Shell's Sinead Lynch: 'You do fundamentally change the way you look at the energy transition'

Last week's Shell Energy Live Summit kicked off with a speech from the company's CEO Ben van Beurden that underlined the oil giant's commitment to the net zero transition, defended the on-going role the fossil fuel industry had to play in the coming decades, and called on companies from other sectors to work with energy providers to drive faster emissions reductions.

The speech was followed by a debate with the Environmental Defense Fund's Fred Krupp that was moderated by ITN's Allegra Stratton, during which the Shell boss was pushed on why the company itself could not accelerate its transition towards net zero emissions.

Later in the day BusinessGreen caught up with Shell's UK Country Chair, Sinead Lynch, to discuss how the company plans to navigate the complex transition towards a net zero emission economy, how it plans to work with other sectors, and what needs to be done to accelerate a rate of decarbonisation currently too sluggish to meet the goals of the Paris Agreement. 

BusinessGreen: What did you think of Ben van Beurden's pitch at the start of the day? It struck me it was probably the clearest the company's been on unequivocal support for net zero and that this seems quite non-negotiable for the company now?

Sinead Lynch: Oh, I think so. I think we made that decision when we put up the net carbon footprint ambition. As soon as you say, you're going to reduce the carbon footprint of your products by half by mid-century, and you're going to move in line with society - so if they move faster, we'll move faster, and vice versa - then I think you do fundamentally change the way you look at the energy transition and what our strategy has to be. And I also think the debate has been very 'you need to do this' and 'you need to do that', and a bit polarised. You know, is it just about changing supply and stopping fossil fuel production and going 100 per cent renewables? Is it about people changing their choices, and then we follow? I think Ben's speech was very much an acknowledgement that you've got to go hand in glove. You've got to go in step together with supply and demand. We have a role to play in this, but we're only one player.

We could walk away from fossil fuels tomorrow, it wouldn't make the blindest difference to anything. Our retail sites would be taken over by somebody else. Somebody else would pick up our fields. So I quite like where Ben is coming from around, how can we be more of a force for good within the change? And how can we partner even more than we are doing? And how can we drive faster change in the sectors - particularly the sectors that are really hard to decarbonise, right. 

What, practically, does that call for greater co-operation entail? Obviously, the big part of the speech was the call to work with others, a call for more co-operation in the hard-to-decarbonise sectors. But then there are lots of trade bodies, lots of groups that are already trying to drive that progress. What practically, do you want to see happen to deliver a more industry-wide approach to a transition that does need higher levels of collaboration?

I think you're right, there are lots of associations and trade bodies, etc, that are doing really good work already. But what they tend to do is come at it from one particular angle, ie the angle of energy producers or the angle of those in the aviation sector, for example, that build or own or operate planes. And so this is about bringing together the different parts of the coin and saying, 'well, what more can we do together than we can do apart?' So there's a lot that will happen separately, but what do we need to do together? Because what we can do together, can cross boundaries, can cross territorial boundaries.

If you can get the aviation sector, for example, to work with the energy sector, you can do things. There's lots of us looking at opportunities and things like biofuels and more efficient engines. But if we were all doing that more hand in glove, then I think we can make faster change. And [Shell's director for integrated gas and new energies] Maarten Wetselaar was right, I think that there are competition authorities, this is not about cutting across the fact there's always going to be competition between energy producers, between plane operators. But it's about recognising there's so much to do that's in the R&D innovation space. How can we how set ourselves a target, and then agree what we need to do to get to that target, and start putting our efforts into the elements of that?

What practically, would that look like? Would that see Shell going, 'let's work with everyone for a green, aviation biofuel fund' or an R&D program?

I think it's quite early. The idea is that isn't the Shell model and everybody comes in. The idea is, how can we co-create something? We want to be part of it, we're keen to dedicate resource and senior CEO energy and at some point there would be levels of funding required. And I think you have to start by almost looking at everything that's already going on, and saying 'where is the value in doing things differently here? Where are the gaps?'

