Feb 21

Activist Proposal to Split Shell Not Enough: Carbon Tracker

Stephen Bierman
Dec 9, 2021
Image: Photographic Services, Shell International Limited

A proposal by U.S.-based activist shareholder Third Point for energy giant Shell to divide its energy businesses as part of a low-carbon transition misses the mark, according to financial think tank Carbon Tracker.

Third Point LLC, run by billionaire fund manager Daniel Loeb, sought for Shell to separate its legacy oil and natural gas businesses from its low-carbon business, which would include liquified natural gas (LNG), renewables and marketing, according to Reuters.

“The existing proposal is unlikely to enhance shareholder value in the long term, to lower the cost of capital or to stimulate more investments in decarbonisation” Carbon Tracker said. “A spin-off of the renewables business, once more developed, deserves consideration.”

Major oil companies have been coming under pressure from governments and shareholders as nations seek to cut carbon emissions and curb their effect on climate change. Shell is not alone in conversation with its shareholders. U.S. major ExxonMobil saw directors unseated over climate change in a proxy battle with investor Engine No. 1 earlier this year.

Shell should introduce scope 3 absolute targets for 2030 and stop sanctioning new hydrocarbon projects, according to Carbon Tracker. The proposal as it stands is doubtful to improve Shell’s transition, as, for one, it includes LNG in the new renewables company.

Meanwhile, the rump business might become less inclined to decarbonise, the consultancy said. And investors would find this segment faces much more serious risks to future valuation due to oil price risk, stranded asset risk, financing risk and regulatory risk.

The proposal illustrates the way in which the asset management industry is polarizing into different approaches to decarbonization, according to Carbon Tracker. Some support investee companies in their energy transition effort, while others are getting “impatient” at the expense and risk.

Different attitudes from asset managers, combined with state pressure, may lead to more M&As and spinoffs in the energy sector. These might come with opportunities.

Carbon Tracker itself sees a spinoff of Shell’s renewables business as worthy of consideration. Yet the group does not see much of a place for natural gas in the transition to renewables. Carbon Tracker sees superior solutions available in investment renewables, and reminds that natural gas, while cleaner, remains emittive. 

Oil and gas majors are on a much cleaner path than years past. Yet, they are loath to give up natural gas businesses. Italy’s Eni is mulling spinning off its gas and renewables business in an IPO. TotalEnergies’ future strategy emphasizes renewables and natural gas, as does that of Shell.

Majors see natural gas as essential for electricity, in addition to being cleaner and conveniently already part of their business. They see its role as a debate for the future. Carbon Tracker sees that debate as happening now. 

There will always be a debate over cost and what is realistic in the transition to cleaner energy. Over the past several years, Carbon Tracker has exhibited a track record pf showing that much more is realistic, or possible, than commonly believed.

Carbon Tracker continues to stick to its guns with regards to the Third Point proposal on Shell. More is not only possible, but proper and profitable, in response to the issue of global warming.

Stephen Bierman

Stephen Bierman is a finance and energy reporter with over 15 years of experience, including at Bloomberg News and Energy Intelligence.

Tweets at: @StephenBierman1

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