Shell plc (SHEL) Earnings Call Transcript

Welcome to Shell's IG Business Strategy Update 2022. We will start with the presentation from Wael Sawan, Shell Director from Integrated Gas, Renewables and Energy Solutions. Please note that this session will be recorded. [Operator Instructions] Wael will be joined by Steve Hill, EVP, Energy Marketing. [Operator Instructions] I will now hand over to Wael and Steve. Please go ahead.

Thank you for that, John, and let me add my welcome to everyone to this Shell Integrated Gas Business Update. As John already introduced, but quick reference also for those of you who didn't join us earlier for the LNG outlook, my name is Wael Sawan, Director of Integrated Gas, Renewables and Energy Solutions. And indeed, as John said, I'll be joined by Steve Hill, our EVP, Energy Marketing for the Q&A. Now before we dive in, let me just first show our cautionary note, as we always share relating to any forward-looking statements. With the benefit of just 100 days in my current role, here are 3 key messages that I hope to bring across in this session: first, natural gas and LNG have momentum in the worldwide energy system, and as Steve presented in the LNG outlook call, this momentum is here to stay; second, we have a truly advantaged and leading LNG and GTL businesses that will sustainably deliver material value to Shell; and third, with the strong foundation that we have, we aim to supply lower and 0 carbon gases to support our customers achieve their net 0 ambitions over time. Let's start on this slide with the first of these 3 points, the momentum of natural gas. Shell's strategy of powering progress is to profitably and purposefully accelerate the transition of our business to net 0 emissions by 2050, in step with society's progress towards achieving the Paris Climate cause. This is a huge and long-term task for an energy business, and we do know that Shell must and will change. And how we exactly change will depend on where we can find opportunity and business value as our customers move towards net zero. This means a much larger role for low-carbon energy, like wind, solar, hydrogen and advanced biofuels in the future. But as we all know, there are also parts of the global economy that cannot be easily decarbonized. Think of heavy-duty transport and the production of steel, cement and chemicals. Gas will play a crucial role in these hard to electrify energy demand sectors now and well into the future. Gas will also play a pivotal role in coal to gas switching for electricity. Gas emits around 45% lower greenhouse gas emissions than coal over the whole life cycle when used to generate electricity. Natural gas and LNG are the logical partner for renewables as they enable reliable, flexible energy. Because of all these advantages, the future of gas looks bright. LNG demand, for example, is expected to grow steadily and reach 700 million tonnes by 2040 from 380 million tonnes in 2021, particularly in Asia and other emerging markets. This demand growth, the continued tightness of gas supply and the current energy crisis clearly all show that the world needs more investment in gas projects and liquefaction capacity, not less. For a long time to come, our integrated gas business will continue to deliver the energy that the world needs and generate material shareholder value. Now let me tell you how this business is delivering on these opportunities. To start with, we have a great portfolio, especially in LNG. In 2021, we supplied 64 million tonnes of LNG, around 750 cargoes, making up 17% of the worldwide LNG delivered. This makes us a world leader in LNG. We create value with this unmatched portfolio and its high level of network integration. We are a major supplier of LNG to China, Japan and Korea and have a fast-growing global LNG bunkering network. But it's not just LNG. We, of course, also have a world-class GTL business that turns gas into high-quality liquid fuels, base oils for lubricants and other liquid products. These products are applied in electric vehicles, in data centers and battery cooling, generating attractive margins. By leveraging our marketing and trading businesses, Shell sells many of these differentiated GTL products through our advantaged supply chains to our global customers. And we have a lot more examples of how we create value from our integrated gas positions by leveraging the broader Shell Group. Our gas business in Australia serves global markets through LNG export. But critically, it also serves the Australian domestic market. When we combine this with our renewable generation, our trading and our marketing businesses, it shows how Shell is uniquely positioned to provide a broad integrated energy offering to Australian customers. And increasingly, this offering will allow our customers to further reduce their carbon footprint. This also includes independently certified carbon credits, which we generate from projects that protect nature and restore the environment in Australia. We also use such credits for our carbon compensated LNG cargoes. In 2021, Shell delivered 16 of these cargoes to Asia and to Europe. This was more than half of the total number of the carbon compensated cargoes that were delivered in the world. And we signed the world's first and until today only carbon compensated LNG term contract with PetroChina. We use many more solutions and technologies to help our customers decarbonize like carbon capture and storage or bio LNG from waste. In our German Rheinland, Energy and Chemicals Park, for instance, we are planning to