But I think it starts with setting sectoral targets. Because right now there isn't a global standard for what you might like low carbon cement to be, and then how are you going to get that that sector to go to a lower or zero carbon level? Could you get to a point where everybody is buying into that? I think that's the biggest stuff, and that's going to be the first challenge, right?

It was difficult enough to get countries to agree on their NDCs. Now you're talking about getting whole sectors to agree an industrially determined contribution.

Is there time? It is that urgency point that keeps being returned to.

I think if it was in sectors like road transport, or it was in power - well, it is not really needed in power.

Because you think power decarbonisation is already going to happen?

And also it tends to be that domestic power markets, quite particular to a country. But I think Ben's point is that you should be aiming for [greater co-operation] in the sectors where we don't quite know how to do it. So therefore, there is time, because there is no pathway today for decarbonising aviation. There may be a pathway for heavy duty freight. But again, if you work together with those that manufacture the trucks and those that want to manufacture hydrogen and those that want to liquefy it, and ship it, and those that want to sell it, then can you do more there? So I think it is about focusing on the areas where we have a bit of time because we don't have answers.

The critique for all this - and Allegra Stratton touched on it repeatedly this morning by asking Ben van Beurden about the ratio between the $3bn of investment in clean energy and the $25bn investment in the rest of the business - is that this is still a marginal part of the business. The accusation from some of our readers will be this still amounts to greenwash; that it is not a fundamental change in the business model. What's your reaction to that accusation?

I understand it. Everybody wants to do this as quickly as they can. And it would be, obviously, wonderful if we were not constrained by current economic and technical and political realities. But we are. And we're one of the largest energy companies in the world, we are in 70 countries, you know, we've been deep in the existing energy system for 120 years. You don't fundamentally change the business model of a company of our scale overnight, or even within a few years - it's not achievable. And if you are going to make that change over time, as we intend to, you need to make it in the right way. And ideally make it so that you don't impact shareholder value.

The way I tend to think of this is that we don't spend our money. We spend other people's money. We spend pension funds' money. We spend money for private investors. So we have to spend that money wisely. And we have to spend it in a way that can demonstrate to us and to them, that we can make it work well and we generate a return.

So it is that same argument you made earlier, that if you don't spend that money it is just going to go to someone else to make that investment, unless you convince them of the whole model behind the entire need to transition?

Yes. We could decide to just sell everything we do in oil and gas, but nothing would change. Other people would do it and possibly do it less well, or less safely, or in a less environmentally conscious way. We do this well. And also if we put our hands up and say, 'right, that's it, there's no business model here'. I do agree with Ben, it's not a great signal for the industry.

How fast then do you think the transition can accelerate from here? Because obviously the challenge from Fred Krupp to Ben van Beurden was to set a net zero target, which you've kind of done, and support economy-wide zero targets, but then he said, 'show that every investment decision is compatible with those targets'. Now obviously, that is where the argument comes in that you and your peers aren't following through on that; there's still exploration for resources that are basically unburnable, and there is still activity that is not 2C compatible. How quickly do you think we can accelerate the pivot that seem to be starting to happen?

There's quite a bit of misunderstanding around what's burnable and what isn't. We absolutely understand that there is a carbon budget - you can argue about what it is, but there's no doubt we have one because we cannot keep burning at the rate we're burning and stay within the goals of the Paris Agreement.

But as an upstreamer - my background is in oil and gas - there's nothing new about stranded assets. I mean, half the oil and gas fields I found will never be developed, because more economically attractive oil and gas fields were discovered subsequently and they'll stay in the ground. So the upstream strategy is more around higher value, it's about upgrading the portfolio, it's not about the fact that we're going to produce more and more and more.

We believe that if we look at our 'Sky' scenario, there will be oil and gas demand for a long time to come. A very sharp contraction in the use of oil and gas would have quite a large amount of economic consequence that I don't think many economies would accept. But we don't look at any dollar investment without looking at whether or not it is compatible. So I have been looking at our UK upstream strategy, as an example. One of my first questions in this role was, 'can we keep exploring North Sea and basically support the government's maximum economic recovery and be compatible with our climate change targets in the UK'? Because that's a pretty fundamental question for me. Are we thinking it doesn't matter, because we're going to export it? Or do we honestly think that this is oil and gas that can be used in this economy as it transitions to meet its emissions reduction targets?

