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Covid-19 a ‘dress rehearsal for peak oil and gas’ – Shell

The impacts of the coronavirus on energy consumption and prices hold crucial lessons for when oil and gas demand peak, says Maarten Wetselaar

Last week’s Gastech Virtual Summit was an opportunity to take the pulse of the natural gas industry at a time when decarbonisation is high on the political agenda. One clear message from Shell is that the Covid-19 pandemic has hardened its determination to accelerate its transition to a net-zero carbon company by 2050 – and preferably sooner.

“If you look at what has happened, you could say it is a dress rehearsal for the moment that oil and gas demand really peak,” says Maarten Wetselaar, Shell’s director of integrated gas and new energies.

He believes that peak oil and gas demand are still some way off, with demand for both commodities staging a recovery before reaching their respective peaks. “But,” he adds, “when we reach peak demand it will look a lot like what we saw this year in the Covid response. Price setting will become a very different game—it will be very unpredictable.

“ESG investors that understand energy want to invest in companies progressively on their way to net-zero” Wetselaar, Shell

“We want to make sure that ahead of the industry reaching peak demand we have built a significant low-carbon energy business, so we can transition from being an international oil company to being an energy company.”

Shell announced four years ago that it planned a build a new energies business. At the height of the pandemic in April this year it announced its ambition to become net-zero carbon by 2050.

Carbon capture critical

Wetselaar is also adamant that the world will continue to need oil and gas for decades to come because some sectors of the economy are hard to electrify.

Indeed, Shell projects that natural gas will supply over 40pc of the growth in energy demand by 2035. It will therefore be critical to boost nature’s ability to absorb carbon dioxide—in forests and wetlands—but also to commercialise carbon capture and storage (CCS), he says.

“We will be in low-cost oil and gas so that we can continue to make money even in that world,” he says. “But if that is the only thing we do by the time peak demand is reached, then we will be in trouble.”

Meanwhile, Wetselaar is passionate about the need for the oil and gas industry to minimise “unnecessary” methane emissions, with the industry as a whole a long way from achieving that goal.

Asked whether he is concerned about the increasing importance of environmental, social, and corporate governance (ESG) criteria to investors, he sees an increasing level of sophistication in how companies are evaluated.

“ESG investors that understand the world of energy want to invest in companies that progressively are on their way to net-zero [by 20]50 rather than sticking with what they have been doing for the last 100 years. There is a segment of investors that believes in the type of gradual but determined change that we are promoting, and they will invest in our shares,” he insists.

Differentiated investor appetite

The more sophisticated investors also understand that the energy transition will play out differently for coal, oil and gas and “therefore investor appetite is differentiated across the three”.

8-12pc – Shell’s target for return on capital

He also insists that natural gas is “absolutely” a destination fuel. “We still cannot model a large power market that runs without natural gas even 30 years from now. I cannot think how you would ever produce petrochemicals without starting with a molecule, and natural gas is the obvious one.”

Shell’s ambition to become a major electricity player will require “a lot more financial engineering than we are used to in the oil and gas side”, says Wetselaar, along with high levels of integration if the company is to achieve the 8-12pc return on capital that it aspires to. “The total business is still in that 8-12pc returns range and that is what we are investing [in] to achieve.”

Commenting on likely price developments, Wetselaar says: “I am not a near-term bull. A lot of the world currently runs on government stimulus. That will run out, as governments will simply run out of money to stimulate the economy. We will then be very much dependent on how far we are with a vaccine as to what the economy will do.

“It will be some time before we can be structurally bullish about energy prices.”

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