produce bio-LNG made from manure. Now moving from our integrated portfolio to our operational performance in 2021. We've seen a number of our assets performing well. QGC in Australia and Pearl GTL in Qatar, for example, performed excellently. Pearl, which is an asset that's close to my own heart, had more than 90% availability and the highest value uplift from GTL products on record. A major turnaround is currently in progress on one of the Pearl trains, which is the largest turnaround ever executed at Shell's operated assets. The turnaround of the other Pearl GTL train is planned for 2024. But we also had our challenges in 2021. Our supply of feed gas was constrained mainly in Trinidad and Tobago and Nigeria. I'm happy this improved to some extent in the fourth quarter, and we are moving in the right direction again. We currently expect overall 2022 liquefaction volumes to be above the 2021 level. Prelude started last year with successive record levels of monthly production. We were happy with this performance after all our hard work to stabilize such a complex asset. However, we had to temporarily suspend production after a power failure in December. We're doing all we can for a safe and stable restart so we can resume production. So how did our portfolio performed financially in 2021? Our integrated gas business continues to deliver strong results with our unique trading and optimization capability maximizing value. We demonstrated this in 2021, especially in the fourth quarter. Even though the supply issues experienced in previous quarters continue to some extent, we were able to overcome these and capture unique optimization opportunities generated through the scale and the flexibility of our LNG trading portfolio. We delivered more LNG cargoes into Europe to mitigate cash shortfalls and with European gas prices overtaking Asian prices, we were able to benefit financially from such optimization opportunities. That brings me to the future. Our current integrated gas business is doing what we said we would do and is on the right trajectory. But we're not yet where we want to be. We have opportunities that we are pursuing to do even better with our existing assets, but also to position our growth portfolio to one with even stronger returns with lower carbon emissions. Let me expand on that a bit more. For our capital spend, we need to be even more focused with a continued emphasis on value over volume. We have a capital budget of $4 billion to $5 billion a year in the short to medium term. We're making good progress on our 2 LNG capacity expansion projects under construction. And Canada LNG surpassed recently the 50% completion mark last October after 3 years of construction. The project remains dedicated to have the first cargo by the middle of this decade. At NLNG, Nigeria LNG's Train 7 project, we experienced COVID-related delays since the final investment decision in 2020 but have moved into full execution mode in May of '21. NLNG is doing what it can to help mitigate the impact of COVID on the schedule. Overall, I'm happy with the progress with construction now firmly underway. Both these projects are competitively positioned for LNG growth markets in Asia. The same goes for most of our long-term project funnel. We have several attractive expansion and backfill projects, a limited number of greenfield LNG projects and several promising new low-carbon gases projects in early stages of development. For the pre-FID projects, we have an expected average internal rate of return of between 14% and 18% and a unit technical cost below $5 per million BTU, with most of these projects clearly having lower costs than the average in the industry. These are good numbers, but you'll understand that we strive to push the IRR to the higher end and to push the unit costs down even further. But the long-term role of gas depends on efforts to abate emissions and develop cleaner pathways for gas. This is why we continually try to reduce the carbon intensity of our new projects. Take LNG Canada currently under construction. It will run on hydropower and is set to deliver the lowest carbon intensity LNG in the entire industry. Another area of focus is managing methane. Methane leaks damage the environment and damage the case for natural gas. 2022 needs to be the year of action on methane. We're already cutting emissions in our own operations at both Pearl GTL in Qatar and QGC in Australia. Recent improvements have significantly brought down methane emissions. We're also showing leadership to drive reductions across the entire gas industry through initiatives like the methane guiding principles and the oil and gas methane partnership to improve transparency and reporting of methane emissions from operated as well as non-operated assets. And Shell is delivering on its target to keep the methane emissions intensity from its own oil and gas operations below 0.2% by 2025. So we will strive to retain our strong position in LNG by continuing to develop new markets and growing our portfolio of supply positions. For GTL, we'll continue focusing on operational excellence as well as margin optimization. And for both LNG and GTL, we will strive to reduce our own emissions and those of our customers. We can deliver the energy that the world needs, help the world on the path towards net zero emissions and create superior value for our shareholders. With that, let's go to your questions. And if I can ask you to keep it to 1 to 2 each so that everyone has the opportunity. And John, can we please have the first question?

