Do Shell’s New Climate Commitments Make the Grade?

, senior scientist, Clean Vehicles | December 13, 2018, 12:57 pm EST
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Last week Royal Dutch Shell announced that in addition to its long-term plans for decarbonization by 2050, it would set goals and track progress on its carbon footprint on a short-term basis and link executive compensation to progress meeting these goals. Reporting on short term results is key to ensuring accountability for long-term goals, so this is a step in the right direction. However, I have two immediate concerns:

  1. The highly aggregated metric Shell proposes conceals as much as it reveals.
  2. The long-term mitigation strategies Shell describes are disconnected from the major sources of emissions under Shell’s immediate control: oil and gas extraction, oil refining, and methane emissions.

Instead of a single metric, Shell needs to provide a comprehensive progress report that quantifies its performance in reducing current sources of emissions along with scaling-up the long-term innovation needed to realize its deep decarbonization goals. And the company should advocate for improved disclosure standards for all companies that would allow investors, scientists, policy makers, and the public to make meaningful comparisons among oil and gas companies’ emissions reduction goals and results.

Shell’s Carbon Footprint Commitments

In its 2017 Investor Handbook, Shell described its long-term strategy to align its business with the Paris climate accord.

We aim to cut our and our customers’ GHG emissions from energy products that Shell sells – expressed in grams of carbon dioxide equivalent per megajoule (gCO2e/MJ) consumed – by around half by 2050. As an interim step, by 2035, and predicated on societal progress, we aim for a reduction of around 20% compared with 2017 levels.

The charts below provide an overview of the strategies Shell is pursuing and a general perspective on the magnitude of the potential mitigation opportunity the company attributes to each of these strategies.

Two things strike me about this chart and Shell’s strategies as described in more detail in the Shell Energy Transition Report.

Shell’s unorthodox and highly aggregated emissions metric conceals as much as it reveals

Shell has developed a lifecycle emissions metric to track its progress, which the company calls its net carbon footprint.  This net carbon footprint is presented in units of WTW grams of CO2 equivalent emissions per MJ of energy.  A WTW analysis most often stands for “well to wheels,” and provides a measure of the lifecycle emissions of CO2 and other heat-trapping gasses emitted in the production and use of the fuel required to drive a car a specified distance.  For example, Argonne National Lab’s GREET lifecycle tool finds that a passenger car powered by typical gasoline sold in the United States emits 257 g CO2e/km, of which 20 percent comes from the production of the gasoline, and 80 percent from the tailpipe of the car.

In Shell’s case, however, the WTW metric is an aggregate of “well-to-wheel” and “well-to-wire,” with the latter describing the lifecycle emissions associated with electricity generation.  Shell describes its net carbon footprint methodology as “bespoke and unique,” which sounds very good in a fancy British sort of way.  But uniqueness is not an attractive attribute in a lifecycle analysis methodology.  The whole point of lifecycle analysis is to compare things on an apples-to-apples basis, and with a unique methodology, it’s hard to know exactly what Shell is doing, and even harder to make quantitative comparisons between Shell and other companies.  Shell argues this is a good way to track its progress, but if we can’t compare the company to anyone else, we’ll mostly just have to take Shell’s word for it.

While the details of the net carbon footprint are elusive, the broad strokes of the plan are clear. The first item on Shell’s decarbonization to-do list is reducing emissions from its own facilities and the power they use, which it describes as “Top quartile (Scope 1+2)” on the chart above.  More on that in a moment, but, based on the size of the yellow bar, the company doesn’t seem to have very high hopes for the potential there.  The next strategy is “Natural gas shift,” which means increasing the share of natural gas Shell sells, relative to oil.  Shell plans to increase its investment in new energies, especially renewable power and hydrogen as a transport fuel, as well as biofuels. It also has long term plans to get involved in electric mobility, carbon capture and sequestration and supporting natural sinks like forests.  These latter strategies are relatively small parts of Shell’s energy business today, which mostly revolves around petroleum extraction, refining and natural gas.

In the long run Shell plans to have a portfolio of transportation energy products including petroleum, biofuels, hydrogen and electricity, and a portfolio in the power sector of natural gas and renewable sources.  But today the transportation energy Shell sells is mostly petroleum-based fuels, and the main source of power is natural gas.  Since natural gas is less carbon-intensive to burn than petroleum, increasing the share of gas relative to oil by merging with a natural gas company or selling some oil fields will reduce Shell’s net carbon footprint even if the carbon intensity of petroleum and natural gas are unchanged.  This is what Shell calls its “natural gas shift” strategy on the chart above, and the size of the yellow bar suggests Shell’s net carbon footprint metric puts far more weight on this shift than in emissions reductions in its own supply chain.  However, as I explain below, oil and gas companies have a large opportunity to reduce emissions from their oil and gas operations, and it’s important that they achieve this near-term goal even as they make investments in other sectors to prepare for a post-fossil fuel world.

