Ep106: László Varró "Managing Uncertainty: The Scenario Shell Game"

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Michael Liebreich So, László, welcome to Cleaning Up.

László Varró Thank you very much for the invitation, Michael.

Michael Liebreich So where are you calling in from today? Are you in Holland? Presumably?

László Varró Yes. This is my working room in our house nearby The Hague.

Michael Liebreich Very good. Let's do the following to start with.... The audience are incredibly knowledgeable, they don't all know exactly who's doing what within Shell, within the IEA, and so on. So why don't you start by giving us a thumbnail bio, in your own words, because you are now the VP of Global Business Environment at Shell, what does it mean?

László Varró So, Strategy and Business Environment is the official legal name of the Shell Scenarios Team, which was established half a century ago to help decision makers navigating deep uncertainties. So this is a team of 38 professionals from all around the world, with professional backgrounds ranging from energy, economics to military history, who are reflecting on some of the great uncertainties of the global economy, the energy and the climate system. And I joined Shell last September, before that, I spent a decade at the International Energy Agency, first as the Head of Gas and Electricity Markets. And I took up the position on the Monday after Fukushima with a very intense crisis management. And then in 2016, I was appointed as the Chief Economist of the International Energy Agency, and I had a five-year period as the Chief Economist of the IEA.

Michael Liebreich Thank you very much. And so these are now... your responsibilities cover the famous Shell scenarios, as you say, 50 years they've been going. And it was really, I think, the first corporate to take this idea of scenarios out of the military environment and try to apply it to their own competitive landscape. And I want to talk about those, those scenarios. But before then I've got a couple of other things that I think we should cover. I think we should talk about this extraordinary moment in history, in the energy sector, but also broadly in the economy and in world history. I think we should talk about those scenarios. And then I want to make sure we have enough time to get on to more general questions around society's transition, around Shell or other oil and gas companies’ role in the transition to net zero, and so on. So for me, that would be those three things I'd like to cover. And perhaps we start with the moment in history. How do you see it?

László Varró So, 2022 certainly shaped up as a year when history was teaching us hard lessons about uncertainties. And the Russian aggression against Ukraine is a moment which is unprecedented since the Second World War. It is a great human tragedy. But it also triggered an energy crisis, which might well become more serious than the 1970s oil shocks. It is certainly deeper and more serious than anything that happened since the 1970s. And of course, the reason for this is that Russia, for decades, was the largest hydrocarbon exporter in the global economy. Saudi Arabia exports more oil, but Saudi Arabia doesn't export gas. So combined oil and gas, Russia was for decades, the largest hydrocarbon exporter. Europe for decades, was the largest hydrocarbon importer, and there were decades of infrastructure and contractual dependency between Europe and Russia. Saudi relationship is built on a foundation of trust, and the Russian aggression completely destroyed that foundation. And what we are observing is not simply that Russian oil and gas is redirected to Asia, that is happening to some extent, but we see the lack of ability of Russia to redirect all their supplies. So a meaningful amount of Russian oil will stay underground. It is still a bit uncertain, depending on how the sanctions are exactly implemented. And in the case of gas, recent data already shows a decline in Russian gas production, which is bigger than the entire global decline of gas demand in 2020 with the coronavirus restrictions. So it is a very serious supply shock for the entire global economy, triggering strong spillover effects in the entire energy system.

Michael Liebreich This is an absolutely enormous boulder that has been thrown into the pool of the global energy system. And the ripples, the waves are clearly going to bounce for many years, many decades, what would you say?

László Varró So the first thing to keep in mind is that there were tensions in the energy system already on the 23rd of February when the Russian tanks started to move. The Coronavirus recovery was very energy-intensive. People went out, spent their money, consumption shifted to manufactured goods, which was driving up the energy intensity of the global economy. Oil and Gas upstream investment adjusted down to the level that would be required in a net zero, well below two degrees [inaudible] trajectory, as the industry adjusted its investment approach to the Paris Agreement. While at the same time, clean energy investment remained structurally below the level that would in real life successfully put oil and gas demand on a continuously declining path. So this mismatch in investment of oil and gas investment adjusting down to dependence agreement, but clean energy investments struggling to ramp up, it already created tensions; global gas markets especially were already going crazy last December before the war started. And then the Russian aggression reinforced those tensions.

Michael Liebreich Can I just interject there just with a question? To what extent was last year's price spike, which was already being called unprecedented, and you've just referred to it as the result of underinvestment in clean energy, the bounce back from the COVID pandemic.... But there was something else going on, which was President Putin already turning the taps down, was it not? And to what extent can we put the blame on the COVID bounce back the underinvestment or the preparation, Russia's preparation for its aggression?

