Shell cannot outrun the climate pressure
Shell’s decision to simplify its dual share structure and move its tax base and senior management from the Netherlands to the UK is a sensible strategic move that looks very much like a fit of pique.
The company’s current set-up, with two lines of shares, dates back to 2005. Its Dutchness, though, goes back much further: to the merger of Royal Dutch Petroleum Company and the Shell Transport and Trading Company in 1907.
However, a mere six months after it suffered a shock defeat in a Dutch court over its plans to cut emissions, the company is asking investors to bless a move to London, albeit one that leaves its shares trading in Amsterdam.
The timing, then, is suspect. Shell says the motivation and logic for the move owes nothing to the Milieudefensie case outcome, which instructed the oil company to cut its emissions by 45 per cent by 2030 — a judgment that was immediately enforceable.
True, it has adopted a target of cutting its direct emissions, or scope 1 and 2, by half in that timeframe. But it is contesting even a best efforts order to reduce the scope 3 emissions generated by customers burning its products by a similar amount.
The restructuring, if approved, will have no impact on this case, or others under way. It could, however, make it less likely that future cases are heard in the Dutch courts, which after Milieudefensie and the Urgenda case against the Dutch government are seen as a favourable jurisdiction for environmental campaigners.
Will that make a difference? Not hugely. “There is plenty of creative litigation brought in the UK courts as well,” notes Tessa Khan, a lawyer and the founder of climate campaigning group Uplift. This is now a global phenomenon. The cumulative number of climate change-related cases has more than doubled since 2015, according to analysis by the Grantham Research Institute, with the UK accounting for about 15 per cent of the cases identified outside of the US.
Moreover, the UK has a government determined to be seen as a leader in climate transition that has already backtracked over approving the Whitehaven coal mine and is under pressure to reject Shell’s Cambo oil project off the coast of the Shetland Islands. Business secretary Kwasi Kwarteng may see Shell’s move as a “vote of confidence in the British economy”, as he tweeted on Monday, but he will have to fight the appearance of a quid pro quo on new oil and gas development.
For all the disappointments of COP26, “global finance is aligning with a 1.5C world — even if it’s still trying to work out what that means”, says Tim Buckley, director of energy finance studies at IEEFA. The news flow from COP, such as the agreements to tackle methane, add up to a tougher time for oil and gas majors, says Buckley. “Investor pressure is only going to build.”
The lesson of this year is that existing investors in oil and gas companies can be kept onside — for now — provided the cash from fossil fuel assets is flowing nicely and being returned to them in sufficient quantity. Shell’s restructuring ticks that box: it should double the company’s ability to buy back shares as it flogs assets.
The company has also come under pressure from activist hedge fund Third Point to break up. But the reality is that its cleaner energy operations — currently tiny and cash negative — don’t currently merit that treatment. A simpler structure at least gives it more options around splits, spins, deals or fundraising in the future. Tacit acknowledgment perhaps that Shell is, one way or another, going to have to move much, much faster in its transition.