The war to win over ethical investors in Shell's North Sea oil revolution
Shell’s ethics have faced constant scrutiny in recent years. The energy giant recently attracted stinging criticism when it went bargain-hunting for cheap Russian oil -- so much so that it apologised and promised to stop any subsequent purchases. But long before this outrage, it had been battling revolts from environmental activists and shareholders alike.
Climate change campaigners have shattered or glued themselves to the doors of its London headquarters. Graffiti on the building has read “Shell kills" and “lies, lies, lies”. As the world shifted towards renewables in a major energy system shake-up, the City has also increasingly focused on ethical investing.
Now the spotlight is once again on Shell as it rethinks its controversial Cambo project - an oil field off the Shetland Islands that could produce more than 170m barrels of oil equivalent.
Not only will the FTSE 100 have to face down activists, but - perhaps more importantly for its future prospects - must win over the backing of investors in its North Sea revolution.
The U-turn on Cambo comes just three months after Shell pulled the plug on its investment, which had become a lightning rod for campaigners calling for an end to new fossil fuel projects.
Nicola Sturgeon, Scotland's first minister, had openly opposed the scheme, reiterating concerns on Tuesday.
Shell will be hopeful its decision to reconsider Cambo won’t trigger an ethical, social and governance (ESG) storm among shareholders, given the current political environment.
Russia's invasion of Ukraine has put further pressure on high oil and gas prices and Boris Johnson has called for the UK to reduce its reliance on foreign imports. Shell's top investors say they back the rethink.
“Investors who are not holders in Shell will look at this and think ‘typical oil company’. But this is a different investment environment than it was a month ago," says one top 10 shareholder.
"Having a domestic project is better than throwing yourselves at the mercy of others. We’re not in the same world that we were in two months ago."
Another top ten Shell shareholder agreed, arguing that “energy security is now as much of a live issue as decarbonisation right now" and investment in Cambo is not a red line “if it is well explained.”
These views reverberate across the City. Veteran investor Richard Buxton, a shareholder in Shell who works for Jupiter Asset Management, argues that one of the consequences of the Ukraine war is “the degree to which energy security matters more now than the net-zero zeitgeist.”
“I’ve been warning for months that the net-zero ESG dash for renewables and dissing of hydrocarbons was sleepwalking us into an energy crisis and here we are,” he says, making clear that this is his personal view.
Yet after years of shying away from the oil and gas sector as climate concern and shrinking returns played their part, many City shareholders are on the fence.
One longtime Shell investor admits he is nervous of this escalating from small repositioning in light of current events, to "hey, let's forget Cop26 and burn instead".
They add: "It's a difficult pill to swallow. Shell needs to be careful that it doesn't look like it's taking advantage of this situation.”
But with soaring oil and gas prices and energy security rising up the agenda, that equation is starting to shift.
Fund managers are likely to lose out this year if they do not hold oil and gas stocks, while energy security is a compelling argument when it comes to ESG. The shift in tone from the Government is also starting to give industry more confidence to spend on new projects, in turn encouraging investment.
Nathan Piper, head of oil and gas research at Investec, says there has been an "incremental shift" towards the sector over the course of the last year, particularly as oil prices rise.
"People realised that these companies would make good returns, they didn't have very much exposure, the Covid recovery plays stopped working,” he says.
"And because interest rates are going up, tech names are going down and bank stocks and energy stocks are going up."
The greater focus on energy security is helping the shift in sentiment, he says, adding: "Clearly, having an oil and gas asset in your fund requires more explaining than some."
Piper stresses the renewed interest in fossil fuels is not coming at the expense of investment in renewables. "Definitely not," he says. "Whereas before it was a binary choice, now it's more a question of [doing] both."
Investment across the energy industry as a whole has been insufficient in recent years, helping to produce the high prices currently being felt by households and businesses.
Rob West, founder of Thunder Said Energy research consultancy, argues that the shift to cleaner energy is more difficult when energy is in short supply - adding an extra social responsibility dimension to the case for investing in oil.
"Thus you could even – albeit debatably – now make the case that lower-carbon, responsibly produced oil, in geopolitically friendly countries, should be considered an ESG investment, where it can save the world from the cruel consequences of steep energy under-supply," he said in a recent note.
However, West cautions he does not expect the outlook to change too quickly for investors who have rushed to exit fossil fuels in recent months.
"I think it's going to take a bit longer," he says. "If a company has announced very publicly that they are divesting from certain industries, it's quite an uncomfortable path to come crawling back."
Oil and gas bosses, meanwhile, are feeling relatively positive about the shift in tone from investors and Government.
One North Sea oil and gas boss said recently: "It's unprecedented. What we're seeing right now is a really intelligent debate playing out. I think everyone is realising security of supply is essential.
"We're really pleased to be part of the answer rather than part of the problem."
Another one said: "After having no friends for a long time, the industry is back to talking about investment.
"If you can develop domestic oil and gas and use them responsibly, why wouldn't you?"
