Anglo-Dutch Shell announced an A$617 million ($418 million) offer for Australia’s ERM Power in August marking another move by the oil and gas major into the power sector. In March this year, Shell completed its rebranding of the UK’s First Utility as Shell Energy, having bought the electricity retailer in 2018. While still small in comparison with its forecast upstream spend of $54.6 billion from 2019-2025, Shell is starting to commit serious money to its power sector ambitions.
However, in one sense, rather than a radical means of addressing the challenges posed by the energy transition, this is old-fashioned vertical integration.
Shell’s production profile, as with most of the other oil majors, has steadily become more gaseous, a phenomenon accelerated by its huge $52 billion acquisition of BG in 2016. Low gas prices as a result of the ramp up in US LNG output, among other factors, are depressing returns on wholesale gas trading, but have improved gas-fired generation margins. Owning the entire value chain means dollars should be made somewhere along the line.
In the oil sector, the trend has most recently been in the opposite direction with oil companies splitting off their E&P functions from refining activities, a strategy which could begin to look somewhat less smart in a weaker oil price environment. Vertical integration may not be the most efficient business model, but it is a resilient structure in hard times.