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Shell’s Carbon Bubble
Shell reserves: high carbon intensity, high
extraction costs, high investment risks
The Authors:
Peter Polder, oil and gas specialist
Rolf Schuttenhelm, climate science writer
Kari Velure, environmental governance specialist
Milieudefensie/Friends of the Earth Netherlands,
May 20, 2014
Table of contents:
Infographic Shell carbon bubble reserves
Foreword
Shell’s climate statement
Abbreviations & terminology
p. 4
p. 5
p. 6
p. 6
Summaryp. 7
Introduction + Shell key statistics
p. 8
1. Shell and the Carbon Bubble
p. 10
2. How big is Shell’s Carbon Bubble?
p. 13
3. Natural gas:p. 16
Does Shell’s ‘answer to
the climate problem fit
the carbon bubble?
4. Biofuels:p.18
Shell’s high-carbon solution to
a high-carbon problem
5. Recommendations to lower carbon emissions
p. 20
6. Shell’s additional climate risks
p. 23
Sources
WAppendix: Methodology
Sources
3
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
p. 25
p, 26
How deep is Shell drilling into the
CARBON BUBBLE ?
UP TO
Global carbon bubble
$
21
TRILLION
Shell’s
oil & gas
reserves
overvaluation of
in national, private
& public energy 1
6
.2
BILLION
OVER
Extra capital
expenditure
$
1
TRILLION
to extract
‘unburnable carbon’
proven reserves 2
LOWER ESTIMATE
PROVEN OIL
ADDITIONAL
RESERVES
UNPROVEN
BARRELS
7.4
BILLION
BARRELS
HIGHEST ESTIMATE
PROVEN GAS
BILLION
46
ADDITIONAL
RESERVES
UNPROVEN
BARRELS
74
BILLION
BARRELS
By definition the
carbon bubble
excludes energy
companies’ unproven
fossil carbon reserves
(and also possible
future exploration).
Mentioned global
overinvestment (up
to 80%) lies solely
within proven
reserves of energy
companies.
Therefore reserves that offer high energy for low CO2 are to be favoured over
more CO2 intense reserves. CO2 intensity follows from nature of carbon
reserves and the energy input required to extract the reserves. ‘Unconventional
fossil reserves’ (for instance: tar sand, deep see oil, shale gas) have
relatively high CO2 intensity, as expressed per reserve per barrel of oil
equivalent. CO2 intensity of shale gas (55) is for instance 2.5x that of
conventional gas (22). These high CO2 intense reserves are therefore
more likely to be classified as ‘unburnable’ and not an
economically viable, high asset
risk investment.
KG
CO2
CO2 intensity Shell reserves
The
is the
financial
overvaluation
of proven
carbon reserves
Thecarbon
carbonbubble
bubble
is the
financial
overvaluation
of proven
carbonthat are
classified
‘unburnable’
– following
from a limited
remaining atmospheric
carbon
reserves as
that
are classified
as ‘unburnable’
– following
from a limited
budget
–
following
from
a
limited
remaining
atmospheric
carbon
budget.
remaining atmospheric carbon budget.
125+
125
<112
KG
KG
CO2
CO2
75
55 55
50 KG KG
SHELL’S
FOSSIL CARBON
RESERVE
33
51
UNPROVEN
KG
4.5
Normal
gas
GTL
Shale Heavy
CO2
CO2
2
CO2
Thight
gas
CO2 INTENSITY
BILLION
TONNES
CO2
CO2
CO2
22 KG
CO
.5
PROVEN
KG
KG
1
gas
oil
LNG
Tar
sand
Oil
shale
Highest
estimate
unproven
CARBON RESERVE NATURE + EXTRACTION ENERGY
Carbon Tracker Institute, 2013 2 Carbon Tracker Institute, 2014
Source: Shell's Carbon Bubble report - Milieudefensie/Friends of the Earth Netherlands, May 2014
een www.mrlee.tv product / ontwerp: laurens kauw a tjoe
Foreword
The proven carbon energy reserve of the
world’s major energy companies vastly exceeds
the remaining atmospheric carbon budget
under internationally agreed climate targets.
According to previous research by Carbon
Tracker Institute (GTI) up to a staggering
80 percent of these proven reserves are
therefore to be classified as being ‘unburnable’
- potentially diminishing the real economic
value of these reserves by 21 trillion US dollars
(2013).
This may also have huge implications for
the value of shares of major oil and gas
companies, as these are assessed under the
false assumption that all proven reserves will
be brought to market and consumed. This
overinvestment in proven carbon reserves is
now defined as ‘the carbon bubble’.
How high is Shell’s ‘share in the carbon bubble’?
Following GTI research on average as much as
80 percent of energy companies’ proven carbon
reserves lies in the carbon bubble – with high
stranded asset investment risk.
The value of the shares of major oil and gas
companies such as Royal Dutch Shell are assessed
under the false assumption that all the fossil
carbon en ergy reserves of these companies will be
extracted, brought to the market and consumed.
Research by Carbon Tracker Institute has already
shown that under internationally agreed climate
targets the proven carbon reserves of the
world’s major energy companies may exceed the
remaining atmospheric carbon budget fivefold.
Therefore the real economic value of the stocks
of these companies (expressed in proven carbon
energy reserves) would only be just 20 percent of
currently assessed value – a financial bubble that
CTI estimates to have reached a 21 trillion US
dollars stranded asset risk.
Here we assess further risk for Shell and Shell
investors related to a decarbonising world
economy – one that the financial world and more
specifically energy investors will rapidly have to
adapt to.
There are however – as shown in the
infographic to the left – additional risk factors,
such as a relatively high CO2 intensity and high
extraction costs of these reserves, which may
even increase the ‘carbon bubble sensitivity’ of
an energy company. These factors we assess for
Royal Dutch Shell.
5
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
Shell’s own climate strategy
statement(1) (2013):
“Rising climate change concerns could
lead to additional regulatory measures
that may result in project delays and
higher costs. In the future, in order to
help meet the world’s energy demand, we
expect our production to rise and more
of our production to come from higher
energy-intensive sources than at present.
Therefore, it is expected that both the
CO2 intensity of our production, as well
as our absolute upstream CO2 emissions,
will increase as our business grows.
Examples of such developments are our
in-situ Peace River project and our oil
sands activities in Canada. Additionally,
as production from Iraq increases, we
expect that CO2 emissions from flaring
will rise. We are working with our
partners to find ways to capture the gas
that is flared. Over time, we expect that
a growing share of our CO2 emissions
will be subject to regulation and result
in increasing our costs. Furthermore,
continued attention to climate change,
including activities by non-governmental
and political organisations, is likely to
lead to additional regulations designed
to reduce greenhouse gas emissions.
If we are unable to find economically
viable, as well as publicly acceptable,
solutions that reduce our CO2 emissions
for new and existing projects or products,
we may experience additional costs,
delayed projects, reduced production
and reduced demand for hydrocarbons.”
6
Abbreviations and Terms
BBL
Barrel of oil (159 litres)
BOE
Barrels of oil equivalent: the amount of
energy that is equivalent to the amount
of energy found in a barrel of conventional
crude oil.
Capex
Capital expenditure
CO2eq
Measures for describing how much
global warming a given type and amount
of greenhouse gas may cause, using
the functionally equivalent amount or
concentration of carbon dioxide (CO2) as the
reference, based on the warming effect of
the gas over a 100-year period
EROEI
Energy return on energy invested.
Determines economic viability, also
influences CO2 intensity.
Reserves
Economically recoverable reserves of oil,
natural gas, and the like
Resources
Proven supplies that are not yet technically
or economically recoverable, or where this
has not been established.
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
Summary
In 2009, Oil Change International extensively
analysed the CO2 intensity of Shell’s production
and reserves for the years up to 2008. It concluded
that Shell was the most carbon intensive oil
company in the world. 3. Its relatively high
investments in unconventional carbon reserves,
difficult exploration terrain and low energy return
on energy investment (EROEI) explorations all
contribute to that high CO2 intensity.
