- All but six refineries to be eventually sold or shut down
- “Not a great time” to be selling refinery businesses
- Growth expected in power, biofuel, marketing
Royal Dutch Shell [NYSE:RDS.A] continues to pare down its refinery portfolio and simultaneously grow investments in new energies, said Guus Greve, vice president of acquisitions and divestments for downstream and new energies.
Speaking in an interview at the Mergermarket Energy M&A Forum on 3 December, Greve said Shell’s customers want to use products with less carbon intensity, and the business is therefore moving from one traditionally focused on fossil fuels to different elements through its New Energies division.
In its 2019 annual report, Shell said New Energies would focus on new fuels for transport, such as advanced biofuels, hydrogen and charging for battery-electric vehicles, as well as power, including from natural gas and low-carbon sources such as wind and solar.
The company has stated its goal is to become carbon neutral by 2050. Greve noted that this measure includes not only its own emissions, but those of its customers.
While it acquired oil and gas company BG Group for USD 81bn in 2015, since that time it has been undergoing a major reset of its portfolio, including USD 30bn of divestments, Greve said. In more recent years, it has been focused on building its New Energies business and has made investments in solar, wind, and power trading, among other areas.
It recently won a tender for offshore wind in the Netherlands, is building a solar farm in Australia, and in 2019 acquired UK-based Limejump, a smart energy company that helps address intermittency issues associated with renewable energy sources.
It is also growing its presence in electricity and thinking about lower carbon fuels like biofuels, he said.
“In a world where we are going through an energy transition, we are finding out that the customers want to use products that have less carbon intensity.”
While the COVID-19 pandemic “put a bit of a halt” to its dealmaking in March and April, “now dealmaking intensity is at the same or higher level than it was before,” he said.
Greve also discussed Shell’s rollout of its six new energy parks, which take traditional refineries and transform them to also provide carbon capture and storage, biofuels, and hydrogen manufacturing with power from offshore wind, for example. Hydrogen has no emissions and is typically generated from electricity.
The energy parks are located at six of its existing sites: Scotford in Alberta, Canada; Deer Park in Texas; Norco in Louisiana; Rheinland in Germany; Pernis in the Netherlands; and Pulau Bukom in Singapore.
In another hydrogen development, Greve noted: “We’ve just agreed on a project in China, where we’re going to convert hydrogen from wind to run buses.” This network should be up and running just ahead of the Winter Olympics close to Beijing, he said.
Transforming the refinery portfolio
Fifteen years ago Shell had 55 refineries and it has reduced that number to 14. To get to 14, the majority of those refineries were sold, but some were closed, depending on the circumstances, Greve said.
“Right now, we are kind of in a bottom of a cycle, so it’s not a great time to be selling refinery businesses,” he said.
“We do still think there are opportunities” but reducing its refinery portfolio to six does not need to happen overnight, he noted. “So this is going to be a longer-term program.” He also said as the Covid-19 period is expected to come to an end, things will become easier to manage.
The company recently said it would shut down its Convent refinery in Louisiana, after an unsuccessful attempt to sell it.
In relation to acquisitions, Shell will look at power, biofuel and marketing, Greve said.
The goal, he explained, is for its customers to be able to fuel their car at a Shell station and also pay for electricity from Shell. It acquired UK-based First Utility in 2017. It aims to cross-sell, so that customers can get discounts for using multiple Shell services.
“We want to make sure that if you are on a journey, that Shell is there to fuel your journey.” That would include filling a car with traditional fuel, charging an electric car, filling a hydrogen car, and fueling the customer with coffee or breakfast. “The customers’ demands will start to evolve.”
He also noted that Shell needs to invest ahead of demand. “You are not going to buy electric cars unless there are sufficient charge ports, so that’s why we are investing proactively,” he said.
Its acquisition strategy also involves acquiring more technology-focused startups, as it did with its March 2019 acquisition of Germany-based Sonnen, which provides customers with backup power in their homes. By selling to Shell, Sonnen gained access to 30 million customers, Greve noted.
Responding to adversity
Some of Shell’s strategic moves were hastened by the weak macroeconomic environment and the COVID-19 pandemic, which also did not spare its peers like Chevron [NYSE:CVX], which announced it would cut spending by 26% next year, and Exxon Mobil [NYSE:XOM], which said it would cut capital spending after losing more than USD 2.3bn over the first three quarters of this year.
According to Shell’s Q3 results, it has a target to reduce net debt to USD 65bn (from USD 73.5bn as of 30 September) – and, on achieving this milestone, a target to distribute a total of 20-30% of cash flow from operations to shareholders. It also said it could cut up to 9,000 jobs by the end of 2022.
“All of these corporate challenges have probably given us a sharper focus on how quickly this can go, and we chose to act and grow proactively,” said Greve.
“We will preserve the ability of our company to make money in the short term, which is why we had to do some really tough measures, including the dividend cuts, reorganization.”
“But as people say, a crisis is also an opportunity,” said Greve.