A peculiar theme park in the Hague celebrates the history of the Netherlands through a series of miniature models. The Madurodam features little canals, old-fashioned windmills, tiny tulips and, amid it all, an homage to Royal Dutch Shell, the oil giant that is the biggest company in the country and, by revenue, the second largest publicly traded oil-and-gas company in the world. There’s a Shell drilling platform, a Shell gas station and a Shell natural-gas field, complete with a drilling rig. The display is at once odd–energy infrastructure in a children’s theme park–and entirely fitting: Shell has been, for decades, one of the most powerful players both in Dutch politics and on the global economic stage.
But that could soon change. As concerns grow over the existential challenges posed by climate change, Shell must grapple with its own existential crisis: How should a company that generates most of its profits by serving the world’s enormous appetite for oil navigate a long-term future in which shifting political and economic tides threaten to make fossil fuels obsolete?
The pressure to abandon oil and gas is already in force. In recent years, protesters have swarmed Shell’s headquarters; advocates representing 17,000 Dutch citizens have sued the company; and powerful investors successfully coerced executives to say they will reduce emissions. In 2015, countries around the world promised to aggressively tackle greenhouse-gas emissions, in order to meet the target laid out by the Paris Agreement: goals that require buying and burning significantly less oil and gas.
Shell CEO Ben van Beurden has a bird’s-eye view of the situation from his corner office at the company’s global headquarters in the Hague. “We have to figure out what are the right bets to take in a world that is completely changing because of society’s concerns around climate change,” he says.
Projections from energy companies show demand for oil could peak and fall in the coming decades; some outside analyses suggest demand for oil could plateau as soon as 2025. Markets are already jittery about the industry: energy was the worst-performing sector on the S&P 500 index in 2019. In 1980, the energy industry represented 28% of the index’s value, according to the Institute for Energy Economics and Financial Analysis (IEEFA). Last year, it represented less than 5%. The shift away from oil looms so large that Moody’s warned in 2018 that the energy transition represents “significant business and credit risk” for oil companies. The heads of the Banks of England and France said in an op-ed that any company that does not change strategically to the new energy reality “will fail to exist.” On Jan. 14, Larry Fink, founder and CEO of investment giant BlackRock, wrote in an open letter that “climate change has become a defining factor in companies’ long-term prospects.”
As oil flirts with the prospect of decline, energy executives are at odds over what to do. Some firms, like ExxonMobil, are positioning themselves to squeeze the last lucrative years from the oil economy while arguing to shareholders that they will be able to sell all their oil. Shell and a handful of others are beginning to adapt.
Under van Beurden’s leadership, Shell is charting a path that will allow it to continue to profit from oil and gas while simultaneously expanding its plastics business and diversifying into electrical power. By the 2030s, the 112-year-old fossil-fuel giant wants to become the world’s largest power company. As part of this strategy, Shell has worked to present itself as environmentally friendly. Last year, it committed to reduce its emissions by as much as 3% by 2021, and by around 50% by 2050, tying its executives’ compensation to the cuts.
Shell’s moves earned some applause among environmentalists, but the Intergovernmental Panel on Climate Change, the U.N.’s climate-science body, concluded in 2018 that to keep temperatures from rising to levels that would bring a wide range of catastrophes, countries must halve their greenhouse-gas emissions by 2030 and hit net-zero emissions by 2050. That would mean more than incrementally reducing emissions; it means keeping vast reserves of oil already discovered in the ground.
Van Beurden’s strategic response shows that years of political and economic pressure–especially from governments and investors responding to a sustained public outcry–can push even the most powerful interests to change. Whether climate activists can harness this mounting pressure to compel Shell and other oil companies to transform the global energy economy may be the weightiest question of our time.
Executives at Shell knew decades ago that burning fossil fuels would cause the planet to warm, and that once climate change became a global issue, their firm would need to change. Last year, I sat down with van Beurden for a wide-ranging interview and asked him how he felt about “Shell knew,” the activist mantra that accuses the company of failing to act on climate change despite knowing the consequences. He was sanguine: “Yeah, we knew. Everybody knew,” he said. “And somehow we all ignored it.”