László Varró Yes, so certainly, certainly, Russia already started to reduce the gas supplies to Europe. Before the war, the dominant interpretation was that this is basically an abuse of dominant power to push European prices high and maximize export revenues. Having said that, Michael, last year - 2021 - was a 5.8% increase in global GDP, as the economy bounced back after the Coronavirus, and a 5.8% increase in global energy consumption, with no improvement in the energy intensity of the global economy at all. Now, before the Coronavirus, the rule of thumb was 3% global GDP growth, 1% growth of global energy consumption with a 2% improvement of energy intensity. And one of the things I was in involved during my IEA tenure was the establishment of this 3% Club, where like-minded governments came together to accelerate the improvements of the energy intensity of the global economy to further the energy transition. And in 2021, we have seen no improvement in energy intensity whatsoever. So this very robust energy demand in 2021 was certainly part of the combination of factors.

Michael Liebreich And in fact, I was a commissioner on the commission that went alongside the launch of the 3% Club, it was the commission for urgent energy efficiency, trying to get this rate of efficiency improvement up to 3%, which I would say at this point, you have to say has not been a success...

László Varró So 2021, to be fair with the energy efficiency policies, was primarily a structural shift. Consumer expenditure shifted from services to manufacture of goods. And that was well documented in the macroeconomic literature. But the energy implications are often neglected. Because when a consumer buys a new PlayStation on Amazon instead of going to a yoga club, then two things need to happen: one, that gadget is manufactured more often than not in Asia,  - so, last year, the electricity consumption increase in Chinese factories was more than the entire British electricity system; and then the second is that that gadget has to be transported to the consumer, which is oil. So by February, all the oil demand components of logistics - so container shipping, highway trucking, but even air cargo - were way, way above the pre-epidemic level.

Michael Liebreich Right so we've this surge of demand, we've seen some elements of Russia turning down the supply in preparation. And under investment, which we've spoken about, actually on quite a few of the episodes of Cleaning Up, and then you get this invasion. And of course, with Russian, the sanctions against Russia, and then Russia's shutting down the taps itself, we then have a return to burning coal we have all sorts of... And that's not just in Europe, we also see a return to burning coal in Asia, to fuel their own re-stimulation of the economy and so on, and in response to high gas prices. But my question then, would be how short-lived do you see that return to fossil growth or to the bounce back in use of coal and fossil fuels overall? I mean, is this a new normal? Or is this a couple of years bulge because of the short term pressures?

László Varró No, it's a very painful, but overall temporary, phenomenon. We certainly observe highly undesirable side effects of the gas crisis. Now, the European approach has been essentially to outbid everybody else, and buy up all the gas. And perhaps the best example for the undesirable side effects is Pakistan, where a European company - I'm proud to say it was not Shell - had a contractual obligation to supply Pakistan with liquefied natural gas; they defaulted on the contract, because even after paying the contractual penalties, it was more profitable to bring the gas to Europe. 12 million people in Karachi were stuck without electricity when the tankers didn't arrive. Now, Pakistan has five major coal projects in various stages of development, all financed by China as part of the Belt and Road Initiative. And as we have this discussion, the European political decision makers are trying to convince the Pakistani Prime Minister in the climate summit to cancel those coal projects, and that is going to be a challenging conversation. So there are clearly undesirable side effects. But overall, we see a remarkably green response to the crisis - a regionally divergent response, but a remarkably green response. So we have observed now the European Union, and also the United Kingdom, essentially double down on energy transition policies, with very strong renewable targets, very strong energy efficiency and hydrogen targets, and also a very open discussion of the necessity to change consumer lifestyle to reduce energy demand. In the US, consumer lifestyle change is not on the political agenda, but the US adopted a historical milestone climate legislation, which we expect to trigger a gold rush of investment into clean energy. And jumping to the Pacific, we also see China investing more into clean energy than Europe and the United States combined. So overall, we see a remarkably strong political determination, to essentially rise to the challenge, and manage this crisis in a fashion which will be good in the long term. And you also see very powerful financial incentives, because of course, very high gas prices feeding into very high electricity prices, makes the economics of pretty much every clean energy project quite compelling.

Michael Liebreich Now if you, before 2022, before all the events of this year, if you had happened, perhaps, to be in the scenarios business, and you were thinking about where the world might be in 2030, in terms of the shift towards low carbon energy, and if that is, let's say, your kind of datum point, has 2020 resulted in that 2030 scenario being cleaner or less clean?

