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The world tells Big Oil to stay out of offset markets

A few months ago the European oil giant Shell quietly decided to abandon its $100M/yr plans to invest in high quality carbon offsets. Bloomberg covered the story in a fascinating article:

Six months after becoming the chief executive at Shell Plc, Wael Sawan quietly ended the world’s biggest corporate plan to develop carbon offsets, the environmental projects designed to counteract the warming effects of CO2 emissions.

In an all-day investor event in June, Sawan laid out an updated strategy for the European oil major that included cutting costs and doubling down on profit drivers like oil and gas. As important was what he omitted: any mention of the company’s prior commitment to spend up to $100 million a year to build a pipeline of carbon credits, part of the firm’s promise to zero out its emissions by 2050.

Shell faced several unique challenges with its nature-based carbon credits program. The first was universal skepticism about its motives. This forced Shell to only invest in the highest quality offset programs, with strong technical fundamentals and unimpeachable on-the-ground partners. Any failure of one of these offset programs would be put under the magnifying glass, by both governments and environmental groups. The risks associated with applying Shell's name to the investments were massive, both for Shell and its local partners.

This coupled to a related problem, which is that high quality programs didn't exist at large enough scale to fulfill Shell's stated ambitions. Back in 2021 when Shell made its commitment to spend $100/yr, there was no obvious way to spend such sums in ways that guarantee success. Two years later, there still isn't. The largest challenge in nature-based solutions is not in attracting capital, it is in setting up the infrastructure, measurement, and verification programs to show that credits claimed by nature-based products will stand public scrutiny, and the test of time. Proof of the quality of these markets will grow at the same rate their trees do, and they will take decades to mature.

Finally, and perhaps most importantly, Shell had no particular comparative advantage in this market, aside from its large bags of money. Existential angst is not a sustainable motivator for a profit-making company, and the rest of Shell's operations fail to dovetail with nature-based credits in a way that makes Shell particularly good. This can be contrasted with Oxy's approach, direct air capture, which matches nicely both to Oxy's expertise in chemical engineering systems, and to its ability to scale operations by co-locating them with oil and gas efforts. Oxy has a story for its carbon-negative business arm that includes world-class expertise, scale, and ultimately profit. Money alone is not enough, even for an oil company.

At the same time Shell was pulling out from the carbon credits market, Shell it was pulling back in renewable energy, a decision that caused the head of its renewables business to leave. From Electrek:

Under former CEO Ben van Beurden, Shell began a (minimal) shift from oil to new forms of energy like wind and solar. Most of it was court ordered, but van Beurden did put policy and people in place to help the company reduce greenhouse gas emissions and repeatedly challenged governments and other corporations to optimize global energy consumption beyond their supply chains.

One of van Beurden’s hires in the summer of 2021 was Thomas Brostrøm – a former North American CEO of offshore wind giant Orsted. Brostrøm signed on as Shell’s senior vice president of global renewable solutions before being promoted to the head of renewables last year.

Since then, van Beurden has retired, leaving the CEO position open for Wael Sawan this past January. Van Beurden was no saint, but Sawan has described his approach to bolstering Shell’s value as “ruthless,” openly committing to the companies upstream business in oil and gas.

This is somewhat clarifying. Shell had no particular advantage in the solar or wind business either: Again, having money and a cloudy conscience is not an advantage in the marketplace, and Shell was certain to be bested by focused rivals. Better, the new CEO thought, to keep its money and its focus, and remain an oil company that can be as profitable as possible in the time it has left.

This is almost certainly what the stock market wants. And it is probably the best for the planet they do. As lovely as it is to think about an oil company reforming itself into a renewables or climate company, it simply is not an efficient use of shareholder funds. Better for Shell to save such money as profits, which become large shareholder distributions, which get re-invested by shareholders into companies that actually have a future. The best metric for forecasting whether an oil company is moving in the direction of hurting the planet less is to watch their R&D and capital investments decline, not their outside interests.

Shell will slowly shrink as the oil business shrinks, and eventually die as the industry consolidates. A new energy economy will grow in its ashes, led by other companies without Shell's cultural baggage. This fine and good. I hate to see an effort in the carbon markets fail, but some must, and this is surely one of the ones that should.

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