Can Shell Have it Both Ways When it Comes to the Energy Transition?

Shell’s share price hasn’t delivered the same level of investor returns this year. A softening of commodity prices has hit the bottom line, even if that line remains highly profitable. A refocus on oil and gas profits this year has drawn criticism. But will sponsoring green initiatives draw accusations of greenwashing?

• Shell’s share price gains this year lag 2022’s gangbusters performance.
• Shell donates to Gitcoin Climate Solutions Round.
• UK government possibly sending out mixed messages on price of energy transition.

Shell’s [SHEL.L] share price has delivered a 2.3% return this year, closing Friday at 2,378.5p. At the start of March, the stock was around the 2,600p level, after the publication of record-breaking annual results for last year.

Those results were fuelled by sky-high energy prices in 2022. Yet a softening in energy prices has meant that Shell’s share price hasn’t seen a repeat of 2022’s gangbuster gains — by this point last year, the stock was up over 44% year-to-date.

This year’s sluggish gains haven’t stopped Shell’s leadership from focusing on its oil and gas business while energy prices remain heightened.

Having taken the top job in September last year, CEO Wael Sawan has prioritised shareholder returns, arguably at the expense of the company’s environmental pledges. In June Shell ditched its plan to cut oil production by 1% to 2% each year until 2030, although it retained its aim to be net zero by 2050.

Asked last month on CNBC’s Squawk Box whether Shell’s investment in low-carbon projects would deflect criticism following second-quarter results, Sawan said Shell had to do the right thing for the company and a “balanced energy transition”.

“If new opportunities emerge that give us line of sight towards the sorts of returns that companies like ours should be going after, then absolutely we will grow our capital, but we cannot grow it on the basis of activist noise. That is not the right approach.”

In the second quarter, Shell posted adjusted earnings of $5.1bn on softer commodity prices, missing the $6bn analysts had been expecting. Shareholders were rewarded with a 15% increase in its dividend.

Shell Pushed Not to Demolish Aberdeen HQ

It isn’t just oil and gas production that have raised concerns about Shell’s commitment to the environment.

A mooted plan to demolish its Aberdeen HQ has become a bone of contention between the oil major and local campaigners. Shell had asked the council for permission to demolish the modernist five-story building in the city’s Tullos area. Since then, nearly forty local activists architects and academics have signed an open letter urging the council to block the move.

The letter says that the environmental impact assessment conducted for Shell “fails to measure or consider the carbon emissions relating to the demolition in any way”. The letter points out that Michael Gove — the UK’s Secretary of State for Levelling Up, Housing and Communities — blocked Marks & Spencer’s flagship store partly due to carbon concerns.

Gitcoin Sponsorship, Leaks in Nigeria

While Shell has rowed back on its commitment to reduce oil and gas production, it is still sponsoring events linked to the energy transition. In August, Shell teamed up with blockchain Gitcoin to leverage blockchain technology for climate solutions.

Shell will support Gitcoin’s Climate Solutions rounds, a programme which distributes funds to communities based on their needs, according to a Gitcoin press release. Shell will also help fund a hackathon focused on “blockchain-related use cases”.

According to the press statement, Shell is committed to “contributing towards sustainable development in its business processes and decision-making”.

Meanwhile, Shell Nigeria is investigating a possible Trans Niger oil pipeline leak. The pipeline is one of two that export Bonny Light crude from Nigeria — Africa’s biggest oil-producing nation. The reported leak comes days after Shell resumed oil exports from Nigeria. Exports had been halted on 12 July after workers spotted fumes near where oil was being loaded onto a ship. In July, 220,000 barrels per day of medium sweet crude were scheduled to be exported.

Mixed messages from UK government

Shell’s profits rise and fall depending on community prices. The same is true for Shell’s share price. How long this relationship remains in place will depend on the transition to renewables.

For all the talk of Shell’s focus on oil and gas profits, Shell has reduced its oil output by 25% over the past three years, even if it has made clear it won’t be reducing output any further.

There are also signs of mixed messaging from the UK government when it comes to the energy transition, reports the Financial Times.

A paper from the Department of Energy Security and Net Zero published this month suggests that solar and wind projects will be cheaper than gas-fired energy generation in 2025. The paper assumes a carbon price of £150 per tonne — nearly four times higher than the current price.

Yet at the end of July the UK government announced changes in its carbon trading scheme that made available more permits to pollute. This pushed down the UK carbon price, making it cheaper to pollute.

Where next for Shell’s share price?

Even as the use of renewable energy sources increases, there will still be demand for fossil fuels over the coming decades. A case in point is Shell reportedly working with Total [TTE] to scout out oil fields off the coast of Namibia.

One risk is that shares in oil majors like Shell go the way of the cigarette companies, with investors refusing to buy in at any price. That hasn’t happened yet, but it’s no surprise that Shell wants to tout its support of green initiatives like Gitcoin’s Climate Solutions fund.

For now, Shell is making profits while energy prices remain heightened. Longer-term, if these prices continue to soften, or political and social pressure increases, it could have to prioritise renewables once again.

As it stands, Shell’s share price has a 2,904.97 12-month median price target. Hitting this would see a 22.1% upside on Friday’s close.