Oil and Gas Will Remain Central to Shell
Shell has looked at its unimpressive returns on renewable energy and the booming profits in its oil and gas divisions and has decided to pivot from its previous course. In an effort to regain investor confidence, Shell’s (SHEL.L) CEO, Wael Sawan, is expected to make a formal announcement of the revised strategic direction of the oil company on June 14, according to an exclusive report in Reuters.
Shifting Gears
Shell’s CEO Sawan, who previously headed the company’s oil, gas, and renewables divisions, is expected in New York next week to formalize the details of his vision, it will include updates on capital allocation, shareholder payouts and “strategic choices we’re making,” according to Sawan.
What is known before the full announcement is that Shell expects it will keep company oil output steady or slightly higher into 2030. This would represent a change from an ongoing deemphasis on oil and gas production that Shell (and other large oil companies) had previously committed themselves to. Shell has been struggling with poor returns and is looking to regain investor confidence.
On June 14th, Sawan will reportedly make the announcement at an investor conference that they are scrapping a target to reduce oil output by 1% to 2% per year. The company is already near its goal for production cuts, which it attained through selling oil assets, including its U.S. shale business.
Returns from oil and gas typically range between 10% to %20, while those for solar and wind projects tend to be between 5% to 8%.
About Shell’s New CEO
Sawan rose to the level of CEO in January. As the new head, with solid experience in both oil and gas, and the renewable division, vowed to improve Shell’s stock performance as it lagged other energy companies. He now plans to improve company performance by keeping oil and gas central to the company’s business at least through the end of the decade – Sawan says that efforts to shift to low-carbon businesses cannot come at the expense of profits.
Shell’s former CEO, Ben van Beurden introduced the carbon reduction targets and the energy transition strategy. Sawan’s more cautious approach to the energy transition is a reversal of his predecessor’s direction.
Sustainability and Profits
In recent months the company intentionally stalled several sustainability and renewable projects, including those involving offshore wind, hydrogen and biofuels, it pointed to weak returns. Shell is also exiting its European power retail businesses, which had been thought, only a few years ago, as key to its energy transition.
Oil Company Profitability
As with many of its competitors, Shell reported record profits last year, driven mainly by strong oil and gas prices. However, the company produced 20% fewer barrels-per-day over 2019 production. Output is now expected to be flat to up slightly into 2030. New projects would have to meet internal profitability thresholds, and also depend on the success of exploration.
The shift away from further cuts in oil and gas production at Shell is similar to a move by rival BP (BP.L) made earlier in 2023. At BP, CEO Bernard Looney exited further plans to cut oil and gas output by 40% (by 2030).
A true global company, Shell Oil, headquartered in Hague, Netherlands, is a leading supplier of refined petroleum products and remains one of the world’s largest producers of oil and natural gas.
Investor Focused
According to Reuters, “a key concern for Sawan has been the significantly weaker performance of Shell’s shares since late 2021 compared with its U.S. rivals Exxon Mobil (XOM.N) and Chevron (CVX.N), which both plan to grow fossil fuel output.” Shell’s formal announcement next week is expected to include no change in Shell’s target of becoming a net zero emitter by mid-century as part of the Powering Progress energy transition strategy it announced in 2021, which he has described as “still the right strategy.”
Managing Editor, Channelchek
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