Climate Ruling Could Force Big Change at Shell

Source: By Sarah McFarlane, Wall Street Journal • Posted: Monday, May 31, 2021

Oil giant might need to sell assets and rethink spending to meet Dutch court order to curb carbon emissions

A liquefied-natural gas project site in Gladstone, Australia, which is operated by a unit of Royal Dutch Shell. A Dutch court on Wednesday ordered the company to reduce its carbon emissions. Photo: Patrick Hamilton/Bloomberg News

To comply with a Dutch court order to cut carbon emissions, Royal Dutch Shell RDS.A -0.82% PLC may have to overhaul its business and cut its oil output faster than it had planned, analysts and investors said.

Potential ways to curb emissions include selling assets, rethinking exploration spending and halting growth of its liquefied-natural gas operations, they said.

Shell faces the potential upheaval after the district court in The Hague on Wednesday ruled that the company is partially responsible for climate change and must reduce its carbon emissions by 45% by 2030, compared with 2019 levels.

That target, which was called for by the environmental groups that brought the case, is in line with United Nations guidance for member states aimed at preventing global temperatures rising more than 1.5 degrees Celsius above preindustrial levels.

Shell said it was disappointed and fully expected to appeal the decision, and that it is already investing billions of dollars in low-carbon energy, including electric-vehicle charging, biofuels and renewables.

“We are carefully reviewing the court’s written judgment and the questions it raises,” a Shell spokeswoman said.

Activists celebrated the verdict of the court case against Shell in The Hague, Netherlands, on Wednesday. Photo: Peter Dejong/Associated Press

If Shell pursues an appeal, the case would be referred to a court of appeal where it can take around one to two years to be heard, after which it can be further appealed in the Dutch supreme court. The court on Wednesday said its order would stand provisionally, despite acknowledging potentially far- reaching consequences for Shell that may be difficult to undo.

“If Shell are going to hit those 2030 targets that have been imposed on them, they need to start acting now,” said Nick Stansbury, head of climate solutions at Legal & General Investment Management, the U.K.’s largest asset manager and a Shell shareholder.

“The range of things they could do is big,” he said, suggesting options could include selling or spinning off assets.

Mr. Stansbury said that while Shell may be able to successfully appeal the Dutch ruling, the pressure to reduce emissions would remain and that he expected there to be other courts considering the same issue.

The number of climate-change court cases has been climbing, according to a database project jointly run by the Sabin Center for Climate Change Law and law firm Arnold & Porter, estimating filed cases rose over 10% to 1,824 in the past six months. The majority of these cases are in the U.S.

Oil companies are facing rising scrutiny from activists, governments and investors to take greater action to mitigate their impact on the environment.

Elsewhere Wednesday, an activist investor won at least two seats on Exxon Mobil Corp.’s board, a historic defeat for the oil giant that will likely require it to alter its fossil-fuel focused strategy.

One way for Shell and other big oil companies to substantially reduce their emissions might be to sell assets, some analysts said.

“Divesting certain projects in the Middle East, Nigeria, Malaysia and few other countries would probably be the easiest way to comply with the court ruling if the company chooses or is forced to do so,” Artem Abramov, an analyst at consulting firm Rystad Energy, said of the Dutch court’s decision against Shell.

But he noted that asset sales might not benefit the climate. “Even if Shell divests high emission assets, they will just change hands, not be taken off the global energy map.”

To meet the court’s order, RBC Capital Markets said Shell could have to reduce its oil and natural gas production by around 3% a year, while holding its liquefied-natural gas production flat and also cutting oil product sales by around 30% from 2020 levels.

“It could force them to look at exploration where they’re spending $1.5 billion per year, and ask whether that number should be lower,” said Biraj Borkhataria, an analyst at RBC.

In its ruling Wednesday, the Dutch court acknowledged that Shell would need to change its policies, which could curb the company’s potential growth. Still, it said the interest served by the more stringent emissions reductions outweighed Shell’s commercial interests. The court didn’t stipulate how the ordered reductions should be met, or how it might monitor or enforce its ruling.

Shell in February set out plans to reduce its oil output by 1%-2% a year, while expanding in lower-carbon energy. At that time it said its carbon emissions likely peaked in 2018, and that it planned to reduce the carbon intensity of the energy products it sells by 20% by 2030 and 100% by 2050.

Earlier this month, around 89% of Shell’s shareholders supported the company’s transition strategy when it was put to an industry-first vote.

A separate resolution calling for Shell to make more ambitious low-carbon investments and emissions reductions was supported by about 30% of shareholders.

Analysts said it was hard to quantify the risk posed to Shell and other energy companies by the Dutch court ruling and the precedent it potentially sets. Shell’s share price closed flat Wednesday and traded down about 1.5% Thursday.

“I think there’s probably a general skepticism as to how enforceable this is and when the case actually concludes, assuming Shell appeals,” said RBC’s Mr. Borkhataria. “These companies are never going to be able to move fast enough for some people to be content.”

Write to Sarah McFarlane at