In this report we have updated the Shell carbon
reserve analysis of 2012. We conclude that Shell
has made some progress, but at the same time
both its corporate strategy and new developments
for curbing climate change are posing threats to
its long-term economic viability and survival. The
future outlook can have much faster implications
for Shell when the financial sector decides
to operate on the understanding of having a
limited atmospheric carbon budget - and thereby
recognises the necessity to ‘deflate’ the carbon
bubble, and also revalue fossil carbon energy
companies’ shares.
Shell’s progress is largely in the field of natural gas.
After many delays, Shell is finally reducing natural
gas flaring in Nigeria. And due to decreasing
worldwide oil production, the share of natural gas
in Shell’s production is rising. That is also reflected
in the reserves - an increasing share of the
reserves consists of natural gas (see infographic in
this report).
The threats lie in the company’s vast tar sands
concessions, deep-sea oil projects, shale gas
projects and the liquefaction of natural gas in
the form of LNG and gas-to-liquids (GTL). Shell
views LNG and GTL as replacements for coal and
oil, but it is unlikely that this view will much help
the climate - as CO2 intensity of such fuels is
exeptionally high (see infographic in this report).
More or less the same goes for Shell’s efforts to
replace oil with bioethanol made from Brazilian
sugarcane, which has only a marginally lower CO2
intensity (including EROI factors). Comparing
CO2 intensity of current Shell production to CO2
intensity of its proven and unproven reserves show
there is a sharp rise in CO2 intensity still to come.
7
These factors, together with the direct impact of
climate change on Shell’s projects in the form of
more extreme weather, rougher seas, drought and
other water stress, conflicts and melting tundra
(see all these elaborated in the report), show that
climate change is also a direct threat to Shell’s
extraction operations.
Climate change of course also greatly challenges
economic viability of large fossil carbon energy
companies, as it necessitates a global policy
towards a low carbon energy system. Political
leaders throughout the entire world have pledged
that the average rise in global temperatures must
be limited to no more than two degrees Celsius.
To attain that goal, the remaining atmospheric
carbon budget (in ‘allowed CO2eq emissions’)
is very limited, according to all leading sources,
including the 2013/2014 IPCC report. Research
by Carbon Tracker Institute translates the
2-degree carbon budget to a seperation between
‘burnable’ and ‘unburnable’ fossil carbon in the
proven reserves of private, public and national
energy companies. Altogether up to 80% of these
proven fossil fuel reserves must remain in the
ground. For companies like Shell this means that a
substantial part of their reserves and resources will
lose their value – the amount that equals Shell’s
‘carbon bubble’. Unfortunately it is the value of
these “stranded assets” that also determine the
shareholder value of the company. When energy
company share values are re-assessed according
to carbon bubble understanding, financial and
economic changes to the global energy market can
happen swiftly, anticipating the low carbon energy
transition ahead.
We would like to conclude that if Shell wants
to adapt to the required low-carbon future,
there are several things the company can do,
right now, to make greater progress: cut direct
emissions where technologically possible, offer
better transparency on their operations and
specifically the risks climate change has for
Shell, and divest from oil and gas projects with
a high carbon intensity (therefore move away
from unconventional oil and gas).
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
Introduction
Royal Dutch Shell plc, commonly known simply as
Shell, is a multinational petroleum
company. Although nowadays 90 percent of the
world’s oil is not produced by major Western
corporations but by state-run oil companies in
countries such as Saudi Arabia and Venezuela,
Shell still tops the Fortune 500 list as the largest
private sector energy corporation in the world. Its
track record has made it a favoured investment
opportunity for many large investors such as
pension funds. It leads the industry in the hunt for
frontier oil and gas reserves.
Royal Dutch Shell: Key
statistics(2)
2%
3%
3.000.000
of worldwide oil production
of worldwide natural gas production
barrels of oil equivalent production each day...
...of which
50%
natural gas
72.000.000 tonnes
of C02 equivalent in 2012 direct emissions
4.000.000.000
...added barrels oil equivalent to reserves in 2012
1.200.000.000
...barrels oil equivalent (BOE) of production in 2012
In 2012...
-2%
less oil
“The world faces the critical challenge of
how to meet rising demand for energy that
powers economies, while urgently cutting
the emissions of carbon dioxide that energy
use generates. Shell is taking action in
four areas; producing more natural gas,
the cleanest-burning fossil fuel; helping to
develop technologies to capture and store
CO2 ; producing low carbon biofuel; and
working to improve the energy efficiency of
our operations.”
The question is whether these efforts have any
impact. The latest Intergovernmental Panel on
Climate Change report emphasises the dangers
of continued mass burning of fossil fuels. If we
remain on our current course, the children who
are born today will grow up in a world that is
warming up far beyond the 2-degree C margin set
for global warming. Substantial damage is already
taking place within that 2-degree margin, but
beyond those 2 degrees, an irreversible avalanche
of climate changes will move our planet towards
being uninhabitable – even more so if we include
scientific understanding of positive feedbacks
in the natural carbon cycle, a very dangerous
threat if warming surpasses the politically defined
2-degrees threshold. To stay below the 2-degree
margin, we have no other option than to severely
limit the amount of fossil fuels that we can still
burn.
+5%
more natural gas
than in 2011
32.000.00
...BOE of resources...
Shell was one of the first major oil companies
to stop denying the scientific understanding
of climate change. In its communications, Shell
emphasises climate change as a major threat to the
well-being of our planet, and the company claims
to be seriously working on reducing its own impact
on the climate, as well as working on the transition
to a low-carbon energy system. A quote from the
2012 Shell Sustainability Report:
...of which
36%
oil(3)
8
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
According to the IPCC’s latest estimates, the
maximum amount(4) of CO2ee that can be emitted
into the atmosphere, counting from now, in order
to have a 50% chance of remaining below two
degrees is 565 billion tonnes, states CTI. Recently
it was calculated that if we burn all currently
known reserves of coal, gas and oil, then that will
produce 2795 billion tonnes of CO2(5). This means
that up to 80% of all fossil carbon reserves must
remain in the ground if we want to limit global
warming to 2 degrees C. Several energy scenarios(6)
show that a phasing out of fossil fuels before 2050
is possible. Fossil fuels will then still be in use, but
only a fraction of what is used nowadays – and
without a major role for large fossil carbon energy
companies.
The authors of this report think
shareholders have an important role to
play by requesting Shell to calculate the
financial risks of overinvestment and
carbon bubble sensitivity and report these
transparantly in its annual reports. This
would require the company to also be
completely transparent about the carbon
intensity of its oil and gas production on
project level. Because these intensities
can differ substantially from project to
project, so would the carbon risks involved
– and therefore investment risk versus
opportunity.
90% of all fossil reserves, mainly consisting of
coal, but also including natural gas and oil, is
government property(7) and is produced by state
oil companies. The remaining 10% is in the hands
of private companies such as Shell. Because
these reserves (resources for future profits)
determine for a large part the value of most of
these companies, an agreement on a binding global
climate treaty may well lead to share price collapse.
For the average fossil carbon energy company 80%
of its fossil assets may no longer have any financial
value, become “stranded assets” – a carbon
bubble of gigantic proportions, with extremely
large (multi-trillion US dollar) consequences to the
financial world.
Shell views climate change both as an opportunity
and a threat. One of the ways the company
hopes to benefit is to provide natural gas as a
replacement for coal in power stations and as
fuel for cargo transport and the shipping trade.
This replacement would produce a substantial
reduction in CO2 in comparison with oil and coal.
The company is also trying to realise reductions in
its own operations and to become a market leader
in carbon storage technology. This technique
pumps CO2 underground so that fossil fuels can
be used without producing CO2 emissions. Shell
assumes that the expected stricter regulations on
emissions will give them a competitive advantage.
This carbon bubble could have an enormous
impact on Shell’s value if the company has to
write off a substantial part of its reserves and
at the same time sees the costs for developing
the remaining reserves rise exponentially. This is
both because the impact of climate effects such
as extreme weather, melting permafrost soils
in tundra regions and rougher seas has major
consequences for oil and natural gas extraction
and because of investments needed to lower direct
emissions of Shell’s oil and gas projects. This will
also directly result in major financial consequences
for Shell’s shareholders, employees and customers.