László Varró So 2030 is only eight years from now. And in 2030, the short term and medium term disruption both from the Russia-Ukraine war, and also from the supply chain disruptions that are still the heritage of COVID, in 2030, this will still be visible. So basically, the headline target of 40%, 45% reduction of global carbon dioxide emissions by 2030.... it's very challenging to envisage a scenario in which that target is met. But for 2050, when there is time for investment, there is time for innovation, I believe that the shock of 2022 overall increases the likelihood of the long-term 2050 target being met.

Michael Liebreich I'm more optimistic about 2030. So I've written about what I call the Great Clean Energy Acceleration. Actually, a couple of episodes ago, I read that as an audio blog. And so I think we've got two very, very difficult winters clearly in Europe, but actually, by 2030... Although, of course, the waves, the ripples from that boulder being thrown into the lake will still be washing around, but I think that by 2030, the trajectory will have tightened, because although it's only eight years, but for a lot of investments, energy efficiency, a lot of renewable energy, they can actually be done fairly quickly. And of course, rerouting some LNG. So, for instance, bringing in the floating storage regasification units, that will be done in Europe. So, I think we're going to see a quicker adjustment perhaps then you're describing there.

László Varró So Michael, I agree with what you what you just described. So certainly, it is very well conceivable to see the peak of global fossil fuel use and the peak of global carbon dioxide emissions this decade. That's entirely plausible. If I combined what I see as investments unfolding on the demand side - so things like heat pump deployment, or solar deployment in Europe, and also the supply side, the new energy sources - by the second half of the decade, the energy security concerns will be in my view comprehensively addressed, if we play our cards smartly. But the question is will we see global carbon dioxide emissions declining, not just a little bit by 2030, but by 45%? That is a very, very radical target.

Michael Liebreich I guess we're sort of... I suspect, we're agreeing because I personally don't think that we were ever on track for 40%, 45% reduction during the course of this decade. So I, in fact, in 2019, I wrote a piece called Peak Emissions Are Closer Than You Think - and Here's Why, for Bloomberg, and I postulated that there might be a 5% or 10% decline in emissions from the peak. So, I thought that we were about at the peak 2020, 2022, 2023, 2024, and then we would see 5%to 10% reduction. I think we will end up by 2030 with maybe a 15% or 20% reduction from the peak whenever the peak is; whether it's...whether, it's going to be some time, I believe, before 2025. And I think we'll go down by, let's call it 15 to 20, but not 45. So, I agree with you entirely there.

László Varró And this has an important mathematical consequence, because basically that means that a 1.5 carbon budget can be satisfied only with negative emissions and carbon removal.

Michael Liebreich Correct, which I have again, been saying, since I think 2017. I've been saying that at some point, we're going to have to come to grips with the fact that we are going through one and a half degrees, and we'll go through the one and a half degrees in maybe 2040, maybe even slightly before then. But you know, the fiction that we've somehow kept one and a half degrees alive through anything other than large-scale carbon removal - I had a very good episode with Julio Friedmann of Carbon Direct and formerly the DOE, and I think it's one of the Lawrence Berkeley National Labs, where he thinks that large scale carbon removal is not a problem and probably going to happen and I think it's not a problem, but probably not going to happen for economic reasons.

László Varró So I'm a great admirer of Julio Friedmann and I would consider him a good friend of mine. And Shell is also doing original frontier R&D on both Direct Air Capture and also on capturing carbon dioxide from the ocean, from the surface levels of the ocean. And certainly, the thermodynamics is challenging. So, capturing carbon dioxide from ambient air, as that will always require energy. But there are very promising approaches to improve the energy efficiency of the process, and there are also very promising approaches to design processes, which use low temperature heat as the energy input from which there is massive quantities of low temperature heat, which are essentially wasted and thrown away in various industrial facilities, or power plants, and so on. And so I would say that the carbon removal is certainly a technology area where further innovation, further investment is needed. And it's never going to be a free lunch. But it's within the realms of possibility. So if you, for example, observe how societies react to existential threats. So in terms of raising defense expenditure from 2%, of GDP to 3% of GDP, is absolutely politically and socially uncontroversial when a society faces an existential threat. So, if climate change is indeed treated as an existential threat, then your Direct Air Capture with carbon removal is within the range of [inaudible].

