No Silver Bullet: Chevron, Shell on Lower-carbon Risks, Collaboration

Big Energy’s role in the transition to lower-carbon energies could bring big opportunities.

But it could also bring risks as a flood of clean energy technologies and projects compete for limited dollars in-house.

“We’re inundated with opportunities, which is actually a really good thing, and I have not seen those drop off in the last few years despite all sorts of macro and geopolitical challenges that are out there,” said Jeff Gustavson, president of Chevron New Energies. “There’s still a lot of momentum in this space … but we look for two things. Will it scale? Is it a solution that will work? And that comes down to cost primarily. And, do we offer something that adds value?”

The competition for capital was among the topics discussed during a recent energy conference. The discussion took place as energy companies balance meeting today’s energy needs while doing their part to lower global greenhouse-gas emissions and turning profits. Traditional oil and gas companies, including Chevron Corp. and Shell, have been adding new clean energy technologies to the mix.

However, every technology with potential will not make the cut—at least not today, given new energies, just like other parts of the business must meet a minimum returns threshold.

“You can get you can run off in a lot of different directions and chase a lot of things that either won’t work in the near term — near term here is in the next decade — or they don’t fit the skills of a company like Chevron or a company like Shell. It’s very difficult to have to say no to more things than you say yes to.”

‘Balanced approach’

Companies realize many low-carbon technologies lack economies of scale to compete on the same level as oil and gas. Some products, such as biofuels, are not yet available at scale, said Anna Mascolo, executive vice president of Shell’s Low Carbon Solutions.

Expectations for returns therefore differ. For these projects, the company is looking at about a 12% return, Mascolo said.

“When you look at hydrogen and CCUS, it is 10% and above, with a view that over time as you scale, you’re able to get the right return levels,” she said.

In 2023, Shell invested $5.6 billion in low-carbon energy technologies that included biofuels, carbon capture and storage (CCS), EVs, hydrogen and renewable generation, Mascolo said.

The European energy company has come under fire in the past on what some considered a reversal of earlier commitments toward clean energy and a shift away from fossil fuels. About a quarter of Shell’s capital spending is on low-carbon energy solutions.

A balanced approach is needed given energy needs today, Mascolo said, with a mixture of capital in both the traditional business and new energy.

“From our side, it needs to be a balanced energy transition. It needs to be one where we also feel that we can play to our strengths,” she said. “So, we won’t be everything to everybody.”

'No silver bullet’

Traditional oil and gas companies can play to their strengths today. For example, they could use existing infrastructure for drop-in fuels or lower-carbon LNG, providing it to other sectors looking to decarbonize, such as the marine sector.

Strengths can come in other forms as well. Advocacy and policy came to mind for Gustavson. The company operates around the world and can point policymakers in the direction of what works elsewhere.

“But there’s no silver bullet here. It’s very complicated,” Gustavson said. He added he once thought policymakers would support a hydrogen and CCS project, for example, because it was good for the planet, Instead, concerns were raised about the impact the project would have on other industries such as coal as well as training for workers.

The industry has seen great progress in this space, however, with the Inflation Reduction Act being a good example, he added. But “that’s just one step. Passing legislation is one thing. Implementing it is very different. The details really matter. …  Then you have to work at the state level, community level, to really grow and build these new businesses and projects.”

Gustavson also stressed the importance of collaboration.

“It’s not just collaboration between Shell and Chevron or other private companies, big, small and everything in between. It’s the private sector collaborating with the public sector to affect the right policies going forward,” which helps with costs.

‘Competitive collaboration’

To scale multibillion-dollar projects, it’s important to have different players involved, Mascolo said, turning to the 200-megawatt electrolyzer Shell is building in the Netherlands.

“We are integrating that with our customers’ value chain. We’re using the hydrogen in our own refinery and chemical facilities,” she said, “but we don’t expect that to be in isolation. We want to create a hydrogen economy” that brings in other players investments to help create scale and bring down costs.

Moving from the current energy system to a lower carbon one requires an understanding of how value chains are linked, according to Mascolo.

Gustavson added that there are few things done at scale in the upstream oil and gas business without partners. Besides costs and capabilities, he singled out collaboration as one of the three areas key to growing new lower-carbon businesses.

Mascolo called it “competitive collaboration.”

Chevron and Shell have worked together on several projects, including the Gorgon natural gas and CCS project in Australia and the Quest CCS project in Canada.

“Collaboration is very important in this space,” and it’s an attribute the energy industry has that not many others are accustomed to, Gustavson said. “We want the attractive returns, but there’s a lot of risk associated with those returns early days. Partnering, partnering, partnering is the name of the game.”