We will take our first question from Biraj Borkhataria of Royal Bank of Canada.

The first one is just on your statement of sort of the world needs more investment in gas. When I think about the Shell top-down climate ambition target, it looks very difficult to add liquefaction capacity in particular with limit on absolute Scope 1 to 2 emissions because we're not looking at gas versus coal here. We're looking at gas in absolute terms and Scope 1 and 2 for LNG is quite high. Having said that, with your oil business, you sell and trade 4x more product that you produce. And for gas, the ratio is roughly 2x. So I guess if you want to grow this business into that market, which is clearly growing, should we expect it to move to a sort of capital-light model where you have more offtake capacity as a ratio of your total portfolio? And maybe could you just talk about the actual benefits of owning liquefaction capacity and why it makes sense for Shell adjourn that? And just a follow on to that is on Qatar. Again, can you talk about the benefits of entering that from a liquefaction perspective and also just from an offtake perspective from a trading perspective?

Okay. And let me just -- if I understood your second question, it's more about the upcoming opportunity in Qatar to access the North Field expansion, which I'll pass on to Steve in a moment to reflect on. On the first question around the considerations for Scope 1, 2 and 3 for that matter when it comes to investments in integrated gas. I think, firstly, to recognize the Scope 1, 2 50% reduction plays across our entire portfolio for Shell. And of course, what we have already announced is for example, the classification of Cove and Green in the upstream part of the portfolio. And so you'll see us divest some of the higher Scope 1, 2 assets there. But you've also seen the significant portfolio rightsizing in our refineries, which will also move our Scope 1, 2 emissions well below where they are today. And so what we will expect to do is to continue to see growth for our liquefaction assets. But of course, it's going to have to be as much as possible abated growth. And so expect new opportunities that are significantly reliant on renewable energy or renewable generation to be able to electrify those facilities. Expect us, for example, in a place like Qatar to continue to look at what we can do both operationally to reduce our Scope 1, 2 emissions but also to consider projects like carbon capture and sequestration. And so this is really looking across the patch to see what we can do to bring down our Scope 1 and 2 emissions in our existing assets and to design new assets that have much lower Scope 1, 2 footprint. When it comes to Scope 3 and your point around indeed, we sell twice as much as we produce in LNG, but 4x what we produce in oil. We will -- we have a carbon management framework that we introduced a year or 2 ago. And what that does is it's going to drive a real focus on the value per carbon molecule. So really allowing us to see where we're going to be able to -- as we think about dollars, we will also think about footprint in the way that we allocate our capital. And so LNG on a carbon molecule basis is very, very attractive in the overall scheme of things, and therefore, will likely take precedence over some of the less valuable molecules that we sell into the market. And so we look at that on a regular basis as we look at our investment opportunities. Maybe, Steve, if you want to talk about the LNG project in Qatar.

Yes. And the question also mentioned third-party LNG supply, and we're continuing to grow our position there. No all our purchases get announced, but we entered into a new long-term purchase from the U.S. Gulf Coast from one of the projects there last year on a kind of industry first liquid hub net back pricing mechanism. So again, we're staying at the leading edge of the commercial innovations in the industry. But we also did several medium-term purchases, the ones from Qatar were announced but several others that weren't announced, but we continue to grow our supply position through third-party suppliers. In terms of the upcoming opportunity in Qatar, it represents an investment opportunity in the most competitive new source of LNG coming into the market. So obviously, that's something that would be attractive to Shell and many of our competitors. In terms of the offtake arrangements, we'll have to wait to see whether we are successful as a partner and offtake in that project. But regardless, we have a very successful ongoing relationship with Qatar Energy, and we have existing long-term contracts, existing internal contracts and we work tremendously well together to optimize our combined businesses and portfolios, and we'd expect that to continue.

Thanks for that, Steve. And Biraj. Thank you for the question. John, can we get the next question, please.

We will now move on to our next question from Irene Himona from Societe Generale.

My first question, well, you referred to your targeted project economics, double-digit IRRs. Can you just remind us of your pricing assumptions behind that, please? And then secondly, if you could talk about a very large but nonoperated asset and that's Gorgon in Australia, which has had various issues. Do you have ground for expecting a normalization of that operation, please?

