By Clark Butler

Oil and gas supermajor Royal Dutch Shell (Shell) aims “to become, by 2050 or sooner, a net-zero emissions energy business.” Its path to that goal includes reducing its net carbon footprint by 30% by 2035 and by 65% by 2050, in part by spending $6 billion on renewable energy generation up to the end of 2020, and then $2- 3 billion a year until 2025. Total, the world’s fourth largest oil and gas company, has pledged 25 GW of installed renewable energy by 2025, to be net-zero in Europe by 2050, and to reduce its carbon emissions intensity by 60% or more by 2050.

Both companies have now clearly articulated that they accept climate science as a reality and realise the need for oil and gas companies to do their part in reducing global emissions. Since 2016, Total has sought to distinguish itself from its competitors “to become the responsible energy major.” This involved committing to the UN Sustainable Development Goals and, in particular, integrating climate action into its strategy. But Total’s strategy is not altruistic. CEO Patrick Pouyanné has stated (quoting the International Energy Agency) that demand for electricity is expected to grow faster than demand for fossil fuels. The company is betting that, by executing better than its competitors in the electricity sector, Total will generate better returns, reduce its stranded asset risks in incumbent businesses, and retain investors in light of the fossil fuel energy sector being the worst performing equity market sector globally over the last decade. As he says, “It’s not a shift, it’s a genuine ramp-up.”

In his time as Shell’s CEO, Ben van Buerden has moved slowly from emphasising Shell’s mature upstream and downstream assets, highlighting the societal equity in providing energy to the half of the world’s population that doesn’t have access to oil and gas, and emphasising that it is governments’ responsibility to deal with carbon policy, to now articulating a bold decarbonisation ambition for Shell.

Addressing greenhouse gas (GHG) emissions is especially challenging for oil and gas companies. They have significant scope 1 and 2 emissions but these pale in comparison with their scope 3 emissions; that is, the GHG emissions caused when customers use their products.

Shell’s total annual emissions in 2019 of 656 million tonnes of carbon dioxide equivalent (Mt CO2-e) and Total’s of 458Mt CO2-e rank them among the most significant contributors to the build-up of greenhouse gases in the atmosphere. By comparison, Australia’s total GHG emissions (not including exports) are 530Mt CO2-e a year.

Strategies to reduce emissions

Shell and Total have similar strategies to achieve their objectives: Improve the emissions efficiency of their current operations; Invest more in fossil gas than oil; Invest in renewables (wind and solar assets as well as battery technology, hydrogen distribution and mobility technology); Rely on carbon, capture and storage (CCS) and carbon sinks to cover any gaps.

Shell said it would spend $1-2 billion a year between 2017 and 2020, and then $2-3 billion a year between 2021 and 2025 to grow its renewables business as well as reducing its net carbon footprint by 3-4% (from its 2016 baseline) by 2022. Total is also focused on investing in renewables, aiming to have 25 GW of renewable energy assets in operation by 2025 and at least 10 million residential customers using renewable energy. In addition, Total pursues emissions reductions in its operations, including by reducing routine flaring (by 80% by 2020 and eliminated entirely by 2030), and by reducing scope 1 and 2 carbon emissions to less than 40Mt CO2e (from 46 in 2015) by 2025.  

Reviewing performance against their objectives


Total has built its renewable capacity largely by acquisition. In 2017, Total paid $267 million for 23% of Eren, a French solar generation company, since renamed Total Eren. It has since increased its stake to 30% and has an option to acquire 100% in 2022. In 2018, Total paid $1.7 billion to acquire 73% of Direct Energie (then acquired up to 95% on market for a total outlay of approximately $2.2 billion), which operates as Total Quadran. This was followed by Total Eren acquiring 100% of NovEnergia for $1.12 billion, and Total Quadran acquiring Vents d’Oc, a major offshore wind operator with 200 MW of capacity, for an undisclosed price in 2019. In 2020, Total, also through Quadran, acquired 100% of Global Wind Power, an operator of 1,025 MW of wind generation.

Total’s investments in renewable energy
Source: IEEFA estimates; Total SA Annual Reports

In addition, Total has grown its business through joint ventures and organic investment. Since 2018, Total has invested considerably more than $1.5 billion each year scaling up to an estimated $5 billion in 2020 so far in acquiring and growing its wind and solar assets. Total also spent $1.1 billion in 2016 acquiring Saft, a French lead-acid and lithium-ion battery storage technology company. Total has invested in a range of biofuel and bio-product technologies, as well as an early stage H2 mobility joint venture (together with Shell, Daimler, Air Liquide, and OMV). This joint venture aims to roll out 400 hydrogen stations in Germany along with 250,000 fuel cell vehicles. There are currently 83 stations (of which 23 are Total’s) in operation as part of existing petrol stations.