Michael Liebreich Right and you know, without relitigating the episode that I did with Julio, essentially, I said, okay, even if you accept that you can do Direct Air Capture for $100 a ton, and he wants to do two gigatons - so that's $200 billion per year, more than the current combined ad budget of all of the developed world. When I say it's not a problem, of course we could do that, the physics and the economics can be made to work. The politics, however, will only happen if it is seen as an existential threat. There are no co-benefits. There's no cleaner air, there's no... you can argue some jobs, but there's really no co-benefits for Direct Air Capture, other than mitigating against climate change. And therefore, it will only happen if it's absolutely clear that the world is going into a substantial immediate crisis. And I think that that's not going to be politically the case until maybe the second half, or possibly even later in the century.

László Varró Well, the example that I like to bring up is to look at two countries which are democracies: Israel and South Korea. These are countries that have defense expenditure per GDP 5% to 7% instead of 2% in other Western democracies. They have compulsory military service, which other democracies abolished 30 years ago. And if either the Israeli army or the South Korean army wants to build a missile battery on privately-owned land, they have legislation in place that does all the licensing and everything is done in six weeks. And this is because these are societies where there is a clear cross-party consensus that they face an existential threat, which nobody in the political spectrum questions. So basically, the question with Direct Air Capture is, will society react to climate change, as the Western European democracies leads defense policy, or will society react to climate change as Israel and South Korea leads defense policy?

Michael Liebreich Well, exactly. That's a great way of phrasing it. And in my view, the answer is that, you know, to get... I don't know what there is in Israel and South Korea, what is the percentage consensus that there is a true and immediate threat worth spending 3%, 4% extra of your GDP. I suspect that 80% or 90% of the population agrees with that. And we are so far from 80% or 90% of the population agreeing that there is a climate crisis worth spending globally $200 billion a year for no co-benefits. Personally, I'm not waiting to see that for quite a few decades. But let me pull us back here because what we're actually doing is starting to talk about scenarios without having yet properly talked about scenarios. So perhaps you can introduce us to the current status of the famous Shell scenarios. What are they and what work are you currently doing on them?

László Varró So basically, we published the last comprehensive set of Shell scenarios in 2021, asking the question: as the world recovers from the coronavirus crisis, what is the key story? What is the key driver? And there we defined three pathways, three drivers, one which we called Waves - it's not in order of importance, we just had to start somewhere - one which we called Waves, where the key story is consumption and [inaudible]; people want to spend money, people want to enjoy life. Now, in the Waves scenario, the climate targets are breached, even though renewable energy and clean energy technology is doing quite well, in the Waves scenario, companies like Tesla are an amazing [inaudible]  story. But in Waves, energy consumption is just simply too high. Very high energy consumption, even though clean energy is doing really well, there is a gap to be filled by fossil fuels. 2021 was actually a pretty good description of the Waves scenario. Then we designed a scenario which is called Islands, and this is a de-globalization scenario where the key driver is security. Now in Islands, climate policy also fails, but for a different reason. Energy consumption is lower in the Islands scenario, because deglobalization hits GDP growth. But the remaining energy consumption is more carbon intensive. Around 30% of global carbon dioxide emissions come from domestic coal. So, these are like Chinese coal mined and burned in China, or South African coal mined and burned in South Africa, which is a climate policy problem but a geopolitical security solution. In a word, prioritizing security, it's difficult to get rid of it. The short term negative impacts of the Russia-Ukraine war are quite quite consistent with the Island scenario. And then we designed a normative, well-below two degrees pathway which we called Sky. And Sky is our scenario which is primarily driven by priority on health and sustainability. And it is, it is broadly comparable to a number of other well-below two degrees scenarios, that it emphasizes energy efficiency improvements, electrification, renewable deployment, but also low-carbon hydrocarbons, and Carbon Capture and Storage for the heard to abate sectors. This year, we did a work which we call the Plunge into Islands, which tried to analyze the short and medium term, regionally divergent impacts of the Russia-Ukraine war, and we'll take the takeaways from this, and next year, we are going to publish an updated set of Shell scenarios.

