Royal Dutch Shell plc CEO Ben van Beurden acknowledged Thursday there may be some pain associated with the share price in constricting oil and gas activities as it moves toward a carbon-free goal, but customers “increasingly” are embracing the global energy transition.

Customers are calling for more carbon-neutral fuel, oil and natural gas, including for liquefied natural gas (LNG) cargoes, van Beurden said during a third quarter conference call.

Shell last year became the first retailer to offset the carbon dioxide emissions from UK customer fuel purchases at no extra cost at more than 1,000 branded service stations. 

“On carbon neutrality, indeed we see this taken up in other parts of our business…It was very successfully launched…in Germany and Austria and Switzerland, and we are doing it also in Canada next month,” van Beurden said. 

Carbon-Neutral LNG

Shell also has now sold six carbon-neutral LNG cargoes.

“Customers want it,” said the CEO. “That is another reason why we have confidence that there is money to be made in the energy transition and also in the more traditional parts of our business.” 

The No. 1 global LNG trader expects total exports to continue to grow, but likely less than a previous forecast by Shell of 5% a year.

“We see the market for LNG grow,” van Beurden said. Shell is now a bit more conservative in the growth outlook, more likely about 3-4% a year, “depending on what timeframe you look at. We want to participate in that growth. It doesn’t necessarily mean that we match it percent for percent, but in a growing market, you will want to continue to invest.

“On the other hand, LNG are very long-dated assets. So, you want to make sure that the investment decisions you take can stand the test of time. And the test of time to LNG decisions may take decades, unlike, for instance, deepwater investment.

“So, we will grow with the market, not necessarily matching the market. But we believe indeed this is a very good proposition for us to continue to invest in.”

Making Magic

Van Beurden also took time to share insight into how Shell manages its trading activities, including for LNG.

“Our trading and optimization business…is absolutely core to the success of our company. It actually makes the magic. In many cases and quite often, it’s very hard to show how that works without disclosing an awful lot of commercially sensitive information.

“But just two points,” he said. “First of all, bear in mind, this is not a speculative trading business,” where it could “turn lucky or unlucky. We tend to be lucky, clearly from our track record. That’s not the way it works.

“Basically, what we do is we give our traders and optimizers, our schedulers and operational

people the mandates to work together to understand how you can add value working our

molecules and electrons through our assets, through our contracts, into our markets…That

gives us opportunities to do things that others can’t do…”
For example, in the LNG business, “if you are able to continuously re-optimize, reschedule, re-arbitrage cargoes in different parts of the world, it is impossible to show exactly what we are doing, unless we want to completely open up our entire trading book, which is something we simply cannot do, even if we wanted to. 

“But we have to tell a better story,” the CEO said. “Our trading and optimization adds value that is clearly visible, but not necessarily always understood in its intricate details.”

CFO Jessica Uhl, who joined van Beurden in the conference call, said the company has “a very clear strategy, and we believe we have an important role to play” in the success of the energy transition. “We can only do that if we’re a strong company. And for us, that means having a strong balance sheet, which I think this year has really proven to be a very important piece.”

The fundamentals remain strong, “and that is the message,” Uhl said. “What’s changed, obviously, the macro is fundamentally different, both in the near term and I’d say to some extent to the medium term. It’s going to take a few years for things to normalize. That does put more time on the clock in terms of getting our balance sheet back to where we wanted it to be.”

Some projects waylaid by the pandemic have been delayed but remain in the queue, van Beurden said. That includes the massive ethane cracker underway in Pennsylvania.

Before the pandemic, Shell had more than 6,000 people onsite. When activity began to ramp up again, it “came back to dozens, simply because we needed to preserve the safety, health and wellbeing of our employees,” he noted. “Bear in mind, of course, we are building this cracker in a relatively small community. Also in terms of medical facilities, as it’s something you have to take into account as well. So, it’s back up again,” back to thousands of employees working onsite.

The cracker is delayed, “there is no doubt about it, but not massively,” van Beurden said. “We are still talking about starting it up in the next few years.” He suggested it possibly could ramp up in 2022.

Offshore Mexico Potential

Another potential growth area is offshore Mexico. Shell already is a top developer in the U.S. Gulf of Mexico (GOM), and it has begun working Mexican waters to see if it has the right stuff.

Mexico, said van Beurden, is one of the “promising areas we have in deepwater,” where the focus is on “delivering growth that will offset some of the decline that we will have in other areas. 

“Mexico is, of course, one of these areas that has to prove itself…If it does, then the Mexican part of the Gulf of Mexico we hope we can count as one of the core areas going forward. The program that is on track. We are in the process of drilling our first wells. When exactly we have results, you will have to be a little bit more patient on that, I’m afraid…”

Uhl offered some insight about third quarter financial performance. 

“In the third quarter, we saw some recovery in our realized oil and gas prices, as well as some improvements in demand from earlier in the year, but we also saw weaker realized LNG prices due to the time lag with the oil price built into many of our contracts. Lower volatility in the quarter left fewer opportunities for trading and optimization as well.”
Volumes also were reduced by production restrictions in countries that are members of the Organization of the Petroleum Exporting Countries and its allies. In addition, Shell output fell from the numerous hurricanes in the GOM. “But despite these headwinds, we performed remarkably well,” Uhl said.

Capital spending is expected to be $19-22 billion in the near term. At the same time, Shell has recommitted to a “progressive dividend policy,” Uhl said. The dividend has been increased 4% to 16.65 cents/share. 

In response to what Uhl called the “profound impacts of the pandemic,” Shell in April cut its dividend by two-thirds to avoid having to borrow to fund it.

“And now that we have more visibility on the pandemic’s impact and the implications for Shell, along with a clear strategy, we can align our approach to shareholder distributions to underpin our investment case,” Uhl said. “We will grow the dividend per share by 4% this quarter and will grow the dividend per share annually thereafter, subject to board approval.”

Net income was $489 million (6 cents/share), down 92% from year-ago profits of $5.89 billion (73 cents). Operating cash flow fell to $10.4 billion from $12.2 billion. The gearing level, which measures net debt as a percentage of total capital, fell year/year to 31.4% from 32.6%. Shell is targeting a gearing level of 25% longer term.

A strategic meeting is planned by Shell in February to share with investors how restructuring may impact the portfolio. It also plans to detail some of its low-carbon investments.