What next for oil giant Shell after £1 billion emissions payment and renewable cutbacks?

The FTSE-100 group, which remains a key player in the North Sea, said the charge was “related to timing of payments of emissions certificates” in Germany and the US. The London-listed company also said it expects profits in its gas business to be “significantly lower” in the fourth quarter than the previous three months, because of hedging contracts expiring.

Shell took a swathe of hedging contracts in 2022 to protect itself against a potential drop-off in Russian production after the invasion of Ukraine. Liquefied natural gas (LNG) production also dropped during the period.

The amount of LNG it expected to have produced fell to between 6.8 and 7.2 million tonnes, down from 7.5 million tonnes in the third quarter, it noted in its latest trading statement ahead of full quarterly figures. Shell, which has its North Sea headquarters in Aberdeen, said this was because of “lower feedgas” - the amount of raw gas used in the process - and fewer cargos carrying the product than in the previous period. The group is the world’s largest trader of LNG, the product which makes up a significant part of many countries’ energy supplies.

Meanwhile, the company said margins in its oil refining business remained at about $5.50 (£4.41) a barrel, after they fell sharply last year. Oil refining businesses such as Shell’s suffered a downturn in global demand last year across both consumer and industrial sectors. The growing prevalence of electric cars, combined with economic slowdowns in major economies including China, contributed to the falloff.

Mark Crouch, market analyst at investment platform eToro, said Shell was facing challenges with LNG and renewable investments amid market volatility.

“The oil giant’s chemicals and oil products division is also expected to report a decline in Q4, signalling a broader slump in its performance as it prepares to release earnings in the coming weeks,” he noted. “Additionally, Shell has announced that it is stepping back from new offshore wind investments. This move raises questions about the long-term viability of windfarms as a practical investment for the company’s shareholders, especially under the leadership of CEO Wael Sawan.”

He added: “Shell investors are no strangers to difficult times. The energy sector is notoriously cyclical, and this downturn is no exception. With political figures like Donald Trump continuing to champion policies that favour increased oil drilling, investors may be bracing for further downward pressure on oil prices, potentially extending the current slump.”

Russ Mould, investment director at AJ Bell, described the quarterly teaser as “disappointing”, casting a shadow over the wider utilities sector.

He said: “Shell’s leading position in liquefied natural gas is a key attribute which makes it stand out from its peers so news of reduced LNG production and volume guidance in the final three months of 2024 is disappointing for the market. The company’s usual teaser ahead of its quarterly results will have done little to whet appetites for the main event, with its trading business also in the mire and the timing of payments for emission certificates and an airline fuel duty payment in Germany hitting cash flow and working capital.

“These aren’t the kind of messages CEO Wael Sawan wants to be delivering to the market at a time when he is desperately trying to close the valuation gap with Shell’s US peers.”

Lebanese-Canadian Sawan, previously the company’s director of integrated gas, renewables and energy solutions, succeeded Ben van Beurden as chief executive at the start of 2023. Dutchman Van Beurden left behind a significant legacy at the energy major after close to a decade in the top job.

Under his leadership, Shell had to give up its “Royal Dutch” designation for the first time in more than 100 years as it scrapped its listing in the Netherlands. The headquarters of Shell also moved to London at the same time, forcing Van Beurden to leave his native country - his was one of only a handful of jobs that moved with the office.

But perhaps the most consequential moment of the chief executive’s time in charge was the promise that Shell would become a carbon net zero company by the middle of this century.

Richard Hunter, head of markets at Interactive Investor, said there was continuing evidence that Shell was “facing challenges” both as a trading company and as a listed stock.

“The renewables segment looks likely to remain as yet unprofitable,” he noted. “Given the current backdrop, fortunes for the unit remain under scrutiny, and either unproven technologies or simply unprofitable forays thus far are making progress difficult, while Shell’s decision to dial back on climate change friendly investments last year received a mixed response.

“As a stock, Shell faces the additional challenge of being in a sector which is the focus of some debate from an environmental perspective, with the ever-increasing possibility that some investors will be unwilling or unable to invest in the sector on ethical grounds.

“Of course, Shell’s shares are inevitably and inextricably linked to an oil price which has risen by just 0.5 per cent over the last year, and which spent much of that time at lower levels. That being said, the group’s diversity of operations across oil, gas, chemicals and alternatives regularly results in different areas of the business picking up the baton as others face more difficult times.”