Total has lived up to its promise of investing at least $1.5 billion per annum for the last two years. With further growth through joint ventures in Spain (Powertis – 800 MW, SolarBay – 1200 MW), India (acquiring a 50% stake in Adani Green Energy’s 2 GW of operating solar projects), and Qatar (800 MW by 2023), Total has grown its capacity to 3 GW in 2019 and over 6.6 GW once the 2020 investments are operating. It currently has plans to install another 4.6 GW by 2023.

In sum, Total is almost halfway to its 2025 objective of 25 GW and has successfully acquired large-scale renewable infrastructure development capacity. No other major oil company is growing renewables this fast.


Shell has articulated a similar strategy but has taken a different implementation approach to Total. Shell has not announced a ‘renewables under management’ target like Total did. It has focused on investing in solar and wind projects rather than making the large acquisitions and joint ventures Total has done. As a consequence, Shell has invested in many projects but most of them are relatively small-scale and fragmented. Shell’s wind investments have been all (with the exception of MP2’s wind generation) in offshore wind, a segment that fits well with Shell’s offshore oil and gas expertise. The other main investment theme has been retail: broad-based retailers of renewable energy in the US and the UK (ERM Power in Australia is a generic electricity retailer that specialises in the business segment). Shell has also invested in hydrogen filling stations and EV charging stations in Europe and the U.S. This connects with Shell’s competitive advantage as a fuel distributor with 44,000 petrol stations worldwide.

Shell ramped up its pace in 2019 and completed more renewables deals than any other oil company (by number of transactions). Yet the company is less than halfway to its 2020 objective and it is difficult to see how Shell will meet that goal, much less scale up to $2-3 billion per year from 2021 onwards, unless it materially changes its approach.

Shell’s renewable investments 2017-19 (US$ million)
Source: IEEFA compilation of information from Shell Annual Reports and media releases

Comparing oil supermajors with renewables competitors

Ørsted: Ørsted, previously named DONG Energy, the Danish Oil & Gas Company, has also pivoted strongly to renewables. It has delivered a perfect case study in energy transition for the benefit of shareholders by being ahead of the curve and divesting fossil assets while there is still a ready market and before stranded asset risks are factored in. Ørsted is now the world leader in offshore wind. In this segment alone, Ørsted has a plan for 15 GW of installed generation capacity by 2025.

Ørsted offshore wind pipeline
Source: Ørsted Annual Report 2019

NextEra: NextEra, the largest and best performing US utility energy company, operates more than 15 GW of wind energy and 3.25 GW of solar energy (through its FPL and NextEra Energy Resources subsidiaries). It plans to add 3-4 GW of wind energy and 1-2.5 GW of solar energy generation capacity in 2020 (at Total’s average cost of GWs, that could be as much as $10 billion of investment). NextEra also announced in April that it will spend US$1 billion on battery storage projects in 2021.18 NextEra’s emissions objective is to reduce its absolute GHG emissions by 40% below its 2005 baseline, with almost twice as much electricity generation capacity.

Iberdrola: Spain’s largest energy group, Iberdrola, told the market it would invest €32 billion in renewables between 2018 and 2022. At its February 2019 shareholder update, that amount was increased to €34 billion. In its COVID-19 update on 1QFY20, Iberdrola confirmed it is on track to meet this objective, with €10 billion planned for FY20 alone, and that there would be no interruption to construction or production as a result of COVID-19. It would meet its net profit and dividend outlook. As of last year, Iberdrola had 52 GW of installed capacity, of which 76% was renewable (the remainder was fossil gas and 850 MW of coal generation). In many ways, Iberdrola is the energy company Total and Shell say they want to become. As shown in the figure below, Iberdrola’s share price performance over the last two years (dark blue – up 53%) compared to Total (pink – down 35%) and Shell (purple – down 52%) confirms the market’s confidence in its strategy.

Two-year share price performance of Iberdrola vs Shell, Total and S&P500
Source: Yahoo Finance

Shell and Total: The two companies have ambitions in the same ballpark as these more seasoned renewables investors, but their plans are, relatively speaking, far higher than their track records to date. Both Shell and Total have much more capacity to invest in zero emissions industries than their plans to-date indicate. Though significantly constrained this year as a result of the combination of an historic contraction in demand caused by COVID-19 and a massive fall in the oil price caused partly by a Saudi Arabia/Russia dispute, Shell and Total have typically spent at least $25 billion and $15 billion per year respectively on capital expenditure, including organic growth and acquisitions.