Himona, thank you for the questions. We don't disclose the underlying assumptions for it. But what I would say is it's mid-market assumptions typically. So I would characterize where we are right now at the higher end of the market. And so we don't look at 1 specific number when we take those investment decisions. Typically, what we'll do is we'll look at the low premise, a high premise and then a mid premise. And we'll test a few things. We'll see the economics at the mid premise. We'll see the resilience at the low premise, and we will look at whether we can achieve upside at the high premise and looking at the risk return profile of that investment, we then sort of choose where we want to deploy scarce capital. And so what I would say right now is at times like this, you enjoy those high sides and therefore, projects that allow you to get some of the fiscal upside are particularly beneficial at this point in time. I think in Gorgon, it is a really big, complex project. Now I'm sure this question is better handled by the operator directly. But what I would say is we continue to be pleased with that investment that we have. It has had some challenges, but these are operational challenges that are not fall to the LNG world. We learn from them. We improve. And I think the operator is doing a good job by making sure that any of the issues that are discovered are very quickly rectified across the trains and then they drive the business forward. So I don't have any particular concerns around the future of this project. Irene, thank you for the question. John, can we get the next question, please?

We will now move on to our next question from Roger Read of Wells Fargo Advisors.

I was just curious, and this question came up in the previous LNG discussion, but what are the true monetization opportunities for delivering lower 0 carbon LNG? I know we talked about a lot of different ways to make it, but what are the paths we should pay attention to in terms of how we should expect you to start, let's say, increasing margins or at least maintaining margins on LNG deliveries that deliver on our low carbon solution?

Thank you for that, Roger. Steve, do you want to take a crack at that?

Sure. And I think when you think about LNG, you have to think about the full value chain for LNG. And the reality is about 20% of the emissions from the LNG business come from the upstream gas production liquefaction, shipping parts of the value chain and about 80% come from the market activity from actually burning the regasified natural gas. So when it comes to the upstream part of the value chain, then the main opportunities that you have are things like electrification of the liquefaction projects in the upstream with renewable power as we're doing in the LNG Canada project with the hydroelectric power, carbon capture and storage for the fuel used in the liquefaction process and operational efficiencies. When it comes to the customer end of the value chain, that's where we've seen less progress so far. And that's why carbon capture and storage will again be very important to capture the emissions from burning the LNG. And that's where we probably have more work to do as an industry. But what's been very positive in 2021 is the increased transparency that we're seeing over the actual level of emissions from the LNG production and the full value chain because, first of all, you have to identify you have a problem, you have to measure it, and then you can set about reducing an elimination, and that's where the industry is going now.

And Roger, I think that if I understood correctly your question, that addressed a part of the question. If I also heard you correct me if I'm wrong, there was also an appetite to sort of probe a bit into some of the lower carbon gases more generally. So for example, hydrogen, bio LNG and whether we can see margin opportunities growing for that. Any thoughts on that, Steve?

Yes. And there's clearly appetite for those products. Bio-LNG is something that is -- has very attractive pricing today. It's just a very limited supply availability and there's a big scale up required to meet the customer demand for that product. And again, hydrogen is a commodity that has many, many attractive features. We've talked about the 4 sectors of energy demand, where hydrogen fits into all 4 very well. It provides the flexibility and reliability needed in power generation. It could be used in transport, in industry and in heating buildings. So there is demand for hydrogen clearly or certainly interest in hydrogen. It's just very early in the evolution. And hydrogen needs to come down the cost curve in the same way as renewable power has recently and to scale up to meet that future demand. So for -- we look at the future of energy demand, people often confuse energy demand and electricity demand, and then so the future is all renewables or the future of electricity will be driven by renewables. But energy demand is far broader than electricity and molecules will still be needed in the energy mix. And therefore, we have a very strong and sustainable LNG business, but we will be decarbonizing that business over time and introducing lower emission forms of gas supply to our customers.

And Roger, the only thing I might add there is of course, every region is moving at its own pace. And what's interesting is there's a compliance angle here, but there's also voluntary commitments being made. And so you see more and more appetite for people to go after some of those scarce low carbon or 0 carbon gases. And so we're going to go through what typically happens in a nascent development of a new product. And I suspect in the coming years as supply starts to catch up, we'll see a bit more of a normalization. But we're very keen to leverage the customer relationships we have today and the demand that we see to be able to help those customers as they slowly step into lower carbon LNG -- lower carbon gases. Thanks for the question again Roger and John, if I can go to the next question, please.

[Operator Instructions] We'll move on to our next question from Giacomo Romeo of Jefferies.