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Shell braces for ‘lower forever’ oil amid electric vehicle boom

Shell flag
Shell flag

Royal Dutch Shell is bracing for a peak in oil demand by the end of the next decade by edging towards renewable power and the electric vehicle industry.

Shell boss Ben Van Beurden said the oil major had changed its company mindset to a “lower forever” oil price environment and is focusing on being “fit for the forties”, in reference to the faltering oil price, which has struggled to remain above the $50 a barrel mark.

The group is already shifting its production focus from oil to natural gas, but in its clearest statement of intent to date Mr Van Beurden said that within the next year Shell will reveal early plans for a deeper presence in renewable energy and the electrical chain to tap into the boom in electric vehicles.

Ben van Beurden
Ben van Beurden

On Wednesday the UK followed France’s pledge to halt the sale of internal combustion vehicles by 2040, just weeks after the world’s fastest growing economies, China and India, also called time on traditional fuel engines.

Mr Van Beurden said the “absolutely necessary” backing was welcomed by the oil group, which is already taking into account a “very aggressive scenario” in which oil use could peak in the 2030s.

The forecast tipping point is a full decade earlier than predictions from the International Energy Agency.

Shell plans to spend $1bn (£760m) a year on its ‘New Energies’ division, which was set up last year to develop hydrogen fuel cells and biofuels that could be used by the aviation and shipping industries to cut their reliance on oil.

Shell is already the largest trader of renewable power in the US and said it would look at the role it could play as a system integrator or aggregator of renewable power in addition to its existing solar and wind power assets.

However the oil major is wary of venturing too far into unknown territory too soon.

Mr Van Beurden assured investors that its advance into low-carbon electricity would be “deliberately capped at a moderate pace”.

“I’m sure we will make mistakes, but I don’t want them to be big mistakes,” he said.

He added that the new generation of non-combustion vehicles did not “mean it’s game over” for oil. Instead, new oil projects will need to be “resilient in a world where oil has peaked”.

“When that will be is not certain. But that it will happen, we are certain,” he said.

Demand for traditional fuel was also likely to remain high in less advanced economies and in aviation and shipping, he said.

Shell truck - Credit: Jasper Juinen/Bloomberg
Credit: Jasper Juinen/Bloomberg

Mr Van Beurden outlined the new company mindset after revealing a trebling of profits to $3.6bn for the last quarter compared to a dismal period in the same months last year.

Shell has sold off $25bn of its less profitable assets and slashed costs by 20pc since the oil price crash in 2014 to cut $9bn from its debt pile. The overhaul began in order to rebalance the group after its takeover of gas giant BG Group, but will continue as the support for electric vehicles gathers pace.

“The main positive from the numbers was that divestments helped drive a near $6bn reduction in net debt, taking gearing to 25.3pc,” said Lydia Rainforth, an analyst at Barclays Capital.

“As we move through the second half of 2017 we do expect gearing to fall further with the likelihood that a share repurchase scheme is started towards year end,” she added.

But the bank warned that despite the better than expected earnings, the market is likely to be disappointed by Shell’s cashflows, which took a heavy knock from the relapse in oil prices.

Shell’s underlying cashflow was reported at $9bn, lower than Barclays' $9.7bn expectations.

Shell's B shares rose 0.5pc to £21.08 in afternoon trade. 

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