While Total’s renewables investment is substantial, it is a small percentage of total capital expenditure. The vast bulk of Total’s capex continues to be directed to exploration and production. Shell’s acquisition spending the last three years has been modest and well below its traditional rate – $688 million, $1.067 billion and $948 million in financial year (FY)17–19, with $559 million forecast for FY20 (prior to its Q1 cutbacks). This renewables investment is very modest in the context that Shell has maintained a significant capital expenditure level of around $25 billion for the each of the last three years.

Shell’s stated objective for investment in New Energies was 5-10% of annual capex. The Integrated Gas segment has consumed around 20% of total capex but, given Shell has continued to spend well over $10 billion a year in upstream capital expenditure, it is difficult to see how this constitutes a material transition in the average carbon intensity of its products. Integrated Gas has remained around 13% of total revenue since the acquisition of BG. In the first quarter of FY20, Shell’s gas production was up 12% year-on-year but earnings from gas were down 16%. Overall earnings (on a constant currency basis) were down 46% on 1QFY2019. There is little question of Shell’s capacity to invest in renewables at the levels it has promised. With the outlook for oil and gas worse than it has been for 10 years, and oil and LNG prices at decade lows, it would seem logical to emphasise New Energies investment, particularly in light of its zero commodity price risk and long term annuity-style earnings profile.

Will the supermajors achieve their objectives?

Even with its first quarter cutback on capital expenditure, Total plans to maintain annual investment of $1.5-2.0 billion in renewables. Total will need to almost double its rate of investment from 2020 to 2025 to achieve 25GW of renewable energy. To be installed by the end of that year, the investment will need to be front-ended. However, moving from that interim objective to Total’s carbon intensity target (60% reduction by 2050) will require a massive step up.

According to Energy Intelligence, renewable power will need to constitute a much larger percentage of Total’s total product portfolio: “as much as 40% in 2050 compared to less than 5% now.” Even assuming the greening of Total’s gas products, Total’s 2050 objective will require 10 times the 25 GW capacity in renewables, or between “one and two times Germany’s annual consumption” of electricity.  One advantage Total has is its disciplined approach to breakeven oil extraction. With a current breakeven figure of $25/barrel, Total is expected to avoid many new oil projects that would meet the investment threshold of other oil majors. This will improve Total’s resilience to sub-$40 oil prices and possibly move the balance away from oil and towards renewables more quickly.

Shell is in an even worse position. It will need to increase its current level of activity by orders of magnitude if it is even to meet its renewables capital investment target ($2- 3 billion per year from 2021). Given Shell’s recent preference for organic investment over acquisition (and its failure to make renewables acquisitions when it tries), it is hard to believe Shell can ramp up sufficiently to meet its 2035 and 2050 targets without undertaking a step change in acquisitions, potentially funded by divestment of more peripheral fossil fuel development assets.

Cause for scepticism

Cost of capital: Shell’s cost of capital is higher than that of NextEra, Ørsted and Iberdrola. Typically, oil and gas companies have a higher cost of equity (10-13% vs 7-10%) and an overall higher weighted average cost of capital (WACC) than utilities (7-9%) or renewables companies (5-7%) due to the traditionally high profits and significantly higher risk associated with exploration and commodity energy price volatility. When long term infrastructure investors such as pension funds are factored in, Shell and Total could be materially outpriced in a competition for renewable generation assets.

In the bid for Eneco, indications are Shell (and its investment partner PPGM, a Dutch pension fund) reputedly bid €1 billion less than the €4.1 billion paid by Mitsubishi (and its 20% partner, Chubu Power Company). With a WACC closer to 5% than 7%, Mitsubishi could take a more aggressive bidding position. The Eneco transaction also shows the growing global competition for limited renewable energy expertise, particularly at scale. IEEFA has long articulated that China has taken prime advantage of its early mover status as the global zero-emissions industry leader, undertaking a disparate, seemingly opportunistic range of international acquisitions over 2016 and 2017, building on its domestic sector leadership. Coinvesting with pension funds and other cheap sources of infrastructure equity might be a way of overcoming this disadvantage.

In addition, given their experience with managing political risk in Africa and South America, Shell and Total may be more competitive when pricing and implementing renewable energy projects in these regions. In general, however, Shell and Total will need to convince investors that lower equity returns26 are acceptable as they transition to an entirely new, less volatile, more annuity like business model. An investor might well ask, why invest in Shell or Total to gain exposure to renewable energy when I could invest in NextEra, Ørsted or Iberdrola, or even ENEL or ENGIE, given these firms are far more advanced in the transition?

