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Avoiding the stranding of assets

Bruce Duguid
05 December 2016

Shell is one of the largest oil and gas companies in the world, with upstream and downstream operations in over 70 countries. We have engaged with the company since 2003 on a broad range of issues, including corporate governance, the management of environmental risks and, in particular, the avoidance and response to oil spills in remote locations, such as the Arctic, as well as the impact of its oil sands operations.

Together with other oil and gas majors, Shell is potentially significantly exposed to a reduction in long-term demand for its products arising from policies to mitigate climate change. If not anticipated and managed properly, there is a risk that Shell, together with other industry players, could over-invest in exploration and production so that supply outstrips demand, thus undermining returns on investment and leading to asset write-downs. In extreme scenarios, some assets could become stranded and cease to operate. Following the fall in commodities prices, the US Energy Information Administration reported impairments by the oil and gas industry in 2015 of more than $200 billion, leading to losses representing 7% of the equity value of energy companies.

Our engagement
In 2013, we helped draft and distribute a letter from investors to large companies exposed to climate change, including Shell, requesting a response to the threat of stranded assets. We attended the annual Socially Responsible Investor (SRI) Day in April 2014 and raised the need for the company to address the challenge of stranded assets to allay shareholder concerns. In 2015, we supported the resolution filed by the Aiming for A coalition of investors, of which Hermes EOS is a member, requesting that Shell commit to enhanced disclosure of climate-related risks, including information about the resilience of its portfolio of assets to climate change. The board of Shell welcomed and supported the resolution, which passed with 98% support, demonstrating investors’ deep concern about the risks related to climate change. Between 2014 and 2016, we addressed this issue at 10 separate meetings with the company, in particular highlighting the importance of enhanced disclosure on climate-related risks.

Following receipt of the investor letter in 2013, Shell acknowledged the concerns of shareholders to understand the risks posed by the stranded assets theory but was initially reluctant to make public statements. After further investor pressure through engagement, the company released a public letter in 2014, stating that it concurred with projections that climate change is likely to exceed 2°C. However, it added that the stranded assets theory contains some fundamental flaws and that it does not believe any of its proven reserves will become stranded. In response to the shareholder resolution presented at its 2015 AGM, the company prepared a further analysis, released at its 2015 SRI Day, of the potential impact of the International Energy Association’s (IEA) 2°C scenario. This recognised that an increased cost of carbon would reduce the net present value of its assets. However, the analysis also indicated that the higher oil price associated with the scenario would more than counteract this effect.

At its subsequent SRI Day in 2016, the company presented a more detailed publication entitled ‘Shell: Energy Transitions and Portfolio Resilience’. In this document, the company further acknowledged that some of its business areas could suffer a reduction in demand in low-carbon scenarios, while noting the opportunity for increased demand in other areas such as gas, biofuels and chemicals, which are used to make energy-efficient products. Its preliminary view is that the aggregate impact of the IEA’s 2°C Scenario would be more positive overall for the company than its own outlook.

We welcome Shell’s acknowledgement of the challenges arising from climate change and the analysis that it has undertaken on its asset portfolio resilience. We also applaud its vocal support for public policy measures to help limit climate change to 2°C, including its support for the wider application of an economically meaningful cost of carbon across the global economy. However, we remain concerned that the company has not fully taken into account the potential impact of a sustained period of reduced global demand for oil, which could result in a structural change to the nature of supply of oil, leading to a permanently lower global oil price. For this reason, we will continue to engage with the company to achieve ongoing disclosure of its asset portfolio resilience to low-carbon scenarios, including a stress-test of the impact of materially lower oil prices on the long-term value of its portfolio.


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Bruce Duguid Bruce Duguid is a director at Hermes EOS and leads engagements with environmentally-exposed companies across the mining, oil and gas and utilities sectors, as well as corporate governance engagements in the UK. He is the lead author of the Institutional Investors Group on Climate Change’s 'Investor Expectations of Mining Companies – Drilling Deeper into Carbon Asset Risk’. Prior to joining Hermes EOS he was head of sustainability at the UK Green Investment Bank, where he spent four years working on the project to establish the bank and then building its sustainability function. Before working in sustainability, Bruce worked in corporate strategy as a management consultant at the Boston Consulting Group and as head of strategy at Visa Europe. He is also a qualified lawyer in England and Wales and holds a degree in Natural Sciences from Cambridge University.
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