By Sarah McFarlane 

LONDON -- Royal Dutch Shell PLC said it would start reducing oil production, calling an end to a decades-old strategy centered on pumping more hydrocarbons as it and other energy giants seek to capitalize on a shift to low-carbon power.

Shell said Thursday its oil production had already peaked and it expects output to decline 1-2% a year, including from asset sales, reducing its exposure to commodity prices over the longer term. At the same time, the company said it would double the amount of electricity it sells and roll out thousands of new electric-vehicle charging points.

The strategy follows similar plans from rivals BP PLC and Total SE to reduce their dependence on fossil fuels while expanding in renewable power such as wind and solar, partly in response to growth in regulatory and investor pressure.

BP plans to reduce its oil-and-gas output by 40% in the coming decade. Over the same period, Total wants to reduce its sales of oil products such as gasoline and diesel by 30%, while increasing sales of natural gas, electricity and biofuels.

However, the pivot is seen by analysts as challenging because it requires investments in areas where major oil companies don't necessarily have a competitive advantage and that have lower returns. Renewables projects typically generate returns of around 10%, compared with the traditional 15% targeted on oil-and-gas projects.

As such, major oil companies' green ambitions have so far failed to ignite enthusiasm among investors. The share prices of Europe's three largest oil companies have fallen dramatically since Covid-19 sapped demand and sent oil prices lower, with Shell down 35% over the past year, BP 45% lower and Total down 24%. Shell shares traded 2% lower Thursday.

Shell sought to allay any concerns about its new strategy Thursday, saying fossil-fuel production would remain a material source of revenue into the 2030s, while reiterating its policy to increase its dividend by 4% each year.

"By accessing the enormous opportunities that the future of energy holds we will create the conditions for future share price appreciation," said Chief Executive Ben van Beurden. "We expect to radically transform Shell over the next 30 years."

Shell confirmed it would allocate around 25% of its spending, or $5 billion to $6 billion, to renewable energy and marketing -- which includes its gas stations and lubricants business -- up from 11% previously.

The company aims to sell 560 terawatt hours of electricity a year by 2030, double its current sales, but stopped short of setting targets for power generation. Shell sells much more power than it produces. This is similar to its oil-and-gas business, where Shell sells around three times as much of the fuels as it produces.

In recent years, Shell has expanded outside of oil and gas with acquisitions of businesses including U.K. power supplier First Utility, electric-vehicle charging company Ubitricity and battery firm Sonnen.

At the same time, it will invest $8 billion a year on oil-and-gas production and an additional $4 billion a year on its so called integrated-gas business, which includes liquefied-natural gas. The company will add seven million metric tons of LNG production capacity by the mid-2020s, including from projects already sanctioned in Canada and Nigeria.

European energy companies' plans to invest more in low-carbon power come at a time when they are still trying to reduce debt. Shell wants to cut its debt to $65 billion from $75.4 billion at the end of last year and targets annual asset sales of $4 billion to help meet its goal.

Write to Sarah McFarlane at sarah.mcfarlane@wsj.com

 

(END) Dow Jones Newswires

February 11, 2021 06:44 ET (11:44 GMT)

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