And so we've been doing a lot of work on that. But the UK's reality is we import about half of our of oil and gas. Even if you look at the Committee on Climate Change's analysis of how much oil and gas will be needed to get to net zero by 2050, oil goes down by 83 per cent - it is a lot, a really steep decline in the use of oil. Gas goes down by about 35 per cent, because of the need for hydrogen. So when I look at that, and I look at what we think is left in the North Sea, and what we're exploring, developing, producing, then we're within that trajectory as a company and as a sector. And that's quite important.

We could stop exploring in the North Sea, and I know that is something many call for, but all that would happen is we would import it. And we would probably import it from countries where they are less worried about the emissions of their upstream projects.

There was a story today about BP saying that some of their resources they do accept they won't burn. The argument is that there is, as you say, more flexibility to manage stranded assets and the transition going bit quicker than expected, than some people would suggest. Do you think you can pivot quicker than your critics would imply?

We do. Ben used a good example once. It was along the lines of, we have a balance sheet which has around $250bn to $300bn of assets on it. We spend $25bn a year. In 10 years of capital activity you have effectively rebuilt your balance sheet. Oil and gas fields decline quite quickly. So we don't make decisions lightly, we don't look at investing in a large oil field now without looking at what the resilience of that would be to a range of carbon prices and a range of demand.

And presumably that is where, if the economics stack up, the scaling up in EVs, renewables, etc, could go a lot faster than, again, is envisaged?

We look at lots of different scenarios for how the uptake would happen. And we look at what that means for our businesses, how resilient they would be, where are the most resilient ones, the least resilient ones in a particular market, where are the most and least resilient markets. We're looking at that. We've been talking about the need to move to a low carbon world for quite a long time. If you go back to the 2000s, we were the largest solar power manufacturer in the world. We were too soon. We were too early. The policies weren't  there and the appetite to make changes wasn't there. The appetite was there in our company, but it didn't work. So we think about this all the time. And we look at 10, 20, 50 years.

Are you more optimistic this time around? Does it feel different.

Yes. It feels really different. I mean, people care about it. Young people care about it. People are on the streets protesting about it. Governments are being told by their electorates that they want to see clean growth. And the technology stuff. I am on the board of Shell Foundation and one of the things we look at is access to energy in Africa. The coming together of technologies is key. It is not just the fact that solar panel costs have fallen, which is fantastic, or that battery costs have fallen, but it's the fact also that these mobile platforms and remote access and management of assets has emerged. So you can put in a solar home system in a home in Rwanda and somebody can run their life around this and pay via their mobile phone and get support remotely.

It's all of those technologies being integrated and getting better all the time, that is what is going to tip this. I don't think any one technology tips things, it is the confluence of different technologies coming together that I think is probably the big change. We didn't see that coming 10 years ago.

The world moves slower in the short term than you think it should or it could, but it moves faster in the medium term. I suspect that is what we will get here. It won't end up looking precisely as we expect, but we are trying to be agile and learn and experiment.

One last question. There was an analysis on Twitter recently by Bloomberg's David Fickling that suggested Shell's reserve replacement ratio is relatively low and the company may be betting on a serious shift in demand. The suggestion is that climate regulations are coming and clean technologies are coming, and the hedging in the face of the energy transition is more advanced than is commonly understood.

I think there's probably a number of factors that play into that. One is with the BG acquisition, that meant our portfolio of resources increased so you don't necessarily need to explore at the same level. I think absolutely, the exploration strategy has shifted slightly, and some of those sort of frontier basin and very high risk, high reward type opportunities are probably less attractive than they were. We've got a real focus on heartland exploration. So that's exploration that uses existing infrastructure because again, from a carbon intensity point of view and a cost point of view, that's economically very attractive.

But also we are looking forward and thinking where is the demand going to be and what role are we going to play in that. It is not as simple as you know, we've just started to pivot for one reason, but there are a number of things that are coming into play that mean all of us will look slightly differently at what is attractive in an exploration sense compared to what was attractive 10 years ago.

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