9
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
Shell’s philosophy on climate change perhaps
comes across most clearly in its reply to the
Carbon Disclosure Project (8):
“Shell’s strategy is influenced by both the
need to meet the world’s growing demands
for energy and by the fact that global CO2
emissions must be reduced to avoid serious
climate change. This is in-line with our
corporate strategy of focusing work around
specific lines of business that serve as core
engines, are growth pipelines and provide
future opportunities. One example of how
CO2 considerations influence business
decisions is that we assess potential costs
associated with CO2 emissions when
evaluating projects. We believe this could
give Shell a strategic advantage if in the
years to come regulations impose a price
on CO2 emissions. ii) Specific aspects of
climate change influencing our strategy:
Strategic: Growth in energy demand means
that all forms of energy will be needed
over the longer term. With hydrocarbons
forecast to provide the bulk of the energy
needed over the coming decades, policy
makers are focusing on regulations which
balance energy demand with environmental
concerns. Operational: The management
of carbon dioxide (CO2) emissions – the
most significant greenhouse gas (GHG)
– will become increasingly important as
concerns over climate change lead to tighter
environmental regulations.
To the casual observer the question remains what
the real intentions of Shell are. Is it continuing its
exploration of even more (and harder to extract,
therefore more CO2 intense and less profitable)
fossil reserves? Will it increase its shareholder
value by developing ever more carbon intensive
resources ? Or is it going to take responsibility
for its share of the worlds total emissions? Is it
intending to offer its shareholders, investors and
employees the assurance that Shell will offer longterm value, despite the carbon bubble, by changing
to an energy company that no longer relies on
fossil fuels? And will this transition go fast enough
in a world which will increasingly experience
problems caused by climate change – a process
that is accompanied by large direct financial
threats to the fossil energy infrastructure.
1. Shell and the Carbon Bubble
Which consequences does effective climate policy
have for Shell as a company? What will happen
if we decide to label up to 80% of proven fossil
fuel reserves as incombustible? Until now Shell
refused to make the risks assessment and share
it with stakeholders and shareholders. Instead
it keeps repeating the mantra that we will need
fossil fuels the coming decades – a statement
that violates both climate scientific understanding
and internationally intended climate policy,
aiming to stabilise atmospheric greenhouse gas
concentrations.
The Carbon Disclosure Project works with
investors and companies on the disclosure
of CO2 emission data for major corporations.
It has made public the self-reported data
of 1550 companies - 26% of all emissions
worldwide(9).”
Incombustable
reserves: 80%
10
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
The unburnable 80% of fossil reserves are mainly
in coal, and oil and gas. Companies like Shell seem
to think that it will be someone elses reserves
that have to stay underground. It could even lead
to a temporary additional demand for natural gas
to replace coal. But also a majority of natural gas
and oil reserves will be qualified as stranded asset.
The most evident conclusion to draw from this
is that, from an economic perspective, it makes
no sense to invest in the search for new supplies
and the exploration of additional reserves, also
because these require large additinal capital
expenditure. Even existing reserves are beyond
our carbon budget. Shell invested $ 39 billion in
its upstream operations in 2013. A substantial
part of the activities, and personnel and capital
in Shell’s Upstream division is focused on finding
and developing oil and gas fields. Effective climate
policy means that Shell has to downsize this
upstream division, cease exploration activities and
cut investments.
The market value of Shell is largely determined
by the value of its reserves and resources. When
Shell in 2004(10) was forced to admit that 29% of its
booked reserves were wrongly defined as such –
and reassessed as unproven resource, the market
value of the company fell by $15 billion.
To determine what portion of Shell reserves are
incombustible, and therefore should be considered
worthless, is difficult. Also, it can not be said with
certainty that carbon bubble understanding will hit
shareholder value in the same way as it did in 2004
– but the consequences could very well be worse:
The reserves Shell had to reclassify as recources in
2004 would be available for future development,
and not be lost.
If we do compare the reserve scandal of 2004
to carbon bubble overvaluation and Shell has to
disinvest 80% of the reserves that the company
owns that could translate in a $41 billion direct
loss. On top of this heavy devaluation of the
resource base can be expected – undeveloped
reserves often consisting of concessions that are
not even recoverable at current high oil prices –
and which under CTI calculation of the carbon
bubble are essentially worthless by definition.
11
Of course there is little reason to assume linearity
when reserve devalution increases – rather than
a direct loss (expressable in billions of dollars)
increasing devaluation would challenge the very
business model the company operates under
(which assumes carbon energy extraction as net
profitable). It can therefore be stated that our
(linear) comparison to the 2004 reserve scandal
only offers an indication of a possible lowest limit
financial estimate of Shells carbon bubble. Much
rather an exponential increase in share value
drop is to be expected, under increasing reserve
devaluation (which is why the fossil carbon energy
reserve overvaluation is so amply-called the
carbon bubble).
Much also depends on assessment of which part of
the reserves have to remain in the ground. Many
companies in the fossil industry seem convinced
that this is mainly going to be the reserves of
their competitors. When it comes to oil and gas,
the bulk of the reserves are held by state oil
companies, and not by shareholders of companies
like Shell. Will these companies have a fair share of
their reserves in the ground after a political deal?
Or do we let the market decide by pricing carbon?
In this case, Shell will be severely affected because,
as this report shows, the production of the
company shifts to difficult to develop reserves that
are carbon intensive, and are already high cost.
When we look at the CO2 intensity of the different
types of oil and gas we see a striking similarity
between the reserve types that require high
investments and have a high cost price per barrel.
Tar sand oil, deep sea projects, schale plays and
LNG are expensive, complex and contribute a
disproportionately high share of Shell’s direct
emissions. These types of projects are also
technically high-risk in that they are vulnerable
to project delays and (costly) incidents. aShell’s
philosophy on climate change perhaps comes
across most clearly in its reply to the Carbon
Disclosure Project(8):
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
Oil majors need ever-higher investments
In 2013 the investments of the oil majors in new
upstream projects rose to record levels. For several
years, the costs increased by 10% per year. But
results were disappointing, the production of oil
and gas majors stagnated over the past decade.
The shareholders of these companies pressed
the companies to reverse this trend (11). In fact,
shareholders told the oil companies that they were
no longer interested in the large high-risk projects
that would have enabled production and reserve
growth – instead, they preferred dividend.
BP was the first to capitulate at the end of 2013,
by announcing to cut 10% of investments. Shell
followed early 2014 after the departure of Peter
Voser by announcing a 20% investment cut. It
is expected that other oil companies will follow
and that this will mean that production by these
companies will decrease (12).
Shell announced disinvesting in several of its
flagship projects. A few examples on how high
carbon intensity and high capex risks combine:
Divestment shaleplays U.S.
Peter Voser already announced he regretted
having invested ($24+ billion) in US shale plays.
Shell, like many other companies, was not able to
make a profit out of shale (13). The rapid depletion
rate of a shale gas wells necessitates continued
investment in new drilling – and sometimes
concession expansion. Next to that the average
production of a shale gas well is far lower than
that of conventional natural gas wells. This makes
shale gas production both expensive and carbon
intensive. Shell lost 2 billion dollars in its attempt
to join the US shale gas revolution. It is also selling
assets in the tight oil producing shale play Eagle
Ford. Shell continues to invest in test drilling in
shale plays in Argentina, Algeria, Tunesia, Turkey,
Ukraine and China. It recently joined forces with
the oil subsidiary of Gazprom and started test
drilling in Siberia’s Bazhenov shale play to find out
if it could produce tight oil (14).
12
Closely linked to the decision to step out of US
shaleplays was canceling plans to develop a Gas
To Liquids plant in Louisiana (15) that would be
able to produce diesel using cheap shale gas as
a feedstock. The $20 billion plan would produce
140,000 barrels of liquids wich would normaly be
made out of oil, and with a slightly higher carbon
intensity if made from conventional natural gas.
