Resilience of Shell's strategy to different climate-related scenarios
Shell’s financial strength and access to capital give us the ability to reshape our portfolio as the energy system transforms. They also allow us to withstand volatility in oil and gas markets.
We continue to optimise our capital allocation balancing energy security and demand, as well as internal and external transition considerations and opportunities. We aim to find the right balance between managing our upstream assets – which provide the vital supplies of oil and gas that the world needs today and produce the returns needed to help us fund the transition – and investing in the energy transition. These activities are essential to identify, build and scale up profitable projects that offer low-carbon energy solutions for our customers.
From January 1, 2022, we have disclosed the financial performance of our Renewables and Energy Solutions (R&ES) segment. R&ES is a business through which we seek to develop commercial opportunities which will be key in supporting the delivery of our net-zero emissions target. See Note 8 to the Consolidated Financial Statements “Segment Information” for more information.
Cash capital expenditure by segment for 2023 is expected to be in the range of $8 billion for Upstream, $6 billion for Marketing, $5 billion for Integrated Gas, $3-4 billion for Chemicals and Products, and $2-4 billion for R&ES.
Investing through the energy transition
Total cash capital expenditure of $25 billion in 2022
- [A]Products for which usage does not cause Scope 3, Category 11 emissions: Lubricants, Chemicals, Convenience Retailing, Agriculture & Forestry, Construction & Road.
- [B]E-Mobility and Electric Vehicle Charging Services, Low-Carbon Fuels (Biofuels/HEFA), Renewable Power Generation (Solar/Wind), Environmental Solutions, Hydrogen, CCUS. We define low-carbon energy products as those that have an average carbon intensity that is lower than conventional hydrocarbon products, assessed on a lifecycle basis (including emissions from production, processing, distribution and end use).
- [C]LNG Production & Trading, Gas & Power Trading, and Energy Marketing.
- [D]Upstream segment, GTL, Refining & Trading, Marketing fuel and hydrocarbon sales, Shell Ventures, Corporate segment.
Movements in cash capital expenditure versus 2021 were as follows:
- 'Non-energy products’ reduced by 9% (from $4.2 billion in 2021) mainly through lower spend at Shell Polymers Monaca as construction came to completion.
- 'Low-carbon energy solutions’ increased by 89% (from $2.3 billion in 2021) mainly through higher investments in renewable power generation, low-carbon fuels, and e-mobility.
- 'LNG, gas and power marketing and trading’ increased by 17% (from $3.6 billion in 2021) reflecting investment in the North Field East expansion project in Qatar.
- 'Oil, oil products and other’ increased by 30% (from $9.6 billion in 2021) mainly through our Upstream deepwater operations, including the acquisition of a 25% stake in the Atapu field in Brazil.
Key aspects of Shell’s financial resilience in the context of climate-related impacts are assessed and described in more detail in Note 4 to the “Consolidated Financial Statements”. This describes how Shell has considered climate-related impacts in key areas of the financial statements and how this translates into the valuation of assets and measurement of liabilities. Shell’s financial statements are based on reasonable and supportable assumptions that represent management’s best estimate of the range of economic conditions that may exist in the foreseeable future.
Sensitivity analysis using external, and often normative, climate scenarios has been performed for the period covering asset life cycles. If these different price outlooks were used, this would impact the recoverability of certain assets recognised in the Consolidated Balance Sheet as at December 31, 2022.
As there is no single scenario that underpins our plans, sensitivity analysis has been conducted using a range of key assumptions to test the resilience of our asset base. This includes sensitivity analysis on asset carrying values using commodity price outlooks from external and often normative climate change scenarios; shifting trends in our portfolio, particularly exploration and evaluation, Upstream production and refineries; risks related to stranded assets; resilience of investments for transformation of the refining portfolio into five energy and chemicals parks; forecasted taxable profits sufficient to recover deferred tax assets; dividend resilience; and limited risk on timing of decommissioning and restoration activities for Integrated Gas and Upstream.
