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Shell in clean energy race

It wants to be leader in the business and establish itself across full value chain of renewables, alternative energies

Royal Dutch Shell aims to be a leader in clean energy and sees an opportunity in using its global presence and established brand to scale up the new energies business quickly as and when. PHOTO: REUTERS

ROYAL Dutch Shell aims to be a leader in clean energy and sees an opportunity in using its global presence and established brand to scale up the new energies business quickly as and when.

The second largest-publicly traded oil company in the world also plans on establishing itself across the full value chain of renewables and alternative energies as it has done for oil, said a senior executive in the firm.

“Clearly this New Energies business is a big opportunity for us, that we want to be a leader in and are progressively investing more money in in order to become a leader,” Maarten Wetselaar, an executive committee member who runs both the New Energies and Integrated Gas divisions, told The Business Times in an interview.

The Anglo-Dutch group in June last year created New Energies as a new unit to invest in renewable and low-carbon power, focusing specifically on hydrogen, biofuels, solar and wind.

The division has since expanded to more than 200 staff, and hopes to invest about US$1 billion a year by 2020; group CEO Ben van Beurden has said the business is expected to become a significant growth priority beyond 2020. The unit is part of a bigger story of how the energy system has to change from where it is today to where it needs to be in future, said Mr Wetselaar.

As the world’s population continues to grow, energy demand will expand. Meanwhile, the current energy system also needs to be overhauled to reduce its carbon footprint.

“So the real challenge is to grow the energy supply and at the same time to reorganise it to become a lot cleaner…In order to get there, our core hypothesis is that we will need to substantially grow both the gas and the new energies businesses, as a company and as a planet.”

In the current energy system, one-fifth is supplied through electricity, and the rest through fuels such as oil and gas. Renewables, which mostly produce electricity, is only part of the 20 per cent, noted Mr Wetselaar.

The electricity segment can be expanded to about half of the energy system over time, if the world works “very, very hard”, but not more as industries such as chemicals and cement production will continue to depend on hydrocarbons, he added.

“You cannot make steel with electricity, or fly a plane or send a big container ship across the ocean on electricity. There isn’t the energy density available.”

And among hydrocarbons, natural gas is by far the cleanest. “Natural gas has an important role to play in meeting electricity demand while we decarbonise the energy production and grow it, and a very important role to play in delivering the energy that cannot be electrified.”

In the one year since its formation, the New Energies unit has been busy.

It has, firstly, been working to deepen its understanding of both the technology and the markets in the sector. “Before we decide where to play, which part of the business and which geographies, you need to deepen your understanding,” said Mr Wetselaar.

It has also won a bid to build an offshore windfarm in Netherlands, and spent money to build digital solutions for electricity consumption.

The group is expanding its presence in power trading as well. In North America, it is already the second largest power trader; it has also set up a power business in Europe, Brazil, Australia and India.

This, said Mr Wetselaar, is part of a strategy to build an integrated value chain for electricity. “Like with our oil business, we believe that integration will become quite important.”

Hence the group will not only generate electricity with windmills or solar panels, but also take it into the distribution system and sell it to industrial and residential customers.

“I think we will want to become value chain players. Whether we will invest equally in all parts of the value chain, I think it’s too early to say,” he said. “It depends a bit on the market design because not all countries have deregulated power markets. So you have to understand, geography by geography, what the opportunities are.”

The business of manufacturing solar panels – which Shell had previously dabbled in – is however one area that the company will not enter.

“Whether it comes to solar panels or batteries or other things, producing those is probably best in the hands of low-cost producing companies and countries.

“So we’re more system integrators where we would invest in a wind farm and take capacity in the transmission system. And then delivering the energy to customers, and building a digital layer and a commercial layer on top of that whole system – it’s definitely something we will have a competitive edge in.”

In his view, the group has a number of strengths that will set it apart from other competitors. One is its strong brand name. “What we find is that in almost every market people like to buy energy from us. So we have a very strong brand that people associate with quality and reliability.”

The second is its strong integration capability that it has demonstrated with the oil and gas business.

The third is its global presence. “The interesting bit about the new energies business is there are no global players in it; the people in this business tend to be local or sometimes regional, but certainly nobody global,” said Mr Wetselaar.

“With the presence we have across the world in so many countries and in all major economies, with the relationships we have with governments, partners and investors, we are uniquely placed.”

Furthermore, the group also has a strong presence in biofuels through its joint venture Raizen, which produces ethanol using sugarcane, and is also a forerunner in hydrogen filling stations . “So in those three legs – electricity, hydrogen and biofuels – we’re quite well placed to play,” he added.

Asked whether the US$1 billion that Shell has committed to invest in new energies is too small compared to its annual spending of US$25 billion, Mr Wetselaar said it is important for oil and gas to continue to receive investments as these will be “absolutely needed” to keep the world running for a long time. Furthermore, Shell is good and profitable in this business, he said.

A lot of investments will also be needed on the new energies front, but “I’m not yet convinced that the size of the new energies business is best measured by the capital employed as it does for oil”.

Many investments in smart grid and the optimisation of electricity supply and demand are not necessarily capital-intensive, and renewables projects such as windfarms also tend to be built with external borrowings, he said.

“It’s a different industry so we probably should not over time measure it the same way as we do with oil and gas. I think you can grow a very substantial new energies business without investing tens and tens of billions every year.”

But the one billion in spending by the end of the decade is also just a starting point, he added. “We intend to make this a big business for Shell that over time can stand on its own feet, just like the oil business does, the downstream business does and the gas business does.”


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