Shell's increased investment in low carbon energy opportunities such as renewables and biofuels could pay significant dividends in the long-term, as fortunes from its traditional oil and gas business fall into decline, according to influential credit ratings agency Moody's.
A report by Moody's Investor Service this week said Shell's low carbon investment activities would only have a limited near-term impact on its credit rating, with earnings and cash flow unlikely to see much of an immediate boost from its recent investments in electric vehicles, renewables, battery storage, and other low carbon industries.
Average returns from low carbon investments are currently lower than for traditional oil and gas projects, Moody's explained, so it is most likely to be Shell's continued strong focus on natural gas that will help cushion the company from expected falling oil demand in the short-to-medium term.
But the agency argued that in the longer term Shell's recent investments in low carbon technologies could pay off significantly, as these green investments are expected to be credit-positive for the oil giant by 2040.
"Shell's more proactive approach than its rivals toward gradually changing its energy product mix, by developing and growing its New Energies business, will become more relevant for its credit quality in the years to come," predicted Sven Reinke, a Moody's senior vice president.
The oil giant has been increasing its focus on low carbon industries while also stepping up its rhetoric on the climate crisis in recent years. In December the company pledged to double its annual investment in green energy to £3.2bn from 2020. Meanwhile, major acquisitions from the firm in the past three years have included electric vehicle charging firm NewMotion, home battery storage specialist Sonnen, and energy supplier First Utility, since rebranded as Shell Energy. It has also now rejoined the wind energy sector and has holds a major investment in Indian firm Cleantech Solar.
Crucially, Shell has begun laying the groundwork for linking its executives' pay packets to the oil giant's short term greenhouse gas reduction goals.
Environmental campaigners and some activists investors have argued the moves do not go far enough, warning the company's continued investment in oil and gas exploration runs counter to the goals of the Paris Agreement.
In its report yesterday, Moody's - which last week acquired climate risk analyst firm Four Twenty Seven - noted that global efforts through the Paris Agreement to limit global warming to 'well below' 2C "pose a material long-term threat for oil and gas companies, including Shell".
But, with growing low carbon assets, Shell may be able to offset some of the potential decline of earning power and cash flow generation from its traditional oil and gas operations after 2040, when a growing number of industry projections expect "a material shift towards low carbon energy sources and away from fossil fuels", Moody's said.
The agency added that Shell is likely to form part of a growing trend as other oil majors look to step up their clean energy investment. BP recently announced a major new biofuel joint venture in Brazil, while a number of leading oil giants have announced plans to crack down on methane emissions and step up investment in carbon capture technologies. However, independent experts have warned that with global greenhouse gas emissions continuing to rise, fossil fuel industry investment in clean energy sources is still well short of the level required to bring the sector into line with the Paris Agreement.
"We also believe that traditional oil and gas companies could be increasingly challenged to adjust their business plans towards a materially lower carbon footprint," Moody's said in the report. "Being at the forefront of this development and allocating increasingly material portions of investment budgets towards developing and growing a low-carbon energy segment as Shell plans to do with it New Energies business is likely to increase its options during the energy transition and reduce the risk that its social license to operate is called into question."
Shell was considering a request for comment at the time of going to press.
