Shell Plc is undergoing a significant transformation in its carbon offsets business, with plans to divest a majority stake in its portfolio of nature-based carbon projects. This strategic shift is driven by the company's CEO, Wael Sawan, who is prioritizing financial returns and reevaluating Shell's strategic positioning.
Shell's carbon offsets portfolio, launched in 2018, includes various projects aimed at generating carbon credits. The company had set an ambitious target to produce 120 million carbon credits annually by 2021, positioning itself as a market leader. However, due to current market dynamics, Shell is reassessing this strategy and considering divestiture.
The proposed sale of Shell's carbon projects reflects broader trends in the carbon offset market, particularly the decline in REDD+ credits used to combat deforestation. Recent investigations have raised concerns about the effectiveness of these projects, leading to increased scrutiny and a significant drop in spot prices. The average price for REDD+ credits has fallen from $12.50 in 2022 to approximately $3.60 this year, creating a challenging environment for carbon credit trading.
Shell's decision to sell its projects aligns with a consolidation trend in the sector, as demand for carbon credits fluctuates. The company is in discussions with private equity firms to explore options that would allow it to retain a minority stake while offloading the majority of its carbon projects. This strategic pivot reflects the shifting regulatory landscape and evolving buyer preferences, particularly in the Asia-Pacific region.
Since Wael Sawan became CEO in January 2023, Shell has been retreating from the upstream carbon market. The company had previously committed to investing up to $100 million annually in developing a pipeline of carbon credits, but this plan has been shelved as the focus shifts back to fossil fuels. This realignment is in line with a broader trend among oil majors as they navigate the complexities of the energy transition while balancing financial performance.
The structure of the potential sale is still under consideration, with one option being Shell selling its equity stake in the projects while continuing to purchase the credits generated. Another option is divesting the projects without a corresponding offtake agreement, which may be less attractive to potential buyers. The introduction of new quality criteria from the Integrity Council for the Voluntary Carbon Market is also influencing buyer decisions, adding complexity to the carbon credit landscape.
Industry experts suggest that Shell, along with other major players, may shift towards engineered carbon removal technologies, such as direct air capture, as these solutions become more cost-effective and scalable. The challenges in the carbon offset market highlight the need for innovation and adaptation as companies align their strategies with emerging regulatory frameworks and market demands. Shell's actions in this regard are likely to influence other major players in the energy sector as they navigate the complexities of carbon management and sustainability.