In the 1990s, he explained, Shell publicly acknowledged climate science and said the world needed to act to combat the problem. But at the time, neither governments nor consumers seemed too concerned about emissions, and the demand for oil was growing like gangbusters to fuel a global economic expansion. So the company dutifully responded to market demands: it produced and sold oil to turn a profit.
Nearly three decades later, Shell’s business model is shifting by the same market-driven calculus. Despite advertising that depicts the oil giant as environmentally friendly, its decision to reduce reliance on oil is not born of benevolence. It’s reacting to market forces. A 2019 McKinsey report predicts that declining gas consumption in the transport sector, because of factors like fuel efficiency and electrification, could lead oil demand to begin decreasing in the early 2030s. “The future of energy needs to evolve as something else,” van Beurden says. “And we find a role for ourselves in it.”
The shift away from oil is not just a macroeconomic calculation. In 2018, Climate Action 100+, a powerful group of global investors that now represents $41 trillion in assets, delivered an ultimatum: either Shell committed to short-term emissions-reduction targets, or it risked losing the support of some of its largest shareholders. While Climate Action 100+ held little formal power over Shell, the investors could wreak havoc within the company by opposing management in shareholder votes, a process where shareholders can force management to take specific actions. In an extreme case, the investors could ditch their Shell stock–which would undermine share prices, tank the company’s valuation and drag down executive pay. “Politics might be pretty confused and babbling at the moment,” says Anne Simpson, director of global governance at CalPERS, the largest public pension fund in the U.S., and a steering-committee member at Climate Action 100+. “But money talks.”
Meanwhile, a Dutch-led group of investors known as Follow This actually went ahead with a series of activist shareholder resolutions that, if they had garnered the support of 75% of shareholders, would have required the company to take aggressive climate action. While the resolutions failed, the threat was real.
By December 2018, Shell relented and, a few months later, made the commitment to reducing emissions as much as 3% by 2021. Significantly, the commitment included end-use emissions: the company was agreeing to take responsibility not only for its own operations, but also for how consumers use Shell’s products. The activist investors claimed victory. “The only reason Shell has made this leap forward is because investors started supporting our resolution,” Follow This founder Mark van Baal told me.
Shell’s public commitment was part of a broader rebranding effort. For decades, Shell and other oil-and-gas companies portrayed themselves to consumers as essential to modern life. Their products power your car and warm your house. But over the years, that image has soured. The 2010 BP oil spill and a series of journalistic exposés of the industry’s misbehavior stole headlines. Shell faced reports of corruption in Nigeria, where it has significant drilling operations, including its alleged complicity in government human-rights abuses. Organizers say that in September 2019, more than 7 million people marched around the globe, skipping school and work to demand that their governments take action to reduce greenhouse-gas emissions. The U.K. declared a climate emergency and prominent members of the U.S. Congress called to eliminate the country’s fossil-fuel emissions by 2030. In July, the head of OPEC, the oil cartel that in 2018 accounted for more than 40% of the world’s crude-oil production, called climate activists “the greatest threat to our industry.”
Widespread public criticism of Big Oil is perhaps especially damaging to Shell. Unlike many of its competitors, Shell purchases much of its oil from other companies, then slaps the Shell brand on it, rather than digging the stuff out of the ground itself. That means that its consumer reputation matters more than, say, Occidental Petroleum’s. Shell also faces scrutiny as a Netherlands-based company. While U.S. firms like ExxonMobil contend with a relatively conservative political environment in Texas, Shell is headquartered in the Hague, a city where you’re more likely to get hit by a bicycle than a car. In Amsterdam, 40,000 people took to the streets last spring to demand action on climate change, and some protesters carried signs with a version of the Shell logo fashioned into a middle finger. In London, protesters demonstrated outside Shell’s offices, graffitiing the walls with slogans like crime scene and Shell kills.
“Their own company is built on the death and destruction of nature and of people all around the world,” says Farhana Yamin, a lawyer turned activist who glued herself to the cement outside Shell’s London headquarters last April. The National Theatre in London dropped Shell as a sponsor in October, just as it declared a “climate emergency,” and the Dutch branch of Friends of the Earth is suing Shell for reneging on its “duty of care” obligation under Dutch law. “All of these initiatives add to the pressure,” says Freek Bersch, a campaigner at Friends of the Earth Netherlands.
