its products by at least 6% by 2023 (from 2016 levels), 20% by 2030, and 100% by 2050.

That might sound impressive, but it isn’t impressive enough for everyone (is anything ever? ). Last month, egged on by climate campaigners, a Dutch court ordered it to go further, lowering its total emissions by 45% by 2030 from 2019 levels. The ruling only applies in the Netherlands, but given how clear the direction of travel is here, Shell is obviously having a bit of a think about what to do.

One possibility is the review of its operations in the Permian Basin in Texas. Shell could, says the Times, be on the edge of selling its operations in “what has been deemed the world’s most important oil and gas site” – and one that generated about 6% of the firm’s revenues last year.

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Campaigners will be thrilled; they love it when oil and gas companies sell oil and gas assets. However, just like the analyst who greeted the news with the comment that this will underline how fast the industry is moving on emissions, they miss the point completely.

First, nothing like this tells us anything at all about how fast the industry is or is not moving on emissions. The bit of the Permian Basin currently owned by Shell will not disappear because it has been sold by Shell, it will merely be operated by someone else – possibly someone without the compliance, public profile and reputation issues a large public company such as Shell has to contend with (I wrote about this here a few months ago). There might be less transparency around the Basin in future, but there will definitely be no fewer emissions.

Demand for oil isn't going away

The key thing to remember here is that we need oil. It would be nice if we did not, but we do – and we will do for some time to come. Right now, wind and solar power – while growing fast – still represent “just 5% of global primary energy consumption” say JP Morgan analysts in their latest Annual Energy Paper. The energy transition may be happening, but it is happening a lot more slowly than optimistic energy futurists might like.

That’s partly a function of rising overall demand: the world might get more energy efficient every year (which is nice) but even so, as developing worlds keep developing (also nice) total levels of emissions just keep rising (not so nice). Note that, while Japan and Europe have reduced primary energy use by 4%-6% over the last decade, “developing world increases were six times higher than their reductions.”

African energy use is rising from per capita levels last seen in Europe in the 19th century – there is a long way to go before Africa meets European levels of consumption.

But rising demand is only half the story, of course; the other half is supply. And the main issue here is that renewables mostly produce electricity – and that doesn’t work for everything.

A mere 18% of global final energy consumption is in the form of electricity. Reducing emissions, then, means not just massive investment in wind and solar as well as new transmission mechanisms, but also massive electrification of transport and industry (all at the same time – China is doing lots of electrification but making electricity from coal – which doesn’t quite count).

Things are changing, but it will take time

This stuff doesn’t happen fast (it’s not just about money, it’s about technology and planning too). Those unconvinced should look up the progress of the huge Viking wind farm in Shetland as well as the cables that will connect it to the mainland: after “more than a decade of working with the community” the project (which will be the UK’s largest wind farm) is finally going ahead.

Add it all up and, on IEA numbers, in 2040 70%-75% of global primary energy consumption may still be met by fossil fuels.

The key in this whole discussion is a simple one, says JP Morgan’s Michael Cembalest. It is not that the transition will not happen, it is just that “the behavioural, political and structural changes required for deep decarbonisation are still grossly underestimated”. That means that “the companies we all rely on for dispatchable, thermal power and energy will need to survive and prosper” for longer than most think.

With that in mind, does it really make sense to bully the big companies in this space into dumping the oil and gas assets that produce that dispatchable thermal power – particularly if the buyers turn out to be not quite as easy to supervise as the sellers?

The truth is that forcing listed companies to dump assets doesn’t make any difference to emissions – just to how we see them. That doesn’t seem like a good thing to us. Campaigners with any sense should not be trying to make Shell divest its vital oil and gas assets. They should be persuading them to keep them - and to manage them well.

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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.