x Abu Dhabi, UAEWednesday 24 January 2018

Shell's soft sell points to the end of the oil era

Shell's concession to produce crude oil in Abu Dhabi, dating from 1938, is due to expire within five years.

When Royal Dutch Shell sends a senior director to the royal court of Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi, to sketch out his vision for the future of energy, it is worth listening carefully. The audience at the Majlis last Wednesday was not just eager to hear the product of Shell's brightest minds. More importantly, they were listening for the message behind the speech, or the spin.

After all, this was the director of exploration and production at Europe's largest oil company talking to the leadership of a nation with the world's fifth-biggest oil reserves. And it is no secret that Shell's concession to produce crude oil in Abu Dhabi, dating from 1938, is due to expire within five years. So everyone was watching for the "soft sell". In the end, Shell's two scenarios for 2050 were outright scary for anyone involved in the oil business. They were respectably academic and not obviously self-serving. However, the same could not be said for Malcolm Brinded's conclusions.

Under both of the company's scenarios, the climate change lobby wins. The world agrees to limit carbon emissions which are produced from burning fossil fuels. Not only that, but coal and other dirty fuels such as tar sands take a big part of the carbon pie away from oil, and the combustion engine yields to the electric car. Under Shell's least desirable scenario, which it called "scramble", big energy consuming nations act alone to grab supplies. In many cases they turn to domestic reserves of coal and other dirty fuels, while turning up their noses at global pacts to cut greenhouse gases, at least at first.

In the end, growing climactic pressures force these governments to impose drastic restrictions on mobility, and sudden curbs on carbon use trigger an economic slowdown. This is apparently the base case scenario, because it most accurately describes what is happening today. In Shell's more favourable scenario, dubbed "blueprint", world governments agree to limit carbon emissions within the next decade, spurring energy efficiency and the long-term development of new technologies.

Both scenarios are bad news for the oil business, in that they see petroleum being squeezed out and the world moving decisively against the combustion engine in favour of electric cars. Under both scenarios, Mr Brinded saw limits on carbon restricting the use of oil, and he identified the transport sector as the key battleground where oil is king today. Mr Brinded drew two main conclusions for Abu Dhabi, based on what he assumed to be the shared interests of oil companies and oil-exporting nations.

Firstly, Abu Dhabi should invest in carbon capture and storage, which allows fossil fuels to be burnt without emitting gases blamed for climate change. Pumping carbon gas underground into hermetic geological reservoirs is seen as critical to extending the life of fossil fuels, and this in turn would open the window for oil to maintain its dominance of the transport sector for longer. In addition to prolonging the oil era, carbon capture is good for oil companies because it exploits geological skills they already master.

The point is not lost on Abu Dhabi, which has announced plans to develop one of the world's first commercial-scale carbon-capture schemes under the Masdar company. Mr Brinded also called on Abu Dhabi to join in Shell's campaign to prolong the life of liquid fuels in the transport sector. Biofuels could be blended with petroleum to create cleaner burning fuels, he said, extending the life of the combustion engine against the threat of electric cars.

This suits Shell because these fuels would use a whole distribution chain where Shell is already dominant. But, perhaps surprisingly, it was unclear if Mr Brinded carried his audience on this point. Although its economy today is fuelled by oil, Abu Dhabi is planning for a diversified future. Meanwhile, Shell recently sold its interest in many renewable energy ventures. It is unclear whether this country shares Shell's attachment to the motor car and the combustion engine.

Indeed, studies show that in terms of energy efficiency, electric cars produce more miles per unit of energy than conventional ones. Oil could lose prominence as a transport fuel, but it will still be indispensable for other applications such as petrochemicals and plastics. By then, Abu Dhabi hopes to have moved on from the traditional rentier oil state model. By 2050, Abu Dhabi wants to be part of a knowledge economy, fuelled by ideas, technology and maybe the power of the sun or the atom.

Like a good diplomat, Mr Brinded made no explicit mention of Shell's Abu Dhabi concession. He apparently took the view that the presentation was more about positioning Shell as a credible partner for the long term. But his commercial designs were not completely hidden. In his opening remarks, he said Shell had been in Abu Dhabi for 70 years and was looking forward to more years to come: "Another 70 would be fine," he said. Maybe it is too soon to call an end to the oil era after all.