Shell warns of ballooning carbon costs, climate risks to its oil, gas business

Shell faces spiraling carbon costs in the coming decade due to unaligned net-zero policies and evolving regulations, leading to "significant uncertainty", it said March 9.

In its 2022 annual report, the energy company also flagged the risks to its oil and gas business from climate change and the energy transition, admitting that they could have a "material adverse effects" on its earnings, assets, operations and supply chains.

These risks could also lead to a spate of legal, regulatory measures, resulting in project delays or cancellations, increased litigation, operational restrictions, Shell said.

"The transition to a low-carbon economy will likely increase the cost of compliance for our assets and/or products, and may include restrictions on the use of hydrocarbons," the report added.

This comes as Shell posted a record profit of almost $40 billion in 2022 as the Russia-Ukraine war led to a surge in oil and gas prices.

Oil and gas companies continue to face pummeling from environmental activists and shareholders, as investors and policymakers accelerate their focus on the energy transition.

They risk losing billions of dollars in investor capital if they do not adapt, as there is pressure on them to reconfigure their core businesses and accept a lower-carbon agenda.

"The risk of stranded assets may increase in a higher carbon price scenario," Shell also warned.

Carbon pricing uncertainty

Shell said its carbon costs are set to treble in the coming decade, after it spent around $493 million last year for its compliance with the EU Emissions Trading Scheme (ETS) and other related carbon pricing schemes.

Annual carbon cost exposures are estimated to rise to $800 million in 2023 and to around $1.5 billion in 2032.

"The lack of net-zero-aligned global and national policies and frameworks increases the uncertainty around how carbon pricing and other regulatory mechanisms will be implemented in the future," it said in the report.

"This makes it harder to determine the appropriate assumptions to be taken into account in our financial planning and investment decision processes."

Shell also called for more clarity around carbon-pricing mechanisms, which it believes can be an effective and economic way to reduce greenhouse gas emissions.

The London-headquartered company admitted that up to 2030 its CO2e costs are largely policy driven, through emission trading schemes or government taxes, which vary significantly globally.

"But beyond 2030, where policy predictions are more challenging, the costs for carbon emissions are estimated based on the expected costs of abatement technologies required for 2050.

From 2030 onwards, carbon costs are estimated to be at $125/mtCO2e under Shell's mid-price scenario, and at $220/mtCO2e under its high-price scenario.

Carbon prices currently vary significantly on a country to country basis and governments across the world have failed to agree on a global carbon price.

Carbon permits under the EU ETS are currently around 10 times more expensive than compliance prices in China, which is the industrial powerhouse of the world.

Platts, part of S&P Global Commodity Insights, assessed EU Allowances for December 2023 at Eur99.11/mtCO2e March 9.

This compares with China's compliance emissions prices which was valued at Yuan 56/mtCO2e ($8.10/mtCO2e) March 3, according to the Shanghai Environment and Energy Exchange.

Cutting emissions

However, the energy major said it managed to report a steady fall in its absolute emissions in 2022 due to divestments, and reduced oil product and gas sales.

Shell's combined emissions under Scope 1, 2 and 3 fell to 1.232 billion mtCO2e compared with 1.367 billion mtCO2e in 2021 and 1.628 billion mtCO2e in 2016.

Scope 1 covers emissions from sources directly controlled by an entity; Scope 2 includes indirect emissions from bought power, heat, or cooling; and Scope 3 covers other value chain emissions, according to the Greenhouse Gas Protocol, which is the global standard-setter on carbon accounting.

The fall in Scope 1 and Scope 2 emissions were mainly due to oil and gas divestments along with shutdowns or conversion of existing assets, along with purchase of renewable assets and some abatement projects.

Scope 1 and Scope 2 emissions fell to 58 million mtCO2e in 2022 compared with 68 million mtCO2e the previous year.

Meanwhile, Scope 3 emissions were at 1.174 billion mtCO2e last year from 1.299 billion mtCO2e in 2021. Scope 3 emissions fell "largely due to a reduction in oil product and gas sales, and a decrease in the intensity of power sold," it added.

Shell has set itself a target to cut its absolute emissions by 50% under Scope 1 and 2 by 2030 and reach net zero by 2050.

"By the end of 2022, Shell had reduced its absolute Scope 1 and 2 emissions by 30%," it said.

It has also set itself a target to reduce the net carbon intensity of the energy products it sells by 20% by 2030, which includes emissions associated with its operations (Scope 1), the energy to run its operations (Scope 2) and the end-use of the products (Scope 3).

The report showed that Shell's net carbon intensity fell to 76 grams of CO2e/Megajoules compared with 77 grams of CO2e/Megajoules in 2021 and 79 grams of CO2e/Megajoules in 2016.