Michael Liebreich Okay, so you've got Waves, which is lots of consumption, you've got Islands, which is a failure of international cooperation, more emphasis on competition, and lots more coal, and then you've got the Sky, which is the kind of the kumbaya, where we'd like to be, dealing with climate and other environmental issues, a glide path to net zero. But isn't it the fact that we sort of see elements of all three? I mean, we are seeing, despite the war in Ukraine, an enormous surge in consumption; the bounce back from the pandemic, and certainly, you know, I'm sitting here in Notting Hill Gate, if you walk around, you see people, you know, waving away in their cafes and shopping, and you see the delivery vans, up and down the street, like nobody's business. We see Islands, we see this descent to competition, although I want to come back to whether that automatically means coal, because you also talked us through at the beginning, a whole list of things, even though we are seeing this global bloc competition, growing, we also see it taking the form of huge investments in clean energy. And then of course, we still see elements of Sky right, we do see COP27 going on as we speak over in Sharm el Sheikh, we do see big commitments, we do see companies committing very substantially to net zero; in the UK it's a legal requirement. So I mean, aren't we just going to get a big mix of all three of these scenarios?

László Varró So, in general, we try to emphasize that the different scenarios are not simply just different numbers in a spreadsheet, they are different stories. And I'm very glad that you mentioned these examples, because one of our success criteria precisely is that if the scenario set is well designed, then all of the scenarios will have components which will feel familiar, all of the scenarios we have will have components which feel plausible and will be recognized as a possible future pathway. Now, of course, in reality, both of these three drivers - consumption, security, sustainability - play a significant role, and the real world is never a purely 100% only one.

Michael Liebreich It's very comforting and I understand that, you know, you have sort of 38 mouths to feed in your group. And so you know, the fact that none of the scenarios is going to be the answer, there's a reason for that. But you know, if we just take a step back, you know, to what extent did the Shell scenarios, this was before your time, did they anticipate the pandemic, and help with the management of the pandemic? Did they anticipate the great financial crisis? Did they anticipate Russia's invasion invasion of Ukraine? I mean, these are the things that throw huge boulders into the sea or into the lake. And I'm going to guess that they were not anticipated in any of your scenarios.

László Varró So around three quarters of the work of the scenario team is not published. Shell is a private corporation, subject to very strong financial disclosure requirements, and anything that is published under the Shell logo will have to comply with those financial disclosure requirements. But in the history of the Shell scenario team, there are some famous success stories. The biggest one is that the Shell scenario analysis did highlight the prospect of the balance of power radically shifting in favour of the oil producer, resource-holding governments. Now, the Shell scenario analysis did not predict that the war between Egypt and Israel will be launched exactly at Yom Kippur, that would have been impossible to predict. But the statement that it is just a question of time before the balance of power and radically shifts towards the resource-holding governments, that was correctly identified, and that was one of the historical successes. So, we do put a lot of emphasis in trying to analyze potential fissures, potential game-changers, and then we regularly revisit them: okay, this was a dog that didn't bark. Because for example, you mentioned a couple of game-changers, but for example, year Y2K, turned out to be a non-event, and I still don't know whether that was a real problem or whether that was a conspiracy of IT consultants. So definitely we are very much aware of the fact that history has a track record to be more extreme than the stress-test scenarios used for risk management purposes. So we quite consciously push the boundaries and quite consciously try to think out of the box. But some of those would be very difficult to publish for a stock market listed company under financial regulations.

Michael Liebreich But there's a huge investment going on. I take your point about you can't publish everything and you shouldn't, nobody can require you to publish everything, all the work you do. But there's a huge investment in Waves, Islands and Sky. So presumably, you see examining those different worlds as the most important thing that you can do with this group. And yet, I would ask, you know, to what extent are you looking at for instance, if China invades Taiwan, that is not a small thing, given Taiwan's role in chip manufacturing, you have to assume if that happens for five or even 10 years, there will be... I don't want to say no washing machines and no cars, but dramatically, there'll be a dramatic recession lasting a decade, a dramatic recession, at the very least. And that seems pretty important to look at, more than whether there's this theoretical Island, theoretical Waves, where the reality has got elements of both as we've already talked about.

