Shell Hits Peak Oil Production, Will Reduce Output

Oil giant Royal Dutch Shell announced that it already hit peak oil production. In a statement released Thursday, the company said its carbon dioxide emissions peaked in 2018 at 1.7 gigatons per year. Meanwhile, Shell’s oil production peaked in 2019. This means that they will end their decades-old business strategy focused on oil. Instead, Shell, along with its Euro rivals, will accelerate their shift to low carbon sources of energy.

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Reduction in Fossil Fuel

The decision is a historic shift for the 113-year-old company, which started out as a seashell importer. Recently, The company said Thursday that it hit peak oil production, and expects output to decline by 1 to 2% a year. This includes declines in asset sales and reductions in its exposure to commodity prices for the long term. Shell plans to cut back on the production of gasoline and diesel by 55% within the next ten years. Meanwhile, the oil company will double its electricity output and roll out thousands of new vehicle charging points.

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European-based rivals BP PLC and Total SE also declared they will reduce their fossil fuel dependence and focus on renewable energy such as solar and wind. In contrast, US companies Exxon Mobil and Chevron Corp have no plans to change strategies or reduce production output for oil-based fuels. Exxon though announced plans to reduce its carbon emissions.  

Pivot to Low-Carbon

The pivot to low-carbon energy will require investments that potentially generate lower returns compared to fossil fuels. Renewable energy projects generate returns of 10% on average. Meanwhile, oil and gas projects earn 15%. This dampens investor interest, especially given that the pandemic reduced demand and cut dividends. Share prices of Shell went down 35%, while BP fell 45% and Total 24%. 

Shell allayed investor concerns on its pivot, saying that fossil fuel production remains a major revenue source into the next decade. It also re-upped its commitment to increase dividends by 4% annually. “By accessing the enormous opportunities that the future of energy holds we will create the conditions for future share price appreciation. We expect to radically transform Shell over the next 30 years,” remarked Chief Executive Ben van Beurden.

Trading and Selling Electricity

Shell declined to give targets for its renewable energy production. The company believes it can make more not from power generation, but from trading and selling electricity.  However, Shell did confirm it will allocate 25% of its budget, equivalent to $5 billion to $6 billion, for renewable energy and marketing. Shell sells more power than it produces, similar to its fossil fuel strategy. In fact, Shell sells around three times as much of the fuels as it produces. Shell owns UK power supplier First Utility, EV charging company Ubitricity, and battery firm Sonnen.

Shell won’t leave the oil and gas business entirely. It plans to invest $8 billion a year on oil-and-gas production, particularly on high-value projects. Also, the company will front an additional $4 billion a year on the integrated-gas business, including liquefied natural gas(LNG). Shell plans to add seven million metric tons of LNG production within the next 5 years.  

Shift to Renewables

The strategy to shift to energy renewables is happening at a time when oil companies are trying to reduce their debt. Shell hopes to pare down its debt from $75.4 billion to $65 billion. It also plans to dispose of assets at $4 billion a year to help.

Watch the WION news video that reported oil giant Shell's profit slumps in 2020 as the pandemic bites:

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Do you agree with Shell’s strategy to shift to renewable energy? Will this accelerate the world’s shift for less dependence on fossil fuels? Let us know what you think about this energy shift. Share your thoughts in the comment section below.