Shell’s decarbonization strategies have very little to do with Shell’s current emissions

The most striking thing to me about Shell’s decarbonization plan is that it is so utterly disconnected from the huge sources of emissions under Shell’s control.  This part of the company’s decarbonization strategy is represented by the very small bar labeled “Top quartile (Scope 1+2).”  Presumably this means Shell plans to the be in the top quartile in the industry for its Scope 1 and 2 emissions, which refers to the methodology for corporate disclosure of global warming pollution under the GHG Protocols. Scope 1 emissions are from sources that are owned or controlled by the company and Scope 2 emissions are those generated by third parties that supply energy to the company.  Scope 3 emissions are indirect emissions that are a consequence of the activities of the company, for example the tailpipe or smokestack emissions from using gasoline or natural gas produced by an oil and gas company.  For gasoline, Scope 3 emissions are the tailpipe emissions of a car, and these account for about 80 percent of the full lifecycle emissions, while scope 1 and 2 amount to about 20 percent.

From a big-picture long-term perspective, it makes sense to consider the full lifecycle, and, for oil and gas companies, the largest share of emissions come from their customers’ use of gasoline, diesel, natural gas and other fuels.  But the process of replacing fossil fuels will take time and the oil and gas industry is not exactly leading the charge here—indeed, these companies and their trade groups most often fight policies to transition to cleaner vehicles and fuels.  But even as the transition is underway, oil and gas companies have a lot they can do to cut their scope 1 and 2 emissions, specifically the emissions associated with oil and gas extraction, oil refining, and methane leakage, venting, and flaring.  The avoidable emissions are large, they are under the direct control of oil and gas companies, and the impact is significant on a global scale.

A recent paper in Science calculated the carbon intensity of oil from thousands of oil fields that account for 98 percent of global production.  This was not a well-to-wheels analysis, just looking at the oil wells themselves.  The authors estimated that through wise resource choices and improved gas management practices the oil industry could reduce emissions over the next century by at least 18 Gt and as much as 50 Gt considering other mitigation opportunities such as reduced emissions from oil refining.  For context, this is 2.5 to 6.25 percent of the remaining carbon budget required for a greater than 66 percent chance of keeping global average temperature increases below 2°C.  Not only is Shell putting little emphasis on reducing operational emissions in its energy transition strategy, the company continues to indirectly lobby against sensible climate policies, for example by funding the American Petroleum Institute (API) and other trade associations that fight to roll back methane regulations.  (Read more about fossil fuel industry lobbying in The 2018 Climate Accountability Scorecard.)

Reducing methane emissions and other pollution from the production and refining of oil and gas does not substitute for the need to transition away from fossil fuels as quickly as possible, but it is foolish to ignore this low-hanging fruit within the fossil fuel supply chains.  Moreover, since Shell intends to keep producing oil and gas for decades to come, reducing the carbon intensity of its oil, oil refining and natural gas operations will reduce the company’s climate impact and improve its competitiveness in a carbon-constrained future business environment.

My recommendation to Shell: Advocate for a supply chain emissions report card, not just a GPA

Shell recently promised to start setting specific net carbon footprint targets for shorter-term periods (three to five years) starting in 2020 and tie executive performance to the results.  In addition to benchmarking against an overall target, it’s important for Shell to show what is behind the aggregated value, and to advocate for a report card that allows investors and civil society to make their own assessments.  The report card should include the emissions intensity in appropriate units for each fossil fuel company’s major business segments, facilitating comparison with competitors.  It should also include the share of each of these businesses in emissions, energy production and revenue.  Using these results and weightings, Shell can then compute a net carbon footprint or other aggregated score to use for compensation and other purposes, analogous to a grade point average or GPA.

A GPA provides a high-level overview of a student’s performance, but generally interested parties, whether they be parents or college admissions officers, insist on seeing the whole report card.  The detailed report card will reveal whether the student challenged themselves with hard courses and suggests what subjects they are prepared to tackle in the future.  Is Shell setting itself up to produce low-carbon liquid transport fuels by cutting oil supply chain emissions and ramping up low carbon biofuels, or is it gradually exiting the transport fuel business and focusing on natural gas and renewable power?  Either strategy might be viewed as a success, but each has different implications for investors and the world and will help inform future investment decisions.

Last month Deborah Gordon at the Carnegie Endowment for International Peace and retired Chevron scientist Stephen Ziman wrote a useful article on petroleum industry climate plans.  They argue that companies need to develop transparent systems based on standardized verifiable climate plans.

Shell can lead the oil and gas industry by developing not just its own bespoke and unique emissions metrics, but working with peer companies, governments and civil society to establish industry-wide verifiable standards for emissions reporting at each link in the supply chains in which it participates.  All oil and gas companies should report the carbon intensity of the oil they produce, emissions from their refining operations, methane losses at each step of the supply chain and also track the emissions associated with using the fuels they sell.  As they expand into other areas like biofuels, hydrogen, carbon capture and sequestration and natural carbon sinks, these will need metrics as well.  Taken together, quantitative, verifiable and comparable emissions metrics for each link in the supply chain can be used to develop a net carbon footprint that provides guidance to the company and insight to investors and other stakeholders.

David Nagy

Posted in: Global Warming, Vehicles

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