Open Letter Shell

An Open Letter to  Shell Shareholders :In Search of the Energy Company of the 21st century


Gerard Kreeft, Managing Director, EnergyWise

Wouter Kreeft, Manager, Continuing Education, EnergyWise

Ing. Frans Debets, Advisor, Energy,Water, Finance


A Shell share has always been seen as a trusted investment, a must in any share portfolio. A Shell share has the stability of a government bond an d at the same time a high dividend. But is that the case for 2017? Last year Shell paid out a dividend of €12 billion to its shareholders. Almost six time the net profit. To pay the dividend money was borrowed, entities sold, and employees made redundant. How Shell will pay its dividend for 2016 and in  the future is not yet obvious. The following is important to note:


Fact 1: Deepwater Discoveries?

For the deepwater areas such as West Africa (Angola and Nigeria), Brazil, and the Gulf of Mexico, it can be predicted that no new projects will be started. An oil price of US$70 per barrel is required if any new projects are to be started. The longer that these lower prices continue to exist, the greater the chance that these projects will never come to fruition. Shell is a deepwater pioneer, but new projects are strongly dependent on the oil price.

Fact 2: OPEC & Non-OPEC countries :A marriage of inconvenience?

OPEC and non-OPEC countries have cobbeled together a fragile agreement in order to restrict their production; in order to maintain a price of US$50- 55 per barrel. This agreement occurred in 2015 when OPEC (read Saudi Arabia) raised its production to lower oil prices in order to rid the marketplace of US shale producers. The net result? Shale producers can take a hit and in the end are still  capable of exporting LNG.This cat-and-mouse game between OPEC & Non-OPEC and the shale producers will continue to be a dominant factor in determining  future  oil prices.

Fact 3; LNG:No Longer the Pot of Gold

The price of LNG (Liquified Natural Gas) is strongly linked to the oil price. Since 2014 prices have tumbled greatly: South  Korea and  Japan who import 50% of global production have seen the import price  in December 2016 fall to US$7.15/ MMBtu from  US$16.4/MMBtu in January 2014. For years Shell has been a market leader  in the production, transportation and trading  in LNG. No doubt the company is feeling the pain.

What Does the Future Hold?   

An oil company in order to maintain its reserves must have an RRR(Reserve Replacement Ratio) of 100%. How Shell and the other oil companies are valued is based on their oil and gas reserves. On this basis Shell has the lowest reserve count, in comparison with the oil majors (see below). If Shell wants to be a major player in the energy transition, Shell must re-write  its development scenarios.   


Why is it not possible to include other types of energy in one’s reserve count? Why should a Shell shareholder be satisfied with a reserve count solely based on fossil fuels? Don’t wind parks, for example, also represent a reserve count?

How should a shareholder react to the fact that Shell is becoming a major investor in the North Sea Borssele 2 Windpark? For shareholders this may have zero value since the investments did not increase energy reserves. CEO Ben van Beurden recently declared that in the US Shell is the largest trader in renewable electricity.  Why not include these figures as part of the energy reserve, so that real value can be created?

The same applies to Total’s Sunpower, a solar energy provider , and Statoil’s Hywind Wind Farm in the North Sea. Good projects, but having zero shareholder value, as they do not add to their companies’ reserves. What is important for the oil and gas sector is that they must combine all of their energy assets in their reserve count,  if they are to be societal relevant.

That renewals are part of the energy mix is now obvious: wind and solar energy on a global scalenow account for double the scale of investment compared to the oil and gas sector. According to Bloomberg, the reason why solar energy investments are increasing investments is that solar energy is based on a technology and not on a fuel. Solar prices shall continue to decreasse. Since 2007 solar energy production  has in 15 years doubled seven times; wind energy has doubled four times (see below).

‘Wind and Solar are Crushing Fossil Fuels’



Source: Bloomberg Investment in Power Capacity 2008-2015, Bloomberg New Energy Finance (BNEF),UNEP

If the oil and gas sector, in competition with the renewables sector, attempts to gain more funding, this could be a match that the oil and gas sector losses.  According to the Financial Times the six largest renewable funds have a net return of between 5% - 7%. Shell’s goal is a  net return on capital of 10%, based on an oil price of US$60. Between 2013-2015  this return on capital is much less. (see below)

If Shell is to reach it’s 10% goal on capital return, and maintain its dividend policy a number of important steps will have to be taken:

  1. Given Shell’s lack of experience in the renewals sector, large investments and buy-ins would have to be done. For example, DONG Energy, market leader in wind energy. Shell produces some 3.6 million barrels of oil per day and an important portion of this should come from renewals.
  2. A large share of renewable energy could help to add value to Shell’s oil and gas reserves; thus reducing the chance that these reserves be viewed as ‘stranded assets’.
  3. Project management teams from Shell and other companies, such as Dong, should work together to ensure that renewals can be completed on time and under budget.
  4. Total energy reserves be converted to energy units or converted to ‘Barrels of Oil Equivalent’ in order to arrive at a basket of energy equivalents.. Enabling projects such as Borssele 2 to be part of the energy mix. Activating their value on the company balance sheet.

Unleashing the Energy Marshall Plan

The oil and gas industry can unleach a tsunami in Europe’s offshore wind energy: if offshore wind capacity was expanded to 100GW, 4x more than what WindEurope (Europe’s  wind  trade association) is predicting for 2020 (25GW). Such a plan could provide a key stimulus in making  the North Sea countries, fossil free by 2050. 

Why is it not possible to put together a North Sea Consortium, from the oil and gas sector, a sector which has deep pockets and  extensive project management experience?  Such a consortium could bring together   the broad  technical  and strategic  expertise of the sector.  

Market leader Dong Energy is an important piece of the puzzle: According to Dong they will in the period up to 2020, have a capacity of 6.5GW wind energy installed, 18 Borssele 2 windfarms.  Approximately one-third of Europe’s  offshore wind capacity. According to Dong their return on capital in the period 2017-2020 will be between 12-14%.

It is important that both Statoil ( Hywind Offshore Windpark)  and Shell ( Borssele’s 2 Offshore Windpark)  see these projects as important milestones in the energy transition. Their new energy policies will only gain legitimacy  if  renewable energy becomes part of the energy reserve mix. An expansion to 100GW is equivalent to approximately 500.000 boe per day. A significant contribution to any company’s bottom line.