Van Beurden certainly feels the heat. In recent regulatory filings Shell listed its “societal licence to operate,” industry lingo for how society views the company, among its key concerns. Shell executives now need “to ask ourselves more questions than just, ‘Hey, is this legal or not?'” van Beurden says. They have to consider how society sees their brand.
To witness exactly how Shell is changing, I visited one of its biggest ongoing investments: a chemical facility outside of Pittsburgh estimated to cost $6 billion. When it’s completed, the nearly 400-acre site will churn out more than a million tons of polyethylene every year, the base for a host of plastic products that may become anything from packaging to toys to medical devices to car parts.
Activists describe the facility as an environmental nightmare. Studies have found plastic in tap water, in food products, and in the bellies of sea birds and whales. And plastic production is a significant driver of climate change. The chemical sector is responsible for 18% of industrial carbon-dioxide emissions, according to a 2018 report from the International Energy Agency. Emissions are expected to grow 30% by 2050. But, for Shell, the investment is emblematic of its future business model. As the company rethinks its business, it plans to expand in plastics.
Shell’s other big bet outside of oil is natural gas, which is also controversial. When burned, natural gas produces less carbon than oil or coal does, but it’s still much more polluting than renewable sources, like solar or wind. But Shell is all-in: in 2016, the company maneuvered a $53 billion takeover of BG Group, an oil-and-gas company that focused on liquefied natural gas (LNG), and two years later Shell announced it would fund a $31 billion LNG-export terminal in Canada along with other partners. Shell is widely known as one of the world’s leading natural-gas producers. The company argues that natural gas is necessary to back up clean-energy sources like wind and solar and to feed growing demand for energy in the developing world.
The company’s least contentious area of change is its investment in the power sector, delivering electricity to homes and businesses. While the power sector is widely seen as essential to reducing emissions, critics point out that it’s a tiny portion of Shell’s portfolio. Shell is now spending up to $2 billion a year building out its capacity to supply electricity–just a sliver of its roughly $25 billion capital expenditure, which is predominantly spent exploring and drilling for oil.
But Shell is rethinking its oil business, too, in recognition that its most expensive drilling ventures won’t work in the future if oil demand slows. In 2015, it ended its effort to drill in the Arctic, and in 2017 it sold off billions of Canadian oil-sand assets. Meanwhile, Shell’s total oil reserves have slowly declined compared with its competitors’. In December 2018, ExxonMobil had more than 17 years of oil reserves stored, BP had nearly 15 and Chevron more than 11, according to Bloomberg data. Shell maintained only 81/2 years of reserves.
Analysts say it’s too early to tell whether Shell’s strategy to reduce reliance on oil will pay off for shareholders in the long run. Last year, Shell, while continuing to pay large dividends, bought back stock, helping maintain its share price. The maneuver kept the company’s stock valuation roughly level, but it’s hardly a workable long-term strategy. Across the sector, companies “have to figure out who they are in this changing market,” says Tom Sanzillo, director of finance at the IEEFA. “They are not the profit center that they used to be, and they probably never will be.”
The viability of sticking with oil, even as major world economies promise to move away, is uncertain. Both ExxonMobil and Chevron are staying the course, hoping to outlast their competitors. But Shell and others are moving to adapt. BP, for instance, has also invested in natural gas and power, while ConocoPhillips has prioritized “short-cycle project times” to help it stay economically competitive. Occidental has dropped money into a method of drilling that allows it to store CO2 in the ground, a bet that it can offset some of the regulatory costs of CO2 emissions within its own operations. And in December, the Spanish oil giant Repsol committed to being carbon-neutral by 2050 and wrote down many of its oil assets on the grounds that their value will diminish as oil fades.
Meanwhile, the landscape for the planet remains bleak. To keep average global temperatures from warming more than 1.5°C above preindustrial levels, oil companies would have to agree to keep trillions of dollars of oil assets in the ground. So while Shell and others are taking steps in the right direction to reduce total emissions, they are still barreling into a catastrophically climate-changed future. “Shell is doing a lot of the right things,” says a senior energy official, who asked to remain anonymous to speak freely. “The question is: What award do you get for being the best-painted deck chair on the Titanic?”
Last spring, Shell announced that it was leaving American Fuel & Petrochemical Manufacturers, an influential oil-industry trade lobby. The group’s position on climate change, Shell said, was incompatible with its own. Shell cited AFPM’s lack of support for the Paris Agreement and for carbon pricing.