Commodity price sensitivities
Oil and gas prices are one of the key assumptions that underpin Shell’s financial statements, with the mid-price outlook informed by Shell’s scenario planning representing management’s best estimate. Price outlooks reflect a broad range of factors, including, but not limited to, future supply and demand, and the pace of growth of low-carbon solutions. The scenarios have been selected to illustrate the resilience of the asset base under a range of possible outcomes, including the price implications arising from the IEA Net Zero Emissions scenario which provides a potential path for the global energy system to net-zero emissions by 2050. Sensitivities of asset carrying amounts to prices are under the assumption that all other factors in the models used to calculate impacts remain unchanged.
Sensitivity analysis has been performed using price outlooks from:
- Average prices from three 1.5-2 degrees Celsius external climate change scenarios. In view of the broad range of price outlooks across the various scenarios, the average of three external price outlooks was taken from IHS Markit/ACCS 2022; Woodmac WM AET-1.5 degree; and IEA NZE50.
Applying these prices to Integrated Gas assets of $75 billion and Upstream assets of $88 billion as at December 31, 2022, shows recoverable amounts that are $4-6 billion and $1-2 billion lower, respectively, than the carrying amounts as at December 31, 2022.
- Hybrid Shell Plan and IEA NZE50: for this Shell’s mid-price outlook is applied for the next 10 years. Because of greater uncertainty, the IEA normative Net Zero Emissions scenario is applied for the period after 10 years. This weights less price-risk uncertainty to the first 10 years reflected in the operating plan period and applies more risk to the more uncertain subsequent periods.
Applying this priceline to Integrated Gas assets of $75 billion and Upstream assets of $88 billion as at December 31, 2022, shows recoverable amounts that are $4-6 billion and $1-2 billion lower, respectively, than the carrying amounts as at December 31, 2022.
- For 2022, we have also included sensitivities based on a 1.5 degree scenario, derived from IEA NZE50. This priceline applies the IEA normative Net Zero Emissions scenario over the whole period under review. This priceline has been applied for the first time in the current year in order to also reflect the sensitivity to a pure net-zero emissions scenario from the IEA.
Applying this priceline to Integrated Gas assets of $75 billion and Upstream assets of $88 billion as at December 31, 2022, shows recoverable amounts that are $9-12 billion and $8-11 billion lower, respectively, than the carrying amounts as at December 31, 2022.
In addition, further sensitivities are provided of -10% or +10% to Shell’s mid-price outlook, as an average percentage over the full period. A change of -10% or +10% to the mid-price outlook, as an average percentage over the full period, would result in around $2-5 billion impairment or some $2-4 billion impairment reversal, respectively, in Integrated Gas and Upstream as at December 31, 2022.
Compared with the prior year the impact on recoverable amounts is significantly lower as a result of the higher short- and medium-term commodity prices.
Carbon pricing and discount rate sensitivities
The risk of stranded assets may increase in a higher carbon price scenario. Sensitivities of our asset carrying values to carbon prices have been based on an IEA NZE 2050 scenario, to illustrate the resilience of asset carrying values to higher long-term carbon prices than those included in the Shell mid-price outlook.
Applying the IEA NZE 2050 carbon price scenario to Integrated Gas assets of $75 billion and Upstream assets of $88 billion, up to the end of life of these assets, shows recoverable amounts that are $2-5 billion and not significantly lower, respectively, than the carrying amounts as at December 31, 2022.
See “Carbon pricing” for more information on our carbon price assumptions.
The discount rate applied for impairment testing is based on a nominal post-tax weighted average cost of capital (WACC) of 5% for Power activities and a nominal post-tax WACC of 6.5% for all other businesses. The discount rate includes generic systematic climate change risk. In addition, cash flow projections applied in individual assets include specific asset risks. An increase in systematic climate risk could lead to a higher WACC and consequently to a higher discount rate to be applied in impairment testing. We have used a 1% shift in discount rate for sensitivity analysis purposes as an indicator of the resilience of our asset base to incremental increases in our cost of capital.
An increase of the WACC of 1% under the assumption that all other factors in the models used to calculate recoverability of carrying amounts remain unchanged would lead to an impairment of $1-3 billion for Integrated Gas and up to $1 billion in each of the following segments: Upstream, Chemicals and Products, and Renewables and Energy Solutions. No significant impairment would arise in the Marketing segment. See Note 4 to the Consolidated Financial Statements for further information on climate-related impacts in key areas of the financial statements.
