(Bloomberg) -- Royal Dutch Shell (LON:RDSa) Plc plans to become the world’s biggest power company within 15 years, a move that suggests it sees climate change as a bigger threat to its business than electricity’s historically weak returns.
The world’s No. 2 oil explorer by market value is spending as much as $2 billion a year on its new-energies division, mainly to grow in a power sector it sees delivering 8 to 12 percent annual returns, according to Maarten Wetselaar, director of Shell’s integrated gas and new-energies unit.
“We believe we can be the largest electricity power company in the world in the early 2030s,” Wetselaar said in an interview with Bloomberg Television on Monday. “We are not interested in the power business because we like what we saw in the last 20 years; we are interested because we think we like what we see in the next 20 years.”
Investors are putting pressure on companies to protect their business from a shift to lower-carbon fuels, driven by new laws and consumer choices. That pressure is especially acute in Europe, where Norway’s Finance Ministry last week instructed its $1 trillion sovereign wealth fund to divest some oil and gas companies to shield it from a “permanent decline” in crude prices.
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The region’s biggest oil majors, such as Shell, BP Plc (LON:BP) and Total SA (PA:TOTF), were spared in the decision, partly because they’re bolstering their investments in renewables. Besides Shell’s move toward power, BP has purchased the U.K.’s biggest car-charging company, while Total has bought electricity provider Direct Energie. They’ve also invested in solar and wind-power production.
For Shell, the electricity business is still in an experimental phase. Last month, the vice president of its new-energies unit, Mark Gainsborough, declined to estimate when it’ll achieve higher returns, but indicated it will introduce new combinations of power products that are more profitable than those from a traditional utility.
“Being smarter with its molecules across the value chain is important,” said Christyan Malek, head of European, Middle East and African oil and gas research at JPMorgan Chase & Co (NYSE:JPM). “But generating a return as good as its oil and gas business will be the key challenge.”
Shell’s acquisitions in power so far include U.K. electricity provider First Utility, car-charging operator NewMotion and a stake in U.S. solar company Silicon Ranch Corp. It has also announced it’s bidding for Dutch utility Eneco, which provides low-carbon power to industrial users and offers apps and other technology to manage electricity consumption.
Even with those purchases, achieving its targets around power will probably require a “major overhaul” of its investment priorities, according to Will Hares, an energy analyst at Bloomberg Intelligence. Half of Shell’s capital is allocated to its upstream business, which finds and pumps oil and gas, with only about 5 percent dedicated to new energies.
The company remains cautious about making big spending changes, according to Wetselaar, who said “we want to prove to ourselves that the hypothesis works before we scale it beyond our current commitments.”
European majors are increasingly setting themselves apart from their American counterparts such as Exxon Mobil Corp (NYSE:XOM). and Chevron Corp. (NYSE:CVX) due to pressure from regulators and investors.
BP, Shell, Total and Equinor ASA have all made specific statements and investments around low-carbon fuels. At International Petroleum Week in late February, Total’s upstream oil and gas boss said oil may only make up 30 percent of the company’s portfolio in 2040, with cleaner natural gas making up 50 percent and renewables and power accounting for the rest.
Meanwhile, Exxon and Chevron have been slower to make changes. Both were later than their European peers to join a key industry-wide climate investment initiative, while each has doubled down on oil production in shale. Both have said they’re committed to helping de-carbonize energy but have doubted the wisdom of altering their business model.
The subject was addressed this week at the CERAWeek by IHS Markit conference, which brings together oil executives from across the world in Houston. Equinor Chief Executive Officer Eldar Saetre took a moment on the main stage to say the fossil-fuel business is increasingly problematic.
“Collectively we’re not doing enough on climate change,” he said. “Not taking action is unsustainable.”
(Updates with analyst comment in seventh paragraph.)