Apparently Shell thinks that natural gas prices in
the US will not be low enough for GTL production
and not high enough for its own shalegas projects.
Shell already operates GTL plants in Malaysia and
Qatar. In Qatar it gets the gas almost for free.
Selling assets in the Niger Delta
Shell also decided to sell assets in the Niger
Delta. This conflict zone has long been a primary
production zone for Shell supplying more than
10% of its oil production. As the oil in the
Niger Delta contains a high share of associated
gas, Shell’s Nigerian oil production has been
accompanied with large-scale flaring. This flaring,
together with massive oil leaks and unattended
poverty contributed to the social unrest that
makes the Niger Delta a dangerous operating
area for Shell. These security risks for personnel
and infrastructure also makes the Niger Delta oil
expensive. Shell is selling its stake in oil blocks in
parts of the conflict zone. Together with steps to
capture instead of burn the associated gas the
carbon intensity of Shell’s production in Nigeria is
declining sharply. At the same time it is ramping
up production in the Iraqi Manjoon Field – another
high-flaring oil production field. Shell is planning
to capture the gas in Iraq somewhere in the future.
The security situation in Iraq is however slowly
moving towards a civil war – so all local long-term
investments are high-risk.
Two areas in which investment cuts would lower
Shell’s carbon intensity and Shell capex problems
would be Shell’s tar sand operations and deep
sea drilling. Both tar sands and deep sea projects
require an above average amount of energy and
material. This translates in both relatively high
costs per barrel and high emissions per barrel.
Where oil production in the Middle East costs
about $23 a barrel, tar sands need a price above
$81, and deep sea oil above $63 (16).
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
Shell is currently planning to expand its tar sand
operations in Canada in several ways. In december
2013 it got government approval for the expansion
of its Jackpine tar sand mine which would allow
production to go up to 100,000 barrels a day (17).
In its 2013 annual report it claims that work on
the expansion has just begun. Shell also started a
carbon capture and storage project called Quest
at the Scotford Refinery processing most of its
tar sands production. The project will cost $1.35
billion, $865 of it covered by government subsidies
and backed up by a two-for-one carbon credit deal
with the province of Alberta. The project would
capture 35% of the CO2 emissions of the Scotford
Plant (18).
Another -perhaps less evident- high-carbon
oil source is the deep sea. Shell has deep sea
projects in the Gulf of Mexico, Nigeria, Brazil,
the South Chinese Sea and several other places
now supplying 10% of its production (19). These
large and financial high-risk projects require
large platforms that take up lots of energy and
resources. The carbon intensity of deep sea oil and
gas is estimated at 40 CO2 kg/ boe
2. How big is Shell’s
Carbon bubble?
There are two ways to answer that question. The
most simple one would be to assume that all oil
companies are equal, and all oil and gas reserves
are equal. As we have to leave up to 80% of the
listed carbon reserves in the ground, this same
number would apply to Shell. In that case Shell
would have to leave 8,366 million to 11,155
million boe of its reserves undeveloped and sign
off the booked associated financial value of that
reserve.
13
Of course reality is more complex – and in this
case that complexity offers little comfort to Shell’s
particular case. The carbon intensity of different
fossil fuel reserves varies a lot. If demand will
fall because of a political decision to leave a part
of the reserves underground it is very likely that
prices for oil and gas would drop. If on top of that
governments decide to put a price on carbon and
adopt policies that would lower the demand for
oil and gas then it will be the reserves with a high
carbon intensity and high capex needs that would
be cancelled first. The exposure to these types
of reserves differs per company. Looking at the
carbon intensity factors it is logical to assume that
investements in unconventional oil and gas, LNG
and oil fields that require a large amount of flaring
will be hit first. Looking at Shell’s reserves portfolio
this would put projects at risk currently providing
971.000 barrels of oil eq – or 42% of current
production.
Calculating Shell’s carbon intensity
The best way to evaluate the ‘climate-friendliness’
of companies is to compare the combined
impact of production, use and disposal of their
products on the climate. For an oil company
like Shell product is expressed as a barrel of oil
or its corresponding amount of natural gas. For
the effect of one barrel on the climate we must
determine the greenhouse gas emissions during
extraction, production and subsequent burning, for
instance in a car or a power station. ‘Fortunately’
for Shell the disposal of its products (the emission
of CO2 into the atmosphere) is currently still
without financial ramifications and it is not held
(financially) responsible for the resulting short and
long term (damaging) effects.
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
Another issue to be taken into account when
assessing climate impact is future oil and gas
production and specifically changes in the
associated CO2 intensity. New reserves are usually
found in smaller and less accessible fields, and oil
quality is slowly decreasing – or to qoute Shell’s
itself: “the era of cheap oil is over.” (20) This
increasing price tag also leads to further increasing
CO2 intensity over the years, as conventional oil
production is shrinking, and a higher share of total
liquids production consist of unconventional oil.
This trend is seen worldwide, but even starker at
the independent,d oil companies, like Shell, that
lack access to large conventional oil fields owned
by state oil companies.
In this report we first consider the current
production, and then we look at the reserves and
resources from which the company will derive
its future production. How many kilos of CO2
equivalent emissions per barrel of oil equivalent
(BOE) can be determined based on the Life Cycle
Analyses (LCA) of various types of oil and various
production methods. The results may sharply differ
– as Box 1 shows.
There are a number of scientific studies on
the LCA of oil and gas. We noticed a degree of
uncertainty in the final numbers caused by the lack
of transparancy of oil companies, and uncertainty
around specific parts of the production cycle,
for instance the amount of methane leakage
from installations and waste water ponds. In the
debate on the climate impact of shale gas these
different numbers cause confusion. There is a huge
difference in methane leakages between shale
operations with or without open ponds to store
waste water. The waste water will contain methane
that will evaporate in open ponds. Although Shell
declined to answer the question if they use these
open ponds for their operations in the US they
have been seen at the Shell shale gas operations
in Ukraine – and also in Argentina. On the basis
of scientific studies by A. Brandt from Standford
University, NETL National Energy Technology
Labratory, the earlier report by Oil Change and
two studies by HSBC we come at these numbers:
14
Type
CO2 factor
unit
source
Conventional oil
25.2
Kg CO2 / boe
HBSC
Saudia Arabia
13.6
Kg CO2 / boe
Oil Change
Niger Delta 2009
128.6
Kg CO2 / boe
Oil Change
Iraq
19.6
Kg CO2 / boe
Oil Change
Deep water/Arctic
25.2 ~40
Kg CO2 / boe
HBSC/Oil
Change
Enhanced recovery
40.0
Kg CO2 / boe
HBSC
NGL
33.9
Kg CO2 / boe
Oil Change
Conventional gas
22.0
Kg CO2 / boe
HBSC
Liquefied Natural Gas
LNG
75
Kg CO2 / boe
HBSC
Coal to Liquid CTL
135.0
Kg CO2 / boe
HBSC
Gas to Liquid GTL
50.0
Kg CO2 / boe
HBSC
Heavy oil
55.0
Kg CO2 / boe
HBSC
Oil Sands
75.0
~111.5
Kg CO2 / boe
HBSC / Oil
Change
Oil shale
125.0
Kg CO2 / boe
HBSC
Tight oil
unknown
unknown
Coal Bed Methane
CBM
50.4
Kg CO2 / boe
HBSC
Shale gas low
22.88
Kg CO2 / boe
Howarth
Shale gas high
55
Kg CO2 / boe
Howarth
Shale gas average
22
Kg CO2 / boe
NETL
Tight Gas
33.1
Kg CO2 / boe
HBSC
Coal
55
Kg CO2 / boe
NRDC
1 barrel is
5.8 x 10-6
BTU
Sources: HBSC, Oil and Carbon, counting the costs, 2008; Oil Changes /
FOEI, Irresponsible Energy Shell: The World’s Most Carbon Intensive Oil
Company Methodology behind. Irresponsible Energy, 2009, NETL National
Energy Technology Labratory 2008-2012, IPCC:
http://www.ipcc.ch/pdf/special-reports/sroc/Tables/t0305.pdf,
A. Brandt https://pangea.stanford.edu/~abrandt/
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
How does Shell report oil, gas and
carbon data?