László Varró Sure. So basically, our methodology on this is that we identify signals and signposts and then the only answer is okay, this is a signpost which points towards the Waves scenario, this is a signpost which turns towards the Sky scenario. So when you observe, for example, that the United Kingdom had quite colourful domestic politics, Boris Johnson himself was called the British Trump. But during that colourful domestic politics period, the United Kingdom maintained a pretty robust, pretty strong net zero policy, and the United Kingdom was an offshore wind success story, during that period. That's a very strong indication towards Sky... so you would say that instead of a one sort, one sort, one sort combination, now you envisage 40% Sky because there is an important signpost turning in that direction. Of course, the Russia-Ukraine war was a very brutal, very sad reminder that Islands is still important. But also the discussions about China's role in the clean energy value chains, because another thing that we identified in the Islands scenario as a negative side effect is that, you know, green energy is a winner of globalization. And a typical wind turbine has components on average from 32 different countries; as in the case of both solar panels, and also electric car batteries, China's role is indispensable. So, in the world of deglobalization, increasing geopolitical tensions, decoupling between China and the West, in such a scenario, scaling of clean energy is slower and more expensive than it normally would be. And so when we finish the scenario analysis, we don't say that, okay, this is done now two years of holiday for everybody before we do the next ones, but very consciously analyze and look at what's happening in the world. And try to put that into the scenario radar screen, and basically saying that, well, these are components that are moving in this direction or that direction. And one of the interesting things that we learned this year, the Islands scenario was designed before the Russia-Ukraine war. Now what we learned after the Russia-Ukraine war, is that overall, the response is greener and has more emphasis on renewables than what the original edition of the Islands scenario predicted. And this year's goal was to modify the analytical framework accordingly.

Michael Liebreich Last week - as we record this it has not yet aired, but when this airs it will be last week - we had Nobuo Tanaka, Tanaka-san, who was your former boss at the International Energy Agency, Director General. And we talked about how we're seeing this resurgence of competition. So, perhaps Islands-like competition between EU, with its Fit for 55 and RepowerEU policies and having to get off Russian gas, and then you've got the US with its Inflation Reduction Act, you've got China with these huge renewable energy targets, Japan with its green transformation, a trillion dollar program, India with its targets. And so we're actually seeing green competition, and the question I asked him was whether that green competition might not do more for the transition over the next 20 years than green diplomacy did over the last 20 years.

László Varró That's a very interesting, that is a very interesting question which we are analyzing also carefully. It is certainly true that in the case of China, which has by far the largest clean energy manufacturing industry in the world, this is very much seen as part of industrial policy. So clean technology is identified as one of the key future industrial areas, and there is a very strong desire for China to have a strong role in them. And this is 100% official, on the record, Chinese policy documents discuss this. Now also, there is a very open discussion in the United States about restarting domestic manufacturing. It is an interesting, of course, hypothetical, what-if question: would it have been politically possible to pass such an ambitious climate legislation in the United States without a very strong domestic manufacturing component? Many American political analysts believe the answer to be no. And many political analysts believe that this was a very smart political tactics by the administration. But of course, the European Union is already on the record as claiming that those American manufacturing subsidies are in contrary to the WTO rules. So it is possible that clean energy technology might end up like space technology was in the 20th century, in the 1960s, when fantastic scientific and engineering achievements were driven, not because of competition, but exactly because of because of the lack of cooperation, as space technology was at the focus of the superpower rivalry. There is such a possibility for that. Now, if that leads to, let's say, Europe, and the United States ramping up domestic clean energy manufacturing, and China exporting solar panels and batteries into Africa and Southeast Asia, then it's a net positive for the energy transition, but where I have concerns is that last year was an interesting milestone that within the Chinese Belt and Road Initiative, the clean energy component reached more than 50%. So more than half of the Belt and Road energy investment is now zero carbon investment. Solar, batteries [inaudible], hydropower and so on. Now, if a Chinese-built solar project in Zambia is regarded as a national security risk by the major Western countries, I don't think that's useful. So Europe and the United States doing their homework on ramping up their value chains, that's a good thing. But overall, this massive scale up of clean energy, which is needed globally, is difficult to see how this could happen without China's capabilities.

Michael Liebreich This is a fantastic PhD thesis, or maybe a document from your group, whether having big bloc competition drives the costs down more quickly than by having global supply chains. As a member of the UK Board of Trade, I certainly would be very interested to read that piece of analysis, no question. Now, if we could just move on to some of the general questions around the sort of role of oil and gas majors and the transition to clean energy, to net zero. You mentioned that China, 50% of the Belt and Road investments were clean investments. Can I ask what is the current percentage of Shell's capital investment that's going into clean, versus fossil technologies?

László Varró So our preferred metric is combining capital investment with operating expenditure, because the fossil fuel projects and renewable projects might have very different cost characteristics in terms of capital and operating expenditures. So for example, there's a very strong investor appetite for wind and solar projects that have long-term contracts. So consequently, Shell has several times more wind and solar in our portfolio than what is our equity ownership, because we routinely go in partnerships with institutional investors into renewable projects. And then we have a power-purchase agreement, buying the wind production or solar production from such a project, then that's accounted as operating expenditure rather than capital expenditure. So with that, we have overall around one third of the expenditure is zero carbon, and the current financial framework, we'll bring it up to half in the middle of the decade. So in numerical terms, Shell has a capital budget of 23-78 billion dollars, of which upstream is eight, into integrated gases four, wind and solar is around four.* But all the electric car charging investment is accounted as part of the retail business, all the bioenergy investment, biofuel investment is counted as part of the refining business. And all the hydrogen and carbon capture investment is accounted as part of the Integrated Gas investment. So the headline on that for wind and solar is only a component of the zero carbon investments.