Expertise: Shell has very little top-level experience with renewable energy. While the board members have strong backgrounds in banking, retailing, oil and gas and government, there is not a single director with any significant experience in transformation of a business, technology and innovation or renewables. The risk for investors in Shell and Total is that these companies risk repeating their financially costly mistakes (think Solyndra, American Superconductor Corporation, Sinovel of China, Suzlon of India, BrightSource Energy, SolarReserve, NRG, SunPower, Sun Edison, Carnegie Wave Energy, Geodynamics, Solazyme, Molycorp and Dow Chemicals’ solar roof-shingles).

On the management team, there is no one with any significant experience outside Shell. The Projects & Technology Director, who has responsibility for Shell’s climate strategy, is a 30-year Shell veteran who previously worked in exploration and production, while the Integrated Gas and New Energies Director has been with Shell since 1995 and has previously worked in gas. It is good news that Elizabeth Brinton, who took over as head of the New Energies division in April 2020, is not a Shell lifer and has a technology innovation background from Australia’s AGL, PG&E, the Californian utility, and several start-ups in Silicon Valley. Total is similar. Of the board members, only Maria van der Hoeven has any apparent exposure to renewable energy: she is on the board of the Rocky Mountain Institute and is a director of Innogy SE, the German energy firm (a subsidiary of E.ON). Total’s other board members have broad-based experience in banking, mining, oil and gas, the auto sector and government. Similarly, the senior management team has no relevant experience in renewables or corporate transformation.

It is reassuring that Shell has announced a major restructure, including potentially putting New Energies into its own division. The CEO may have recognised the need for expertise and objectivity.

By contrast, Ørsted’s board includes experience in renewable energy, private equity, shipping, oil and gas, banking and finance and corporate. Iberdrola has a management team dominated by engineers along with executives with investment banking, accounting, legal and electricity backgrounds.

Carbon capture and storage: Both Total and Shell emphasise the role that carbon capture and storage (CCS), carbon sinks and a carbon price play in their ability to meet their long-term net-zero objectives. Total and Shell currently spend an immaterial percentage of annual capital expenditure on CCS, so it is arguable that CCS is emphasised more as a matter of marketing than as a concrete strategic priority.

Cause for optimism

There is good reason to believe that Shell and Total can make a successful pivot away from fossil fuels and towards renewable energy. The supermajors have traditionally had several sources of competitive advantage: One, their sheer size provides access to capital, political power and the ability to undertake world scale projects; Two, they have nurtured engineering and project management expertise in ways many other industries envy; Three, their massive physical retail footprints around their work give them a close relationship with consumers and the ability to distribute their products in the market.

In sum, the two have solid progress in getting started but neither Shell nor Total is on track to meet its climate goals. The new elevated commitments of 2020 by Shell and Total have the right approach but they need to do four things:

Bring on expertise all the way to the top: the board and the management team need renewables, technology and transformation skills and experience.

Be transparent: the renewables businesses must be carved out of fossil gas into separate business segments for management and reporting.

Focus on competitive advantage: One, scale: undertake the largest projects in the world (potentially farming in as they do in oil and gas, then leveraging low cost patient pension capital by capital recycling once projects are fully commissioned), and make larger acquisitions; Two, geography: Most OECD countries have decoupled energy use from economic growth, so the majority of new energy demand is in emerging markets, and the supermajors have a competitive advantage in political, country and operating risk management here; three, complexity: use the world class project management and engineering capability to do difficult projects that NextEra or Iberdrola would not and could not do; and four, distribution: use the massive retail networks and distribution capability to accelerate growth in renewable energy for transportation, including electricity, hydrogen and biofuels.

Speed up: the allocation of capital to renewable energy and related technologies must be increased.

To reach their own stated targets, IEEFA estimates that Shell and Total each needs to shift at least $10 billion per annum (or 50% of total capital expenditure) from oil and gas exploration and to acceleration of their renewable strategies. This will at least tip the balance of investment in favour of renewables over fossil fuels and will scale them up towards NextEra and Iberdrola. It will also accelerate global decarbonisation, adding scale and learning which in turn will drive down renewable energy deployment costs.

Shell and Total are betting that expanding their exposure to zero emissions growth sectors in the global energy markets will motivate shareholders to move towards them from ExxonMobil and competitors, but investors may avoid the supermajors altogether unless they demonstrate serious progress towards their stated goals.

The article was originally published by IEEFA in July 2020. Full version of the article can be accessed here