In its annual investors’ handbook, sustainability
report and annual report, Shell gives fairly detailed
figures on its production, differentiated in natural
gas, oil and tar sands, but without precise figures
on shale gas, coal bed methane or tight oil
production. Average energy intensity and total
direct emissions are provided, but the company
has not replied to requests for more exact data
per project or fuel type. Precise figures on
reserves are given (supplies which are recoverable
according to the regulations set by the US SEC
market watchdog) but no specific figures on the
far more extensive resources. These are still to be
developed resources, which at the current price
of oil are not now economically recoverable with
current technologies. We have tried to estimate
the composition and scope of these resources,
based on news reports, Shell’s communications
to shareholders and other sources. This lack
of transparancy means that Shell does not
provide the data that would make it possible for
shareholders and stakeholders to be informed
about Shell’s exposure to the carbon bubble in
detail (21) – on the required reserve type and
project scale. Based on the numbers that can be
found we made an estimate. This means there is a
margin of uncertainty in our calculation of Shell’s
CO2 intensity.
In its 2009 report ‘Irresponsible Energy, Shell: The
World’s Most Carbon Intensive Oil Company’, Oil
Change International made extensive efforts to
calculate Shell’s CO2 intensity. We see that Shell’s
production at that time had an estimated CO2
intensity of 33.8 kg CO2e/BOE and its reserves
and resources were 62.6 kg CO2e/BOE. That
makes Shell’s average production in 2008 low
in comparison to its direct competitors Exxon,
BP and Chevron, but the future production from
its resources is – in comparison to these same
companies – much higher.
Between 2008 and 2012 a number of
developments have increased the carbon intensity
of Shell’s resourses and reserves in a major way.
These raised the average intensity for current
production to 35.9 kg CO2 per BOE and lowered
future production to 40 kg CO2 per BOE. This
raise in current production is mainly due to the
company’s tar sands and shale projects, but flaring
natural gas in Nigeria and Iraq and energy intensive
projects in the deep seas and the Arctic region also
play a role.
15
On the positive side, we see a substantial
improvement in reducing natural gas flaring in
Nigeria combined with asset sales in the carbon
intensive Niger Delta. As its Nigeria operation
accounts for about 12% of Shell’s total oil
production, what happens in the Niger Delta has
a big impact. If Shell’s plans are implemented,
the capture of associated natural gas from the oil
fields in the Niger Delta will be reduced by 90% in
2015(22). Shell reports that this will lower the CO2
intensity of the oil production from 128.6 CO2
kg/boe a day to a level ‘below the current global
industry average’(23). Lacking a precise number we
estimated this means less than 40 CO2 kg/boe
a day. Shell also sold oil fields in the Niger delta
that were producing 70,000 barrels a day. This will
further lower total emissions accountable to Shell
(24)
.
Shell’s oil production has been stagnating for
years. Between 2003 and 2012, oil production
dropped from 2,359 million barrels of oil eq per
day to 1,488 million barrels of oil eq per day. In
the same period natural gas production rose from
1,518 million boe per day to 1,629 million boe per
day, and was much lower in several of the years in
between. The rising share of natural gas can thus
mainly be attributed to decreasing oil production.
Nevertheless, this lowers average CO2 intensity of
production. Shell states that since 2012 natural gas
comprised 50% of its worldwide production.
Increases occurred due to the growth of tar sands
production, from 78,000 in 2008 to 145,000
barrels of synthetic crude per day in 2013. A
considerable part of the tar sands resources are
comprised of tar sands at a great depth, which
cannot be profitably extracted with present
technology, although this is expected to change
in the future. In all probability, large-scale open
tar sands mining, as it now occurs, will have to be
replaced with another in situ extraction method.
Shell is betting on more production from
alternative fossil fuels like oil from the deep sea
and Arctic zones, shale gas, tight oil, liquid natural
gas (LNG) and gas-to-liquids (GTL). Producing
these alternative fossil fuels is expensive and also
demands a great deal of materials such as steel and
concrete. This means the energy input to produce
oil from these types of oil and gas is higher than
average conventional oil, making them more CO2
intensive.
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
Shale
Shell has many resources in the form of
shale plays and oil shale. Because these
terms sound similar, the two are often
confused. Shale plays are composed of
low-permeability former sea floor clay
sediment and can contain oil and gas. This
can be extracted from the shale layers via
hydraulic fracking; breaking the shale layers
open by drilling horizontally and using
highly pressurised water mixed with sand
and chemicals. Shale oil and shale gas from
these layers do not differ chemically from
conventional oil and gas, only the source
and the extraction method are different –
and EROEI values. Shale oil is also referred
to as tight oil. The production of both shale
gas and tight oil has increased sharply in
the US. An increasing portion of Shell’s US
production now consists of shale gas and
tight oil. Shell recently decided to dispose
of these interests due to the extremely
high costs that accompany these extraction
methods. Shell is still seeking shale gas and
shale oil in other parts of the world.
Oil shale is comprised of kerogen, an organic
material that has not yet been converted
into oil or gas by geological processes. Oil
shale is found in very large quantities in
the US, as well as in Jordan and Russia. For
decades, Shell has been trying to develop
a method to convert this kerogen into oil
and to make it recoverable. But in 2012 it
decided to abandon these efforts and sell its
US shale lab (25). In calculating Shell’s CO2
intensity, we have omitted oil shale from the
calculations although Shell still owns large
concessions in the US and Jordan. This is in
part prompted by Shell’s decision to stop
research into an extraction method; it does
not appear that oil shale will be economically
recoverable for the next several decades.
Taking 30 billion BOE with an extremely high
carbon intensity out of the final calculation
is the main reason the carbon intensity of
Shell’s total resource bases is now much
lower than the value calculated in 2008.
16
Shell’s reserves offer the physical possibility of
continued growth in both oil and natural gas
production. Its oil reserves were 5,598 billion
barrels in 2003. These dropped sharply in 2007
and came back up again to 6,180 billion barrels
of oil eq (BOE) in 2012. Natural gas reserves rose
from 6,881 billion boe in 2003 to 7,375 billion
boe in 2012. In addition, Shell has claims to yetunproven resources of somewhere between 46
and 74 billion BOE. Of these, 32 billion BOE are
in fields already in production, in the development
phase or are a subject of research. The remaining
resources are currently not economically and
technically recoverable. This includes 30 billion
barrels of oil shale concessions that Shell has in the
US and Jordan and a substantial portion of the tar
sands concessions in Canada. Of the remaining 32
billion BOE, we know that 36% or 11.5 billion BOE
consist of oil and the rest is 20.5 billion BOE of
natural gas(26).
Natural gas:
Does Shell’s ‘answer’ to the climate problem
fit the carbon bubble?
As we’ve seen Shell is partly transforming from a
petroleum oil company to a natural gas company.
An increasing share of its reserves and production
consists of natural gas, and according to Shell that
is good for the climate: “Natural gas is abundant,
acceptable and affordable. At Shell we believe
that it is an important component of a sustainable
global energy mix,” Shell states on its website(27).
It is a fact that Shell is slowly making the transition
to natural gas. But it isn’t doing so voluntarily, but
because fewer new oil fields are being discovered
worldwide. The new oil fields that are found are
increasingly located in deep seas, the Arctic or
conflict zones – or unconventional oil reserves,
presenting technical challenges, lower EROEI
values, with ever-decreasing profit margins.
Natural gas stocks are much more abundant,
though it is difficult to transport the gas. If it
cannot be marketed close to the source, it must
be liquefied. However, the question then arises to
what degree this strategy -because of its energy
intensity- actually contributes to reducing CO2
emissions. Natural gas is indeed cleaner than oil,
but does the share of natural gas compensate for
the rising CO2 intensity of Shell’s tar sands and
shale oil projects? And doesn’t liquefying natural
gas in the form of LNG (liquefied natural gas)
negate any CO2 benefits? And to what degree
does this natural gas replace another fossil fuel,
or does it just result in availability of an additional
fossil fuels – possibly even hampering other energy
policy options, like energy efficiency measures or
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
development of renewable and other low-carbon
sources? A major part of the answer on those
questions has to do with if and how other fossil
fuels are displaced by natural gas. Will natural gas
be able to replace coal in electricity production?