Michael Liebreich Okay, but now, so just the headline figure, if I've understood correctly is something around 70% is still going into legacy businesses. Is that what I heard?

László Varró That's in terms of expenditure? That's correct.

Michael Liebreich Okay. But if you look at the energy sector as a whole, there's about two trillion dollars a year invested, in everything - oil, gas, coal, electrical system, etc, setting aside actually energy efficiency. But the if you take the renewables, nuclear and the grid, which is broadly speaking, most of the future - and there'll be some CC, you can add CCS, in frankly, because the numbers are still so small - then that is something already around more than a half, with fossil investment now, which is down to about sort of 800 billion, is now down to about 40%. So something like 60% is going into clean and 40% into fossil... Shell is doing 70% into legacy, 30% into clean. That mathematically must mean that you're still falling further behind the overall energy sector?

László Varró So, we are very conscious to define where Shell can play a role. So Michael, for example, you mentioned electricity networks, which is no doubt a key area of clean energy investment, the energy system analysis is absolutely clear about that. But we made a very conscious decision: Shell is not going to invest in electricity networks. On the commercial side, the current oil and gas investment budget is around half of what it was at its peak a couple of years ago, that was a very painful process to adjust it down. The largest fossil fuel project that Shell is involved with is Canada LNG, which is going to be geopolitically secure gas supply from a stable and friendly democracy. And the carbon intensity of the liquefaction process is going to be 35% better than the second best project in the world. So we are we are quite comfortable, we are quite comfortable that the remaining oil and gas activities are very resilient to a transition trajectory. Now, where you have an absolutely legitimate point, is that there is no doubt that we need to scale up our clean energy investment activities. And we have a very strong strategic objective and very, very intense activity to do so.

Michael Liebreich There will be a people listening to this, who will be jumping up and down at this point, saying the IEA has said no new investment in oil and gas if we're to stick within one and a half degrees. Now, I know that that's not exactly what the IEA said, but it's not a million miles from it, is it?

László Varró No... there is no doubt that for a well-below two degrees trajectory, you don't need to increase oil and gas investment from the current level. And by the way, that's a very important thing...

Michael Liebreich No, no, the IEA actually said that you don't need to develop any new fields beyond the ones that were under consideration in 2021. They didn't say you don't increase investment, they actually said you decrease it very substantially.

László Varró So, Michael, I'm very proud that I had a chance to contribute to that historical report, so I'm very familiar with the modeling and analysis behind it. The IEA net zero roadmap identified around four hundred milestones, investment milestones like 100 new nuclear power plant being built by 2030, policy milestones like $110 per tonne federal carbon price in the United States, and behavioral milestones, like people voluntarily tuning down the air conditioner in their cars to save energy. If all the 400 milestone are successfully met, then the consequence of that, is the oil and gas investment [inaudible]. But stopping oil and gas investment was not part of those 400 milestones. Now, I have an impression that some people who tweeted about the IEA net zero roadmap didn't actually read the technical analysis before tweeting it, but the subsequent IEA research, the investment report that, the new World Energy Outlook, has been quite clear that the current level of oil and gas investment after the brutal investment cuts that unfolded in the past couple of years, is pretty well in-line with what should happen in a net zero trajectory. And Michael, very, very powerful political decision makers are putting pressure on the industry to invest more and produce more fossil fuels. So in this respect, I think the IEA coming very clearly on the record, and very clearly outlining the type of oil and gas investment which is consistent with a net zero trajectory, is a very important public policy service.

Michael Liebreich But saying that there's these 400 milestones, and if those milestones are met, then you do not need new investment. I mean, it sounds marvelous, but isn't it essentially saying that, don't look at us, right? It's saying, you know, if people stopped flying, if people insulated their homes, if people went to heat pumps, if people used electric cars, if if if if if, then we would stop investing. But meanwhile, don't blame us for investing. Isn't that just a restatement of the same position?