The news made a splash. Shell appeared to be firing a shot across the bow to other powerful lobbying groups: the politics on climate change is shifting. Get with the program or get left in the dust.
It was the latest in a series of similar moves. In recent years, Shell, as well as Exxon and BP, left the American Legislative Exchange Council, a conservative political group, over its stance on climate change. In 2014, Shell and other major global oil companies convened to form the Oil and Gas Climate Initiative to fund clean-energy ventures, and in 2017, a consortium of global Fortune 500 companies, including Shell, Total, ExxonMobil and BP, joined with a handful of green groups to launch the Climate Leadership Council to advocate in the U.S. for a carbon tax that reflects “the conservative principles of free markets and limited government.” A related lobbying group has spent several million dollars lobbying Congress for the proposal. Critics largely dismiss these efforts as too little, too late. They question the companies’ sincerity and suggest they may abandon their support when push comes to shove. And, given the scale of the challenge, many argue that the time has long passed for incremental initiatives.
But given the central role the oil-and-gas industry plays in both politics and the global economy, it’s hard to imagine the world tackling climate change unless the industry either loses its political power or stops roadblocking climate solutions. The rise of the oil industry is intrinsically intertwined with the rise of modern capitalism and the 20th century market economy. Oil provided the resources to power the near nonstop GDP growth of the postwar era. That history offers the modern oil industry immense political power, which it has used to block any legislation, including climate initiatives, that would curb its profits. In particular, Big Oil has spent decades funding campaigns to discredit the science linking greenhouse-gas emissions to warming and later spent millions more on messages that downplayed the catastrophic significance of climate change. For the most part, they have been successful both in blocking bills that would have curbed emissions and in securing government support for their business. Senator Sheldon Whitehouse (D., R.I.), who wrote a book on corporate influence in government, told me he doesn’t “think there’s ever been such political might assembled on one issue in the history of the Congress” as oil-and-gas interests fighting climate-change regulation. Globally, fossil fuels receive roughly $5 trillion annually in government subsidies, a figure that includes the cost of environmental damage caused by industry that’s left to everyone else to clean up, according to a 2019 International Monetary Fund paper.
But if Big Oil’s roots are deep, belief is growing across the globe that the industry’s untouchable status needs to end. Beyond activists, public opinion in the U.S. continues to turn against fossil fuels. According to a 2019 Gallup poll, 60% of U.S. adults, including the vast majority of Democrats and a large share of Republicans, support policies aimed at reducing the use of fossil fuels. Senators Elizabeth Warren and Bernie Sanders, both of whom are polling at the top of the Democratic presidential primary, have promised to ban fracking–a move that (though unlikely) would transform the industry overnight. And, across the Atlantic, a Green Deal in the E.U. unveiled late last year proposes, among other things, to create a new tax on imports that could hit oil companies. Even the Shell display at Madurodam, that strange miniature theme park in the Hague, has been condemned by activists.
Basic economic factors also loom large. This year, analysts expect that many overleveraged oil firms in West Texas will likely go bankrupt, and those that stay afloat will face withering headwinds. Production of low-cost shale oil means some established companies will need to continue to reassess their portfolio to turn a profit. Meanwhile, both geopolitical tensions in the Middle East and disagreements over trade continue to rattle the industry: global operations require safely and efficiently moving vast amounts of oil across borders.
Despite the gathering momentum to wean the economy off fossil fuels, we’re not there yet. Analysts predict oil will continue to dominate the global economy into the early 2030s. And even as this transition takes place, Big Oil will likely continue to wield outsize political influence. In the U.S., the coal industry is a shadow of what it once was as companies struggle to turn a profit, but the Trump Administration continues to work on behalf of its barons.
Oil executives would, at any rate, prefer to avoid coal’s fate. In his office in the Hague, van Beurden considers the uncertainty facing his company over the next decade: souring public perception, shifting consumer behavior, the risk of becoming activist investors’ next target, political leaders’ bold promises to dramatically reduce emissions. In this environment, van Beurden says, companies like Shell must be ready to adapt. “It’s the time we live in,” he says. “I have to find a way to make the most of that.”
This appears in the January 27, 2020 issue of TIME.
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