At the moment outside the US the opposite is
happening because of the higher market price of
natural gas. Especially in Europe it is natural-gas
fired power plants that are closing down – opening
room for coal-based power. Or does natural
gas replace oil in the transport sector? Shell has
several programmes to develop the market for GTL
and LNG in transport, a transition that would have
a negative climate impact, as these fuels have high
CO2 intensity.
What is the effect of new natural gas
projects on Shell’s CO2 intensity?
Shell is investing in natural gas, or actually liquefied
natural gas, and claims that it can develop 8.2
billion BOE in natural gas, most of it as LNG. This
technique for transporting gas, which consists
of freezing, shipping and then thawing LNG, is
energy (and thus CO2) intensive. In both the LNG
terminals and LNG tankers a small percentage
of the methane will escape to the atmosphere.
Methane is a more potent greenhouse gas than
CO2 but its effect in the atmospheer is much
shorter (it decomposes to CO2). Shell plans to
build several floating LNG installations that are
larger than aircraft carriers. The Prelude is the
first floating LNG terminal currently beeing built
in Korea. Once operational the Prelude FLNG
facility will produce 5.3 million tonnes of liquids
per year; 3.6 MTPA of LNG, 35,000 barrels per
day Boe of condensates and 0.4 MTPA of LPG
200 km off the west coast of Australia. The carbon
intensity factor of LNG used in this report is
based on LNG terminals on land and estimated
at 75 kg CO2 per boe. If this number will change
for a FLNG is yet unknown but very likely due to
the higher amount of materials needed to build
the plant. This means that our caluclation of the
carbon intensity of future Shell LNG production is
probably too low still. In much the same way the
effect of using unconventional gas as a feedstock
for LNG is unknown, so we used the most likely
lower number of LNG using conventional gas as
a feedstock. For example on the other side of
Australia Shell’s joint venture with Chinese state
oil company Sinopec, Arrow, is planning to build
the Arrow LNG Plant(28). This LNG plant will make
it possible to ship 18 mtpa of LNG made from coal
seam gas produced in Arrow’s controversial coal
seam gas opererations in Queensland, Australia.
17
The coal seam gas operation has, like shale gas,
a higher carbon intensity than conventional gas,
mainly caused by methane leakage (from drilling
method, high number of wells, and waste water)
and the low production per wel. Converting coal
seam gas in LNG would further worsen the carbon
intensity. Australian LNG is primarily intended
for Asia and will compete with both coal and
sustainable energy but most likely – as in Asia
net energy consumption is increasing following
production – will just add extra fossil fuels to the
energy mix. Shell hopes to supply 368 Million
boe LNG worldwide in 2020, that will produce
690,225,000,000 kg of CO2 emissions per day.
The other way to get natural gas to consumers
is the gas-to-liquids (GTL) method, by using the
Fisher Tropsch process to convert natural gas,
chiefly into diesel and aviation fuel. Natural gas
has a carbon intensity of 22 kg CO2/barrel, GTL
has a CO2 intensity factor of 55(29). By 2020 Shell
wants to raise its GTL production from the current
154,700 bbl/d GTL to at least 294,000 bbl/d
although it just scrapped plans for a big GTL facility
in the US. This could increase the emissions from
Shell’s GTL factories from 7,735,000 kg CO2e per
day currently to 14,700,000 kg CO2e per day. It
should be mentioned that Shell is still developing
the GTL technique, which will probably lead to a
more efficient process and thus to lower carbon
intensity. Through the energy-intensive conversion
process, GTL fuels have 5% higher CO2 emissions
(well to wheel) than conventional diesel and
kerosene(30).
Natural gas conclusion
Assuming LNG would replace coal would
lower emissions, if it replaces conventional
oil in either transport or a power plant
it would let emissions rise. If GTL would
replace diesel made from conventional oil
it would have a higher carbon intensity. If it
would replace other feedstocks it could be
lower. Based on current market conditions
it is to be expected that Shell’s investments
would make extra natural gas available
that would most of all add extra fossil fuel
to the energy mix, instead of replacing coal
or oil. This only serves to increase the net
stress on the limited atmospheric carbon
budget – and therefore increases carbon
bubble sensitivity.
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
Biofuels:
Shell’s high-carbon solution to a highcarbon problem
In 2011, Royal Dutch Shell and Brazilian sugarproduction group Cosan formed one of the biggest
joint ethanol fuel ventures in the world, with
an estimated market value of $12 billion. Shell
invested $1.6 billion in the joint venture(31).
The new company, named Raízen, produces over
2.4 billion litres of ethanol per year (35,000 barrels
a day) to Brazilian and international markets. The
target is to more than double ethanol output, to
up to 5 billion litres a year(32), and the company
expects to have a market share of 20% of Brazilian
ethanol in seven years. According to Shell, “It can
reduce net CO2 emissions by up to 70% compared
with petrol. We recognise the sustainability
challenges associated with some biofuels and
are working to ensure that the feedstocks and
conversion processes for the biofuels we purchase
today are as sustainable as possible”(33)
Biofuels sustainable?
Sugarcane is grown as a mono-crop, predominantly
in southern and central Brazil, as well as in parts
of Asia and Africa. It relies on heavy quantities of
inputs, particularly fertiliser (34). The cultivation and
processing of sugar has environmental impacts
through the loss of natural habitats, intensive use
of water, heavy use of agro-chemicals, discharge
and runoff of polluted effluent and air pollution
due to pre-harvest sugar cane burning. These lead
to the degradation of wildlife, soil, air and water in
production areas and downstream ecosystems(35).
Shell claims “Our Raízen JV agreement includes
a set of principles to help improve sustainable
production. These require Raízen to assess the
potential direct and indirect impacts of cultivating
new land.”
CO2 Footprint
The main driver of demand for ethanol as a road
fuel lies in climate targets to reduce CO2 emissions
from transport. However, when compared to
electric transport, ethanol as a biofuel is not the
optimal alternative. Research has shown that
bioelectricity outperforms ethanol across a range
of feedstocks, conversion technologies and vehicle
classes.
18
Bioelectricity produces an average of 81%
more transportation kilometres and 108% more
emissions offsets per unit area of cropland
than does even cellulosic ethanol (produced
from wood, grasses or the non-edible parts of
plants). These results suggest that alternative
bioenergy pathways have large differences in how
efficiently they use the available land to achieve
transportation and climate goals.(36)
Figures on the carbon footprint of ethanol as
compared to conventional road fuels differ widely,
depending on the weight attributed to land use
change (LUC), including indirect land use change
(ILUC). For example, in 2008 the US Environmental
Protection Agency (EPA) calculated that ethanol’s
carbon footprint is 26% lower than fossil road
fuels. These calculations included figures for LUC.
Two years later, they concluded that the footprint
of ethanol would be 50% lower as compared to
fossil road fuels, and that it can be 60 to 90%
lower in scenarios where by-products are collected
for combustion. The difference was that with the
new figures, EPA also assumed that sugarcane
would be planted on pastures and not in previously
forested areas.
Scientific research has now shown that emissions
from indirect land use change (ILUC) have
the potential to negate any greenhouse gas
emission savings which might be generated. In
fact the net-effect of biofuel targets could be an
overall increase in emissions(37) from biofuel use.
