UK Asset Owners Challenge Shell’s LNG Gamble
Shareholder resolution warns of value erosion, calls for increased transparency of strategy alignment with climate goals.
Oil and gas major Shell’s big bet on liquefied natural gas (LNG) contradicts its pledge to achieve net zero by 2050, a group of UK-based asset owners has argued.
Shell has plans to grow its LNG business by 20-30% by the end of the decade. Shareholders are also concerned the investment will lead to oversupply and value degradation.
“Shell is one of the world’s leading LNG suppliers, which has a hugely damaging impact on the climate,” Jackie Garton, Corporate Climate Campaign Manager at responsible investment NGO ShareAction, told ESG Investor.
“The level of fossil gas production planned by Shell is not only environmentally dangerous – it creates financial risk for shareholders, too.”
ShareAction is supporting a shareholder resolution co-filed by UK-based Brunel Pension Partnership, Merseyside Pension Fund and Greater Manchester Pension Fund, as well as the Australasian Centre for Corporate Responsibility (ACCR), ahead of the company’s annual general meeting in May. It asks Shell to explain how its forecast for LNG production and sales targets and capex in natural gas assets is consistent with its climate commitments.
“Shell uses language that characterises LNG as a transition fuel, or a low-carbon fuel,” said Nick Mazan, UK Company Strategy Lead at the Australasian Centre for Corporate Responsibility (ACCR).
LNG is primarily composed of methane, a greenhouse gas that is up to 84 times more potent than CO2 over a 20-year timescale. The amount of energy required to turn fossil gas into LNG can also outstrip coal.
“[Shell argues] that reconciliation would come through a high degree of negative emissions technologies like carbon capture and storage and carbon dioxide removal, but we don’t think this is a very credible position considering the success rate of these kinds of projects,” said Mazan.
Several carbon credits purchased by Shell to offset emissions from its LNG shipments have also since been found to be ineffective.
Research published in November by ACCR noted that Shell’s ambitious forecast for LNG is misaligned with the International Energy Agency’s (IEA) global net zero scenarios.
“At its heart this is an issue of transparency and credibility,” said Owen Thorne, Investment Manager of Monitoring and Responsible Investment at Merseyside Pension Fund.
“Given the company’s bullish forecast on LNG demand, it is perfectly reasonable for shareholders to seek clarity as to how this outlook squares with [its net zero target].”
Hidden costs
The co-filers’ concerns over value erosion stem from uncertain future demand.
“LNG currently isn’t competitive in the power sector. Shell and other oil and gas companies are lobbying to create demand for LNG, because they’ve already locked a huge amount of capex on the future spot market – but that doesn’t mean the fundamentals and economics are going to stack up,” said ACCR’s Mazan.
The ACCR noted that Shell has assumed emerging market policymakers will prioritise LNG over cheaper and faster-to-deploy renewables, which it argued is an “unlikely scenario” unless gas is priced below its lifecycle production cost.
To compete with renewables in Asian emerging markets (EMs), it said Shell’s LNG prices would need to drop to below US$5MMBtu – significantly lower than LNG’s typical US$8/MMBtu lifecycle cost.
A US$1/MMBtu fall in the price of LNG could result in a US$13 billion impact on Shell’s net present value (NPV), the ACCR warned.
This week, Shell reduced its LNG production outlook for Q4 2024, noting that oil and gas trading results were expected to be significantly lower, citing the impact of the war in Ukraine.
“LNG represents one of the liferafts the industry has attempted to use to extend its relevance,” said Maeve O’Connor, Oil, Gas and Mining Analyst at think tank Carbon Tracker.
“The business case for new LNG projects has deteriorated rapidly over the past few years: estimations of future global LNG demand have fallen markedly, and sufficient projects are coming online to meet the world’s LNG needs for years to come.”
Empty shell
Shell’s ambitions for LNG production follow a year of backsliding on climate action, including plans to develop new oil and gas fields.
In December, Shell announced new investment in Bonga North off the coast of Nigeria and plans to partner with Equinor to combine their UK offshore oil and gas assets to launch the North Sea’s biggest independent producer, in a bid to sustain existing levels of production.
This follows a decision in November to overturn a ruling requiring Shell to almost halve its carbon emissions by 2030. In March 2024, it published an updated Energy Transition Strategy which watered down its decarbonisation commitments – lowering its emissions reduction target from 20% to 15-20% by 2030 and scrapping its 45% emissions reduction by 2035 goal.
“We need to see further transparency to assess Shell’s alignment with climate goals, particularly in the context of recent removal of its interim 2035 climate target,” said Vaishnavi Ravishankar, Head of Stewardship at Brunel.
“We are committed to engaging with Shell to enhance the ambition, transparency, and credibility of its climate transition efforts.”
However, Mazan noted that an ACCR resolution filed in 2023 seeking increased disclosures on lobbying in emerging markets was withdrawn, following an agreement with Shell.
“We have [also] over the longer-term seen improvements in [Shell and other oil and gas firms’] approaches to preparing for the energy transition and reducing the climate-related risks the companies and investors face,” said Merseyside’s Thorne.
“However, more recently we have undeniably seen changes in ambitions and plans, both regarding targets and investment. As long-term investors, we need companies to be providing material climate-disclosures […] to enable us to make informed investment and stewardship decisions.”
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