Delivering our energy transition strategy
To ensure the resilience of our Powering Progress strategy, our responses to the risks and opportunities identified are:
- delivery through our integrated business model;
- a sectoral decarbonisation approach – recognising that we need to work with our customers to identify low-carbon energy solutions for their energy demands; and
- decarbonisation of our energy value chains and operations.
Our net-zero target includes emissions from our operations, and the life-cycle emissions from all the energy products we sell. We will seek to reduce emissions from our own operations, including the production of oil and gas. More than 90% of the total emissions we include within the NCI boundary are indirect emissions associated with third-party products and end use emissions of energy products we sell, so we are also working with our customers to support them in transitioning to low-carbon products and services.
Our integrated approach allows us to withstand volatility in oil and gas markets. Our financial framework is based on sector-leading cash flow, continued capital discipline, capital flexibility and a strong balance sheet.
- Upstream delivers the cash and returns needed to fund our shareholder distributions and the transformation of our portfolio, and provides vital supplies of oil and natural gas to help meet the world’s energy needs.
- Integrated Gas and Chemicals and Products make the products needed to help enable the energy transition. They produce sustainable cash flow and provide us with the asset infrastructure to support our investments in the future of energy.
- Marketing and R&ES include service stations, sales of gasoline and diesel, fuels for business customers, power, hydrogen, biofuels, charging for electric vehicles, carbon credits, and development of commercial CCS. They focus on working with our customers to help accelerate the transition to net zero and are the foundation for the future businesses in Shell.
See “Strategy and outlook” for more information.
Our research and development (R&D) activities are also key to achieving our net-zero emissions target. They are an important way to address the technology risk as mentioned in the "Transition risk and opportunities" section.
In 2022, our R&D expenditure on projects that contributed to decarbonisation was around $440 million, representing about 41% of our total R&D spend, compared with around 40% in 2021. This includes expenditure on reducing greenhouse gas emissions:
- for our customers through renewable power generation, storage, e-mobility and other electrification solutions;
- from our own operations, for example, by improving energy efficiency and electrification;
- from the fuels and other products we sell to our customers – for example, biofuels, synthetic fuels and products made from low-carbon electricity, and hydrogen produced using renewable sources;
- by carbon capture, utilisation and storage applied to hydrogen production from natural gas and other carbon emissions; and
- by researching nature-based solutions to offset emissions.
Examples of R&D activities other than decarbonisation include safety, performance products such as lubricants and polymers, robotics, automation and artificial intelligence.
Supporting our customers in achieving net-zero emissions
Changes to the supply of energy products and decarbonising the energy system require structural changes in the end-use of energy. This requires energy users to improve, update or replace equipment so that they can use carbon-based energy more efficiently, or switch to low- and zero-carbon energy.
For example, in the transport sector, decarbonisation includes replacing internal combustion engine vehicles with electric and hydrogen vehicles. In the industrial sector, replacing oil- and coal-fired furnaces with electrical furnaces would be one solution, carbon capture and storage is another. And in the buildings sector, replacing gas heating systems with electric heating systems would also contribute to decarbonisation.
Such structural changes will help to trigger transitions along the supply chain of individual sectors and across sectors, including the production of energy and emissions over time. The IEA estimates that these changes in the end-use of energy will require substantial investment. Under the IEA Net Zero Emissions by 2050 scenario, for every one US dollar spent on fossil fuels, a further five US dollars need to be spent on clean energy and a further four US dollars spent on efficiency and end-uses.
Helping to transform energy demand is the focus of our decarbonisation strategy. To help transform demand, we are working with customers sector-by-sector across the energy system. We will seek to change the mix of energy products we sell to our customers as their needs for energy change. This is reflected in Shell’s strategy to develop a portfolio that seeks to:
- provide more electricity to customers, while also driving a shift to renewable electricity;
- develop low- and zero-carbon alternatives to traditional fuel, including biofuels, hydrogen, and other low- and zero-carbon gases;
- work with customers across different sectors to decarbonise their use of energy; and
- address any remaining emissions from conventional fuels with solutions such as CCS and carbon credits.