According to the Dutch research and consultancy
organisation CE Delft, when climate impacts, land
use (incl. ILUC) and depletion of crucial minerals
(phosphorous and potassium) are combined, using
sugarcane ethanol has an overall environmental
impact comparable to driving on gasoline, natural
gas or sugar-beet ethanol.(38)
Land use change for biofuels and
its impact on food production and
communities
Based on figures on sugarcane expansion,
researchers concluded that sugarcane expansion
in Brazil preferentially occurs in the Cerrado, the
tropical savannah area(39). The area covered by
sugarcane in the Cerrado is predicted to increase
by 365 per cent by 2035(40). By 2035 Cerrado
might have lost some 600 thousand hectares to
sugarcane in new deforested areas.(41)
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
In the state of Mato Grosso, which has areas of
Amazon forest and Cerrado, as well as Brazil’s
largest cattle herd, eight per cent of the sugar
cane expansion has been on former forest land.
This means an increase in net greenhouse gases
emissions(42). Sugarcane expansion has also
resulted in other agriculture in the south and midwest of Brazil being displaced, particularly cattle
pasture. In the southern central region, 60 per cent
of the expansion was on land previously used for
grazing cattle. Cattle farmers sell their pastures and
often move to new ground on former rainforest
lands.(43)
Sugarcane expansion on farm land is fuelling land
conflicts, as rural and indigenous communities
are forced off their land to make way for the
plantations. Small-scale farming has become
unviable in the plantation areas and many small
farmers feel they have no financial choice but
to sell up. While ethanol firms paint a picture of
Brazil as the world’s ‘ethanol barn’ with large areas
of land ‘available’, there is mounting violence by
ranchers against indigenous people, such as the
Guarani in Mato Grosso do Sul. The agricultural
sector is said to put pressure on the government
against the demarcation of indigenous lands,
thereby exacerbating land conflicts.
The government of the state of Mato Grosso
do Sul even intends to amend the law to allow
new mills to be built in the Pantanal nature
reserve, in the region between the river basins
of the Paraguay and the Paraná. This project
may intensify land conflicts even further, while
also causing more destruction to the Cerrado
and contaminating rivers and subterranean
water reservoirs, including the Guarani Aquifer.
Shell responds: ‘Raízen supports the work of the
Brazilian government to implement effective land
use policies and address concerns over sugar cane
production displacing other crops to areas rich
in biodiversity. Raízen also supports government
efforts to protect the land rights of indigenous
peoples.’
19
In 2008, research by Wageningen University in
the Netherlands concluded: ‘The rapid further
expansion of sugarcane areas forecasted for Brazil
is expected to continue at the expense of current
crop land and extensively managed pastoral
land in the Cerrado region. This expansion may
directly or indirectly affect parts of the Cerrado
area with native vegetation and unprotected
forest where biophysical, infrastructural and
socio-economic conditions are favourable for
sugarcane cultivation. Most threatened are
those lands adjacent to current production
areas. Environmental consequences of sugarcane
expansion might range from quite acceptable
(conversion of crop land and managed pastures) to
very negative where sugarcane expands directly
or indirectly in unprotected areas, which still have
native vegetation with high bio-diversity or into
unprotected native forest areas.’(44)
Biofuels conclusion
It is doubtful that sugarcane biofuel can
provide net CO2 benefits over conventional
fossil oil. It is negligible in terms of Shell’s
total oil and gas production. Furthermore,
a lot has to change before sugar cane
production will be social and ecological
sustainable.
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
Recommendations for Shell to
lower carbon emissions.
If we are to remain below the agreed 2-degree
global warming limit, by 2050 fossil fuels use
would be fully marginalised. If Shell seeks a
future role as an energy company it will have to
use the remainder of the first half of this century
to undergo a dramatic transition, away from its
current core activity as extracting fossil carbon
reserves.
For the time being Shell will remain a large player
in the energy industry – although its financial
status can be quickly challenged by carbon bubble
ramifications, as that may lead to both share value
drop and disinvestment. One thing Shell can do
to decrease its ‘carbon bubble vulnerability’ is to
try and reduce its overall CO2 intensity. Current
actions in this field are disappointing though, and
the general trend moves in the wrong direction:
increasing intensity.
Stop investing in CO2 intensive fossil
fuels like shale play reserves
Shell could make the choice to no longer focus
on tar sands, shale gas and oil shale. In recent
decades the company has been the leader in
developing technology that has made these
reserves recoverable. Shell has major interests
in concessions and resource positions in tar
sands in Canada and the US, shale gas in the US,
Ukraine, Russia, Turkey, South Africa and China,
and has been trying for years to make its oil shale
concessions in the US and Jordan recoverable.
These investments are a deliberate choice to
develop types of oil and gas that are extremely
CO2 intensive.
End the flaring of surplus natural gas
In Nigeria, Iraq, and other places, natural gas that is
recovered during oil production is flared – simply
burned on the spot, without using the energy. This
often happens because it is not profitable to utilise
the natural gas locally, to pump it back into the oil
field or to make use of it elsewhere. Large-scale
flaring harms local air quality and affects the health
of local populationin oil extraction areas. Also
it is a globally significant source of atmospheric
CO2 emissions, further decreasing the remaining
atmospheric carbon budget. Making use of the
gas efficiently, in a way that replaces the use of oil,
would lead to a sharp reduction in emissions. Some
options include connecting households to a natural
gas network to take the place of cooking with
20
kerosene, or replacing oil-burning power stations
in Africa and the Middle East. Shell is working on
phasing out flaring in its Nigerian projects but
the pace has slowed. In 2004 Shell emitted 24.1
million tonnes of CO2eq via flaring worldwide; in
2012, 7.7 million tonnes of CO2eq. Much of the
natural gas is exported to the West as LNG. The
transportation of gas as LNG increases the CO2
intensity of gas reserves and elevates the financial
break even points of the exported reserves. This
decreases climate benefits of halted flaring and
maintains a high carbon bubble sensitivity for the
overall oil & gas reserve exploitation.
Transparency about the sources of oil
Shell is not only a major producer of oil but also
a major oil trader. The company does not reveal
quantities but based on media statements it can be
estimated that half of all oil in Shell refineries does
not originate from Shell oil fields, but has instead
been purchased on the global market.(45)
Legislation in the US compels companies to be
relatively open about the oil fields where oil is
sourced. Such legislation does not exist in the
EU and is actively resisted by Shell and other
companies. The EU Fuel Quality Directive [still not
implemented], which would oblige companies to
reduce the CO2 intensity of fuel for road transport,
will act on the basis of averages provided by the
industry itself, not specified by source. The EU
is working on regulations which would require
reporting on the most climate-damaging oil,
such as tar sands oil, to the great dismay of oil
companies.
Because of this lack of transparency, motorists
or other customers of Shell are unable to choose
whether or not to buy oil sourced from a particular
technology or production region. As one of the
larger companies, Shell could insist on increased
openness for the sector.
Inform shareholders on Shell’s exposure
to the carbon bubble
The market value of an oil company is to a large
degree determined by the value of the company’s
proven reserves. If the world’s political leaders
should one day decide to adopt a stringent climate
policy to limit global warming, a significant part of
those reserves might become so called ”stranded
assets”, assets that are unsellable, the value of
Shell’s shares will decline. This is the so-called
carbon bubble. Shell and other oil companies
should inform their shareholders about the
exposure to these risks.
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
A new business model for Shell
Finally, the company should take responsibility
for the long-term interests of its shareholders and
90,000 employees. It could begin to develop a
vision for Shell beyond oil. What does the company
want to do? How can it use its capabilities for new,
useful and profitable purposes?
Shell’s five additional climate risks
Climate Risk 1
Climate Risk 2
Increasing wind causes ice buildup oil rigs
cannot withstand
Can´t build pipelines on
melting tundra marsh
The Arctic is the last oil frontier. Several oil
companies, especially Shell, desire to extract its
percieved oil and gas riches now that the melting
ice cover seems to make such carbon reserves in
reach. Shell’s plans to start drilling outside Alaska
are currently postponed due to an inadequate
oil spill response plan, high costs and a series of
incidents. The company however still insists on
pursuing drilling in the Arctic, despite the wellknown fragile ecological state of this area and the
security issue for Shell itself: melting ice causes a
large amount of floating icebergs. Such ice masses
can accumulate under projected increases in wind
fetch and create enormous physical pressure,
possibly damaging oil rigs, tankers and other
facilities. In July 2012 an iceberg twice the size of
Manhattan broke off a glacier on north-western
Greenland, illustrating the speed and scale of
changes to the local environment.