László Varró So Michael, oil and gas investment in dollar terms globally, is almost exactly what the IEA estimated to be the oil and gas investment need of the net zero trajectory. Now, on your question, we do very much think that the industry has joint responsibility for the consumer. So, our entire energy investment strategy is emphasizing the philosophy of consumer tact. So for example, take an example of light duty transport. If you as a consumer, if you cannot buy an electric car because there is no proper charging infrastructure, that was our responsibility and we own it. Right now, our mobility business is deploying an electric car charger every 20 minutes on average. If there is not enough renewable electricity in the grid, so you end up driving your electric car on coal-fired electricity, that's also our responsibility and we own it. And Shell this year is going to be more than 1% of the total global wind and solar investment, which is not so bad. But we also think that if there is a consumer who comes to a Shell station with a gasoline car, maybe that consumer is just too lazy to ride their bicycle, or maybe that consumer needs to take a sick child to hospital, and we don't think that it's our responsibility to tell one consumer that you get gasoline, and tell the other consumer that you do not get gasoline. So, we very much we very much believe that we have a responsibility, and we are engaging with consumers sector by sector, industry by industry. We are telling the logistical companies that we love to have you as a client, but we want to stop in the future selling diesel fuel, so let's see what we can do on electric trucks, let's see what we can do on hydrogen, what we can do on biomethane, what will be the good solution for your industry, for your company. But we also think that up until you have 100 million people heating their home with natural gas in Europe, it is not responsible to shut down gas supply for them.

Michael Liebreich And just to be clear, I had Bill McKibben - it's actually an episode that to be honest, I don't think nearly enough people have listened to, Bill McKibben, the father of the divestment movement - and I challenged him very hard on this idea that the number one responsibility for the climate crisis is the oil and gas companies. And he was adamant that they were, and his number one requirement was stop investing, and essentially shut down production. And I asked him if he bore any responsibility, if he feels any responsibility for the price spike, and the terrible hardship that's being invested on really vulnerable people around the world. And the answer effectively was none. And so I gave him just as hard a time as I have been giving you just now.

László Varró Michael I think your challenge was absolutely fair. I do think that the industry has responsibility to help consumers decarbonizing, and we very strongly emphasize this principle. But we also think, you know, last winter the UK government assigned half a million British families to Shell because their supplier went bankrupt during the recent market volatility; I don't think it would have been appropriate for us to tell the British government that we refuse to supply half a million British families. I don't think that would have been responsible behavior.

Michael Liebreich Although you could tell the British government that you don't want to develop new fields in the North Sea?

László Varró Well, we could, we could, and Michael, our current oil and gas production, if you look at our quarterly reports, is 23% below where it was in 2019. Our global oil and gas demand is roughly as much as it was in 2019. And since 2013, Shell sold $80 billion worth of oil and gas assets, as they were fine tuning our portfolio to the Paris Agreement.** And the primary result of that was that an ever increasing proportion of the global fossil fuel production is controlled by various state-owned entities, private equity investors, non-listed entities. The type of entity, the type of companies where then you might have less commitment to decarbonization.

Michael Liebreich But that raises another challenge though, because we had Dev Sanyal who's now the CEO of Varro Energy, and he was formerly a BP executive, on the Executive Committee for many years, and at Varro he is managing that organization - it's an oil and gas company, midstream and downstream. And he is managing it to net zero scopes, one two and three by 2040 without selling assets. He thinks that selling assets so that somebody else runs them and produces the emissions and you look good, is not acceptable.

László Varró  We very much share the skepticism about divestment, but we observe... I wouldn't like to comment on the strategy of other companies. Any conventional energy company listed on a Western stock market is under tremendous pressure to divest. Social pressure, NGO pressure, ESG, sustainable investors and so on. And we very much agree that Shell selling assets does not solve any problems. In fact, at Shell we have a corporate level 0.2% methane leakage target. And I'm pleased to say that we are on track achieving that. The global average is 1.5%. So, in terms of managing the assets responsibly, there is a very strong track record that we are significantly better than the global average.

Michael Liebreich Laszlo, I promised to get you out at the top of the hour, we've gone a few minutes over. We are, as always, when you and I meet, I think we have a very robust discussion, a very good discussion, very enjoyable discussion. And I could certainly continue for longer. But I'm afraid we are out of time. I will thank you for your good humour, you know, I pose these questions in a challenging way, because I think that that's helpful for the audience, and the audience usually comments and say that they're glad that I asked the slightly difficult questions. So, I hope you don't mind that, and it's been an enormous privilege having you here today.

László Varró Thanks for the invitation.

Michael Liebreich Have a good day, and I look forward to the next time that you and I can meet in person.

László Varró  Thank you.