The arms race in setting carbon emissions targets is such that Shell, once one of the industry leaders when it announced its scope 3 intensity targets in 2017, has been left playing catch-up.

Shell has announced a further refinement of its goals, aiming for net zero emissions from its own operations and a 65% reduction in the carbon intensity of the energy that it produces and sells (previously 50%). Shell has therefore upped its ambition, but continues to leave critical holes that position it behind the leaders in our view.

“Net zero” applies to operational emissions only

While much of the discussion around the announcement has focused on the “net zero” by 2050 headline, it is important to note that this applies solely to the emissions from Shell’s own operations. In other words, it excludes the emissions from the combustion of the fossil fuels it sells (“scope 3” emissions), which account for around 85% of lifecycle emissions for oil and gas.

The list of oil and gas companies that have set net zero ambitions for their own operations only is getting longer – goals similar to or more aggressive than those at Shell have already been announced by Equinor, Energean, Lundin Energy, and Eni to name a few. Achieving the goals of the Paris Agreement is going to require all companies to lower their own direct emissions, including oil and gas companies. These announcements should therefore be commended.

However, in the fossil fuel sector, goals that relate to operational emissions only are inadequate on their own from two viewpoints. Firstly, by ignoring the large majority of emissions that result from a company’s business activities (i.e. producing and selling oil, gas and/or coal), they aren’t reflective of that company’s ultimate effect on the planet’s dwindling carbon budget. Secondly, they do not mitigate the financial risk of stranded assets, by allowing the company to continue investing in further fossil fuel projects without limitation.

Scope 3 emissions approaches are evolving – Shell feels the heat

Oil and gas companies have begun to address these concerns by setting other targets relating to their scope 3 emissions. Shell was one of the first, announcing in 2017 that it would cut the average carbon intensity of its sold energy products by 50%. While recognising the need to tackle scope 3 emissions was a big step, we have been critical of this particular approach – it allows a company to continue increasing production of fossil fuels and hence carbon emissions in absolute terms, as long as it also adds renewables at a faster rate (thereby lowering the average CO2 per unit of energy sold). It therefore fails both to deliver the overall reductions in emissions needed to get the planet to net zero, and to mitigate the risk of stranding. We explored these issues in our 2019 report “Balancing the Budget”.

The next major leap forward has been in the last 6 months, when some companies introduced scope 3 emissions goals with absolute basesRepsol and BP via net zero limits in 2050, and Eni via goals that don’t reach net zero but do require scope 3 emissions reductions in absolute terms.

Pressures from a variety of stakeholders continues to drive increased ambition when it comes to emissions goals for oil and gas producers. With Shell perhaps feeling left behind, it has upped its scope 3 emissions intensity target to a 65% reduction. Improving ambitions over time is plainly a good thing, and every time a company sets a precedent it sends a message to the rest of the industry. However, being on the same intensity-only basis as before, the revised scope 3 target has the same failings as the last one.

Scope 3 and the kindness of strangers

Shell expects that some energy applications for its products will not be decarbonised for the foreseeable future, hence why it does not set a target net zero for its scope 3 emissions. However, it argues that it can still become “a net zero emissions energy business” if its customers lower their own emissions to take care of the remaining 35%.

Relying solely on the actions of customers would be a very weak way of claiming net zero on scope 3 – all oil and gas companies would be net zero on scope 3 if only their customers would decarbonise. Shell does go further than this, saying that it will work with customers on their decarbonisation. However, with no commitments or even non-binding goals in this regard, we think it is very hard to see this as a net zero goal in a meaningful sense.

Competitor targets feature bottlenecks for GHG emissions

While several companies have announced scope 3 emissions ambitions, they also use subtly different methodologies that makes it difficult to directly compare the scale and implications of these ambitions.

Shell’s goals are formulated differently to those at BP and Repsol; whereas BP and Repsol’s scope 3 net zero targets relate to their upstream production, Shell’s ambition includes all energy they trade including that which they purchase from third parties. Shell could therefore justifiably claim a wider scope of their footprint calculation, and greater difficulty in getting all the way to net zero – BP has another, more comparable target for all product sales including that bought from third parties, which is an intensity reduction of only 50%.

However, we think it is critical that, even though BP and Repsol’s net zero targets are narrower in base, they set an absolute limit somewhere in the value chain. This makes sure that emissions are lowered overall, as required globally by the Paris Agreement and showing recognition that oil and gas investment can’t trend upward forever.

Shell’s solely intensity-based ambition does not achieve this, allowing continually greater fossil fuel production/emissions in absolute terms. There is nothing to stop Shell setting a comparable net zero target for its own production.

What impact does the emissions goal have on actual investment behaviour?

A world that hits the Paris goals will use less fossil fuels, meaning that fossil fuel producers must be ready cut output. BP and Equinor have previously made vague allusions to lower oil and gas production in future, and now Shell has joined in – in the CEO’s speech he notes that “over time, Shell aims to sell fewer of these products that create emissions”. However, Shell’s sustainability report, referring to the previous target but released less than two weeks ago, states that its strategy for hitting its intensity ambition is to “keep increasing the share of such low-carbon energy products in our portfolio, while also developing carbon sinks” rather than contemplating less oil and gas.

In risk terms this does at least deliver a portfolio diversification effect, but an investor could achieve similar by holding a basket of independent renewables and oil and gas companies instead. They may prefer to hold oil and gas producers that have committed to limit their investments to those that fit within a carbon budget aligned with the Paris goals.

Aside from emissions targets and from a financial stakeholder point of view, it remains of paramount importance that any of these companies invest in only the subset of the most financially resilient projects, rather than just fewer projects irrespective of their cost structure. For example, a smaller, but highly leveraged company with a high cost portfolio would not be at an advantage in the energy transition. However, targets with an absolute scope 3 basis at least recognise the reality that achieving international climate commitments will require less use of fossil fuels, and give more confidence that management are prepared for this rather than raging against the dying of the light.

We therefore consider Shell to still be behind BP, Eni and Repsol in terms of the logical basis of their approach.