Shell’s oil infrastructure in the Arctic Circle is
partially resting on permanent frozen soils. These
permafrost soils are thawing and thus become
unstable. This could result in damage to pipelines
and buckled roads and increasing land transport
difficulties. Damages to infrastructure in the
onshore Arctic will therefore be costly to repair.
Moreover, oil spills resulting from damages to
unstable permafrost-based pipelines would be
highly damaging to the existence of this ecosystem
- and may open up extremely costly legal charges.
Wildlife such as reindeer and vegetation such as moss
and lichen has adapted to live in the Arctic tundra.
Pic: http://www.earthonlinemedia.com/ebooks/tpe_3e/climate_systems/
tundra_1.html
21
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
Climate Risk 3
Climate Risk 4
Water competition serious threat to
economic viability Shell’s shale reserves
Increasing hurricanes and extreme weather:
Multi-billion risk to offshore
Shell extracts oil and gas reserves with production
methods that require very large amounts of water.
This is most evident in the mid-west US shale
plays - a drought-sensitive region. The water
usage of such shale gas production is extremely
large (between 7 – 30 million litres per well) times potentially thousands of wells - capable
of lowering ground water or depleting aquifer
reserves. Especially in the parts of the US hit by
drought competition for water between farmers
& public drinking water services and shale gas
companies can arise - where local population
is likely to party with the first interest group.
Efforts to save water use will however further
increase shale gas production costs - risking loss
of economic viability of such production. Due to
its disputed profitability Shell is currently divesting
from multi-billion US shale gas investments, but
continues pushing shalegas in other dry - and
sometimes drier - areas, like Algeria, Tunesia,
China and the Karoo in South Africa, where
farmer communities have already expressed grave
concerns over water competition. The water
demand of oil and gas operations is increasing
worldwide at the same time climate change can
increase water scarcity in some regions, including
the mentioned Shell shale gas operating areas.
That shale gas is a “bridge fuel” from high carbon
energy sources to a renewable energy future
is arguably a myth (see Hughes, D.Will Natural
Gas Fuel America in the 21st Century?) - for
the simple reason that shale gas is in fact very
CO2 intense - and adding any additional carbon
reserves to an already limited atmospheric carbon
budget competition only helps to further increase
overinvestment and carbon bubble tensions.
In recent years we have witnessed a growing
number of extreme weather events - a trend
that can be linked to global climate change and
that fits projections of expected further (net)
increase in magnitude and frequency of such
events. The consequences of extreme weather
events can be huge for companies like Shell. When
hurricane Katrina struck in 2005, Shell’s oil and gas
infrastructure in the Golf of Mexico was severly
damaged. Shell was responsible for the second
largest oil spill after this hurricane with a leak of 4
million litres from a broken pipeline near Pilottown
as well as a saller spill of 50,900 litres near Nairn.
Despite these damages Shell rebuilt its plants and
increased oil production in the region. After Katrina
the authorities in the Gulf of Mexico enforced
regulation for offshore oil and gas platforms that
improved their preparedness to hurricanes but
also raised the costs of production. Next to more
regulation insurance costs also rose considerably,
reflecting higher financial risks of operating in the
area. When negligence (possibly including failure
to adapt) is at play, there is additional risk of multibillion legal charges, as shown in the case of the
Gulf of Mexico BP Deep Water Horizon oil spill.
Shell’s Mars platform was highly damaged after Hurricane Katrina.
Pic: http://www.upstreamonline.com/epaper/article1332153.ece
That shale gas is a “bridge fuel” from high carbon energy sources to a
renewable energy future is arguably a myth (see Hughes, D. Will Natural Gas
Fuel America in the 21st Century? )
Pic: http://s08.static-shell.com/content/dam/shell/static/future-energy/
downloads/innovation/world-map-with-legend2011.pdf
22
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
Climate Risk 5
Security problems and climate change,
drilling for conflict can cost billions
There is growing evidence that climate change
is already contributing to conflicts and social
unrest. The consequences of these conflicts can
in some cases also hit Shell’s operations. Firstly
climate change - caused by the fossil carbon
energy system - is already hitting food production
and food prices. Together with higher oil prices
these contribute measurably to social unrest, as
was the case in the so-called Arab Spring. Social
unrest and conflicts have already worsened
security conditions for Shell in North Africa and
caused Egypt to build up a $3 million debt on oil
imports. Shell pulled out of Libya in 2012 citing
the worsening security after the toppling of the
Kadafi regime. Also Shell was forced to shut down
its operations in Syria. None of these conflicts are
caused just by climate change - but as a globally
destabilising factor (to the economy, social welfare
and political stability) - companies relying on
intercontinental cooperation between production
and consumption zones (as typically the case in
the fossil carbon energy system) are themselves
in the high-risk zone to suffer consequences including high financial risk. That local instability
in production can backfire dramatically to Shell’s
financial profits is further illustrated by the againincreased tensions in its Niger Delta operating
areas, including possible financial consequences of
oil spills in such conflict zones, when negligence is
a contributing factor and other parties can claim
compensation for oil spill-induced losses.
23
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
Appendix: Methodology
This report follows up on “Shell’s Big Dirty Secret”
(published by Friends of the Earth and Oil Change
International in 2009) and the scientific research
done on the life cycle analysis of different types
of oil and gas production (for example by the
U.S Department of Energy’s National Energy
Technology Laboratory and Adam.R.Brandt
of Stanford University). Also we try to add
qualitative assessment to supplement en specify
the understanding of Carbon Tracker Institute
reporting.
We have tried to use Shell’s own data whenever
possible. Unfortunately, Shell does not publish
production and direct emission data on a
project-by-project basis. Because of this lack
of transparency we had to use other sources
or estimate the exact carbon intensity of its
production and resource base. Where we had
to make estimates we did so conservatively; all
estimates in this report are noted.
Other data not made available by Shell is its oil
trading. Shell refineries do not exclusively use oil
produced in Shell’s upstream projects. Shell sells
its upstream production on the world market and
also buys oil for processing in its refineries on the
world market. Since it gives no information on how
much oil it buys and from which oilfields, in theory
it is possible that it sells its relatively clean oil from
the North Sea to other companies and buys more
carbon intensive oil form Russia.
On all these issues we have contacted Shell by
email to ask for more details. None of these emails
were answered. We would like to invite Shell to
make more of the requested data available to
us so that it is possible to make a more accurate
calculation in future.
And how to count the CO2 emissions? Should
we measure the amount of CO2 released when
burning a barrel of oil, or should we estimate the
total amount of CO2 emitted “from well to wheel”,
so including the production process? We favour
the latter – as it expresses the full climatic impact
of the current inter-continental fossil carbon
energy system.
In scientific literature several sources can be
found giving numbers for carbon intensity.
When comparing these it becomes very clear
that an absolute number does not exist. There
is a margin of uncertainty depending on the
extraction process, technological experience at
the well and unknown factors like the amount of
methane leakage. This explains for example the big
differences between the carbon intensity numbers
given for the extraction of shale gas. With shale
gas the amount of methane leakage varies widely
depending on whether or not at the well open
ponds are used for storing waste water. It is known
that Shell uses these ponds at shale gas wells in
the Ukraine and possibly in the US. Combined
with lack of information about the amounts of gas
produced and the proven reserves at a specific well
the carbon intensity can only be estimated within a
wide bandwidth.
Based on the sources mentioned before and the
methodology Oil Change used when writing the
Irresponsible Energy report in 2009 we come to
the following numbers:
Carbon intensity
The amount of CO2 emission produced by burning
a barrel of oil can vary significantly. Because oil is a
fossilised natural product its chemical composition,
and the amount of carbon it contains, is variable.
Also the method of extraction and the subsequent
refinery processes play their part in creating
variation.
24
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014
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25
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26
Shell’s Carbon Bubble, by Friends of the Earth Netherlands, May 2014