The Future of Big Oil? At Shell, It Is Not Oil
Comment of the Day

July 20 2016

Commentary by David Fuller

The Future of Big Oil? At Shell, It Is Not Oil

Here is the opening of this interesting article from Bloomberg:

At Australia’s Curtis Island, you can see Big Oil morphing into Big Gas. Just off the continent’s rugged northeastern coast lies a 667-acre liquefied natural gas (LNG) terminal owned by Royal Dutch Shell, an engineering feat of staggering complexity. Gas from more than 2,500 wells travels hundreds of miles by pipeline to the island, where it’s chilled and pumped into 10-story-high tanks before being loaded onto massive ships. “We’re more a gas company than an oil company,” says Ben van Beurden, Shell’s chief executive officer. “If you have to place bets, which we have to, I’d rather place them there.”

Van Beurden is betting on gas projects such as Curtis Island to address the central challenge facing all oil giants: how to survive in a world moving ever faster toward new ways of producing and consuming energy. A crucial element of Shell’s pivot toward gas was its $54 billion takeover of BG Group. The deal, which closed in February, gave the company Curtis Island, other massive LNG plants, and gas fields from the U.S. to Kazakhstan. It now has a 20 percent share of the global LNG market, scores of giant gas tankers prowling the seas, and double the production capacity of its closest competitor, ExxonMobil.

David Fuller's view

People of my generation grew up with the seemingly secure ‘miracle’ of cheap and abundantly available crude oil.  However, from the mid-1970s onwards this vision faded into increasing anxiety over finite resources which were rapidly being depleted.  We were told by visionaries, energy experts, scientists, religious leaders, political parties and national governments that we faced a grim future in which the lights would go out against a background of declining GDP growth and economic collapse.  These views were still widely held beyond the turn of the century.    

This 20th century version of Malthusian catastrophe theory is no longer credible today, thanks to our accelerating rate of technological innovation which is arguably mankind’s greatest achievement. 

Today, the world faces a glut of energy, from fossil fuels to renewables and nuclear power.  However, among developed economies, few have taken full advantage of these opportunities.  Actually, the USA has done so more than most other countries, albeit in the face of some now mild criticism from environmentalists.  The USA currently has the cheapest energy of any large, developed economy.  This has encouraged reindustrialisation and is one very important reason for America’s economic health relative to other nations today. 

In contrast, the European Union took the moral high ground in terms of renewable energy, before this was sufficiently efficient and reliable to support the region’s economic needs.  Consequently, as EU economies have underperformed, its atmospheric pollution has actually worsened, due to the increased use of coal to literally keep the lights on and factories running.  Moreover, the VW emissions scandal has led to a sharp increase in Europe’s hazardous NOx pollutants.  

Where does all this leave Royal Dutch Shell B?  Given the desire and almost certainly the need to address climate change, the company has wisely moved significantly into the global liquid natural gas (LNG) market.  Gas will long be a crucial ‘bridge fuel’ for many decades as the world transitions to a lower-carbon future. 

Will this protect RDSB’s dividend, currently just above 6%?  That probably depends on the price of natural gas and also crude oil, both of which are currently too low to secure the dividend.    

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