The end of an era

Published June 29, 2023
The writer is an expert on climate change and development.
The writer is an expert on climate change and development.

THE announcement by Shell to disinvest from Pakistan was no less than a bombshell for many Pakistanis. Hardly any other petroleum company has played a bigger role in the economy of the region in creating a market for fossil fuels than Shell since it started operations in the subcontinent in 1903. The company popularised the use of kerosene oil by using revered singers like Mohammed Rafi when advertising was possible only through radio during the 1950s, and when it was known as Burmah Shell. Its pioneering role, however, was seen to diminish steadily as it did not capitalise on opportunities to help the host country’s transition to renewable energy or net zero emissions.

The company has not been very forthcoming on the actual reasons for its decision, but at least three broad, intertwined motives can be discerned: a) performing in Pakistan’s challenging operating environment, b) internal corporate dynamics to address historical baggage by initiating disinvestments from various business lines and countries, c) global pressure to reinvent by diversifying its portfolio. Let’s take a look at these intertwined issues, one by one.

Challenging business environment

Shell’s flagship business in Pakistan has been mostly downstream: retail marketing, lubricants and aviation. The company is selling its 77 per cent stake together with its 26pc ownership of Pak-Arab Pipeline Co. It is believed to have been planning to leave Pakistan for years. But the timing of its announcement raises questions about the stability of the country’s economic landscape. It is also a reflection of the Pakistan’s own economic crisis and the unannounced ban on repatriating profits to headquarters due to an acute shortage of foreign exchange reserves. The exit could have a ripple effect on the economy, including job losses and reduced foreign investment.

Let’s not blame distortions in the Pakistani market alone for the multinational’s exit. The company is presently divesting from several other places too, including Russia and Nigeria and from its downstream operations in Australia and Brazil, despite a $40 billion windfall from the Ukrainian war.

Shell’s exit could have a ripple effect on Pakistan’s economy.

Historical baggage

Shell was perhaps the first major oil company in the world that started researching climate change as early as the 1970s but it has been observed that its findings should have been readily available to stakeholders and the general public. An internal 1986 study on The Greenhouse Effect warned of climate impacts “larger than any that have occurred over the last 12,000 years”. A Shell report in 1988 projected that carbon dioxide could double by 2030. The internal report acknowledged that the carbon dioxide concentration was mainly due to fossil fuel burning and deforestation, a finding that the Intergovernmental Panel on Climate Change reached over a decade later in its third assessment report in 2001.

Going by a US congressional investigation, it appears that the fossil fuel industry, comprising major oil and gas companies — Shell among them — was not prepared to share what it knew about climate change, while continuing to promote the use of fossil fuels. Further, the industry was accused of misleading the public by supporting climate-deniers such as the American Legislative Exchange Council and the American Petroleum Institute. According to a media report, the fossil fuel industry “perpetrated a multi-decade disinformation, propaganda, and lobbying campaign to delay climate action by confusing the public and policymakers about the climate crisis and its solutions”. The global climate agenda became divisive and lost several years of collective global action.

Internal dynamics

In 2021, a Dutch court ruled that Shell must decrease its carbon emissions by 45pc by 2030. It was a landmark case, as it was “the first ruling ordering a company to reduce its emissions in line with the Paris Agreement”. Friends of the Earth and other co-plaintiffs argued the company’s carbon reduction target was not ambitious enough, posing a threat to the environment. The company has acknowledged its responsibility for reducing emissions even if it has filed an appeal against the verdict.

In Pakistan, it avoided court proceedings in 2001 when it pulled out of a joint venture planned for the exploration of oil and gas in the Kirthar National Park.

Criticised for the amount of carbon emitted by its operations, it faces pressure to invest more in clean energy; in fact, it is, presently, in the midst of its largest overhaul yet. The rapid uptake of electric vehicles, long-life batteries and other technology innovations pose threats to downstream and retail businesses. It is now preparing to expand its low- or no-carbon businesses. Disinvestments, as in Pakistan, are probably part of the roadmap.

Going forward

Shell’s approach to reducing its carbon footprint includes the growth of its low-carbon businesses, particularly solar and wind energy, biofuels, hydrogen, carbon capture and storage, and nature-based offsets. They all reduce reliance on fossil fuels, the backbone of Shell’s businesses. These are precisely the areas where Pakistan is presently seeking investments as per its Nationally Determined Contributions (NDC) and national energy policies. But, as two sides of the same coin, Pakistan was unsuccessful in convincing Shell to invest here and, conversely, Shell has not found Pakistan’s market mature or large enough to make investments in these areas. Shell must have also reviewed the investment opportunities in sectors of its interest: aviation, shipping, road freight, and industry. It has obviously not taken seriously Pakistan’s investment needs for climate-smart development.

Its recent investments in renewable energy include expansion in order to build significantly large scale low-carbon businesses. In 2022, for example, it invested $1.6 billion in the Indian renewable power developer Sprng Energy platform. The deal will triple its current renewables capacity in operations. On the other hand, ambition in Pakistan was miniscule, limited to a demonstration project with Reon Energy to solarise a few petrol stations in Karachi. Does Pakistan have an NDC investment plan to offer opportunities for long-term upstream investments for downstream energy players? Or will we let them go, one after the other?

The writer is an expert on climate change and development.

Published in Dawn, June 29th, 2023

Opinion

Editorial

Saudi investment
Updated 10 Apr, 2024

Saudi investment

The state has to address barriers that stand in the way of attracting foreign investment, and create a pro-business environment.
Charity for change
Updated 11 Apr, 2024

Charity for change

PAKISTANIS are large-hearted people who empty their pockets at the slightest hint of another’s need. The Stanford...
World Bank’s advice
Updated 09 Apr, 2024

World Bank’s advice

The next IMF programme will be far tougher than any other Pakistan has embarked on in the past.
Middle East heat
09 Apr, 2024

Middle East heat

America must communicate to Israel that further provocations, particularly targeting sovereign states, will be unacceptable.
Killing fields
09 Apr, 2024

Killing fields

PERHAPS rankled by the daily flood of grisly news — murders, armed robberies, muggings and kidnappings — and...