Energy transition in action – selection of portfolio changes and actions in 2022:
Electricity and renewable power
- acquisition of Sprng Energy Group, a solar and wind platform in India;
- winning bids with our partners to build offshore wind farms in the UK, the Netherlands and US waters (December: Hollandse Kust west VI with Eneco; July: with Scottish Power in the UK; February: Atlantic Shores in the USA);
- the acquisition of Powershop Australia, an online energy retailer; and
- started operations at the power-to-hydrogen electrolyser in China.
Develop low- and zero-carbon alternatives to traditional fuels
- acquisition of Denmark’s Nature Energy – the largest producer of renewable natural gas in Europe, completed on February 20, 2023;
- final investment decision to build a 200 MW electrolyser, Holland Hydrogen I (Shell interest 100%);
- agreement to buy sugar-cane ethanol under a long-term agreement with Raízen (Shell interest 44%). The low-carbon fuel is expected to be produced by five plants that Raízen plans to build in Brazil, bringing its total portfolio of ethanol facilities to nine; and
- began construction of a bio-LNG plant at the Energy and Chemicals Park Rheinland in Germany to make liquefied natural gas from biological waste.
Help customers to decarbonise their use of energy
- launched a programme with our partners called Avelia which will encourage companies to invest in the production of SAF;
- made progress rolling out our network of charging for electric vehicles and joint venture with Chinese automobile company BYD to operate a network of charging points in Shenzhen; and
- acquisition of German company SBRS GmbH, which provides electric charging services for e-buses, e-trucks and e-vans. This is a step towards decarbonising the commercial road transport sector.
CCS and carbon credits
- Agreement with Northern Lights CCS joint venture (Shell interest 33.3%) in Norway and Yara for a world-first cross-border carbon capture, transport and storage contract.
- Investment in Carbonext, a Brazilian company operating carbon-centric preservation projects in the Amazon.
Because emissions resulting from customer use of our energy products make up the greatest percentage of Shell’s carbon emissions, this is where we believe we can make the greatest contribution to the energy transition, by enabling our customers to transition to low-carbon energy products and services. We intend to increase our share of low-carbon energy sales, which is reflected in our target to reduce the NCI of the energy products we sell by 20% between 2016 and 2030. See “Working to reduce our net carbon intensity” for more information.
We have restructured our company so that we can better identify opportunities and the role that we can play in each sector to help transform demand. We are moving from an approach focused on types of products to one where our customer and account management is focused on sectors.
We aim to build on our existing relationships across each sector, with consumers, infrastructure owners, other suppliers and policymakers to help to accelerate change.
Our strategic approach to climate change emphasises the need to work collaboratively. We aim to make strategic alliances with customers, other companies and entire sectors so we and they can make profitable progress towards net zero.
Collaborating with our customers
We are helping software company SAP move to an emissions-free global car fleet by 2030 in support of its net-zero targets. Through our Accelerate to Zero programme, Shell is providing on-the-go and home charging, as well as other fleet solutions, for SAP employees in several countries. At SAP’s headquarters in Walldorf, Germany, we are working to build solar generation capacity to help the company decarbonise and become more self-reliant in its energy use.
As a founding member of the Oil and Gas Climate Initiative (OGCI) we are part of a group of 12 national and international energy companies. The OGCI supports the climate goals of the UN Paris Agreement and recognises that collective actions will help drive the energy transition.
Decarbonising our value chains and operations
We will seek to base the decarbonisation of our value chains and operations on a deep understanding of the decarbonisation strategies and plans of our customers and users of our energy products. We are focused on decarbonising our own operations by:
- making portfolio changes, such as acquisitions of and investments in new, low-carbon projects. We are also decommissioning plants, divesting assets and reducing our production through the natural decline of existing oil and gas fields;
- improving the energy efficiency of our operations;
- transforming our remaining integrated refineries into low-carbon energy and chemicals parks, which involves decommissioning plants;
- using more renewable electricity to power our operations;
- developing CCS for our facilities; and, if required,
- using high-quality carbon credits to compensate for any remaining emissions from our operations.
We have set an interim target to achieve a 50% reduction in absolute Scope 1 and 2 emissions under our operational control by 2030 on a net basis, when compared with 2016. See “Working to reduce our absolute Scope 1 and 2 emissions” for more information.