News that a Dutch court ruled that Shell must reduce its carbon emissions by 45% by 2030 has rocked oil and gas headlines, but Rystad Energy’s analysts weigh the real ramifications of the ruling.
Artem Abramov, head of shale research at Rystad Energy
When I saw the news earlier today, the first thing I did was to check the stock market reaction. Looking at the general market movements among peer firms today I saw was no major net reaction at all. As shareholders kept their calm, I conclude that the news have little relevance for the actual business and the significance of this ruling could be somewhat exaggerated.
Of course this court decision is the first of its kind globally, and that deserves attention, but there will be a thorough appeal process as already outlined by Shell. If we are to hypothesize that Shell is set to deliver on the court decision, this can be done quite easily by portfolio optimization and a dedicated divestment program for high-emission assets.
Shell has very competitive Scope 1 emission intensity among its major peers, but it still has significant variability in its own portfolio in terms of intensity for different assets.
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.
However, other than setting a precedence, there are no immediate implications for the general oil industry. Even if Shell divests high emission assets, they will just change hands, not be taken off the global energy map.
Also I think it is important to highlight that Shell indeed has very competitive emission intensity among E&Ps in general, and in the regions where it is mostly active.
For example, Shell always had very low flaring intensity in the Permian even back in 2018-2019 when the basin was struggling with infrastructure bottlenecks.
So it is definitely hard to argue that Shell is not doing much to reduce emission intensity structurally.
Another way of viewing the company’s flexibility is by a closer look at its emissions. Our data shows that 45% of Shell’s Scope 1 emissions come from only 14% of its total portfolio production.
Magnus Nysveen, head of analysis, Rystad Energy
It is hard to imagine a final ruling that will condemn oil companies for end use emissions.
E&P companies might one day be held liable for high or unnecessary emissions from the oil fields, but this is more difficult to happen for emissions by cars.
End user emissions should be more of a consumer’s responsibility. In my opinion this ruling has negligible chance to survive appeals.
It is not surprising however that we see this low court ruling occur in Netherlands, as the country’s public opinion is particularly sensitive to the climate impacts of the energy industry.
Lars Eirik Nicolaisen, Deputy CEO
It is unlikely but it may be a little early to conclude that the ruling will never stand and that E&Ps won’t at some point be made liable for their Scope 3 emissions.
After all, the E&Ps that have decided to go down a fullhearted transition pathway have invited their stakeholder set to measure the carbon intensity of their energy mix.
Given the mere fact that such a ruling now exists – albeit in a progressive jurisdiction like the Netherlands – is evidence in itself that a court of law can make these kinds of judgements.
On another note when it comes to Scope 3 emissions, although a very different market, there is some analogy to the tobacco industry, where producers became more liable for the choices of their customers.
