Michael Liebreich
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.
László Varró
The Shell Scenario Team was established half a century ago to help decision makers navigate deep uncertainties, and 2022 certainly taught us some hard lessons about uncertainties. This energy crisis is deeper and more serious than anything that has happened since the 1970s. For decades, Russia was the largest hydrocarbon exporter in the global economy, Europe was the largest importer, and there were decades of infrastructure and contractual dependency between Europe and Russia. What we are observing is not simply that Russian oil and gas is redirected to Asia, but we see the lack of ability of Russia to redirect all their supplies. 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. It should be kept in mind that there were tensions in the energy system already when the Russian tanks started to move in February. 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 for net zero, while clean energy investment remained structurally below the level that would put oil and gas demand on a continuously declining path. So, this created tensions. Last year - 2021 - saw 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.
Michael Liebreich
How short-lived do you see the bounce back in use of coal and fossil fuels being? Is this a new normal?
László Varró
No, it's a very painful, but overall temporary, phenomenon. We certainly observe highly undesirable side effects of the gas crisis. The European approach has been essentially to buy up all the gas, leaving countries like Pakistan without LNG and without electricity. Now, Pakistan has five major coal projects in various stages of development, all financed by China. But overall, we see a remarkably green response to the crisis. The European Union, and also the United Kingdom, have essentially doubled down on energy transition policies; the US adopted historical climate legislation, which we expect to trigger a gold rush of investment into clean energy. We also see China investing more into clean energy than Europe and the United States combined. It remains very challenging to envisage a scenario in which the headline target of 45% reduction of global carbon dioxide emissions by 2030 is met. But for 2050, when there is time for investment and innovation, I believe that the shock of 2022 overall increases the likelihood of the long-term 2050 target being met.
Michael Liebreich
Perhaps you can tell us the current status of the famous Shell scenarios. What are they and what work are you currently doing on them?
László Varró
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? One we called Waves, where the key story is consumption. In the Waves scenario, the climate targets are breached, even though renewable energy and clean energy technology is doing quite well. 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. The short-term negative impacts of the Russia-Ukraine war are quite consistent with the Islands scenario. And then we designed a normative, well-below two degrees pathway which we called Sky, primarily driven by priority on health and sustainability. One of our success criteria is that if the scenario set is well designed, then all of the scenarios will have components which will feel familiar. 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 try to think out of the box.
Michael Liebreich
If you look at the energy sector as a whole, there's about two trillion dollars a year invested. 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
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. 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. 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. 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.
Michael Liebreich
The IEA didn't say you don't increase investment, they said you decrease it very substantially.
László Varró
The IEA net zero roadmap identified around four hundred milestones, investment milestones, policy milestones and behavioral milestones. Stopping oil and gas investment was not part of those 400 milestones. The IEA’s new World Energy Outlook has been quite clear that the current level of oil and gas investment 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… Isn't it essentially saying, ‘don't look at us,’ right? It's saying, 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.
László Varró
So, Michael, oil and gas investment in dollar terms globally is almost exactly what the IEA estimated to be the investment need of the net zero trajectory. We do very much think that the industry has joint responsibility with the consumer. Our entire energy investment strategy is emphasizing the philosophy of consumer tact. Take the 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. 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 Shell this year is going to be more than 1% of the total global wind and solar investment. 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. So, we very much believe that we have a responsibility, and we are engaging with consumers sector by sector, industry by industry. But we also think that while you have 100 million people heating their home with natural gas in Europe, it is not responsible to shut down gas supply for them. 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.