Shell Malaysia: Navigating the energy transition in a challenging landscape
Mar 22, 2021
Shell Malaysia has undoubtedly played a big role in the development of the nation over its 130-year history in the country, especially from the perspective of its contribution to the domestic oil and gas (O&G) industry. Yet, it now faces a major hurdle — its transition to a net-zero emissions business.
The group ventured into Malaysia in 1891 selling kerosene in the Straits Settlements and drilled its first well in Miri, Sarawak, in 1910, leading to the first production of oil in the nation.
“It wasn’t even Malaysia yet back then,” says Shell Malaysia chairman Datuk Iain Lo.
The group also built the first refinery in the country and played a part in the development of both Miri and Bintulu, where it discovered gas. Back then, the two cities were small fishing villages, says Iain.
He adds that Shell introduced liquefied natural gas (LNG) to Malaysia and was a major driving force in the development of the local O&G industry, bringing in its knowledge and experience from other countries.
“We have always had a long-term view. We were never here thinking to make some money and move on to the next place,” says Iain.
“For example, we started with onshore drilling. We then continued to invest and look for broader opportunities within Malaysia, bringing in our technologies and expertise to venture offshore, the Baram Delta, and from there to Bintulu. Everywhere we went, we made sure to develop the communities there.”
Shell Malaysia is currently the largest independent oil producer in the country, producing 200,000 barrels of oil per day, as well as the largest gas producer in Malaysia, producing two billion cu ft of natural gas per day.
It has achieved several milestones over the years, including its position as the deep-water leader in Sabah, with Gumusut-Kakap coming onstream in 2014 and Malikai in 2016. Gumusut-Kakap was built entirely in Malaysia by Malaysian fabricators, whilst Malikai was Shell’s first tension-leg platform outside of the Gulf of Mexico. Together, these fields produced up to 225,000 bpd at peak production, and enabled Shell to share deep-water expertise with Malaysian energy companies and assist the government’s goal to create a deepwater industry hub.
It also set up the Shell Middle Distillate Synthesis (SMDS) plant in Bintulu, the first commercial gas-to-liquids (GTL) plant of its kind, delivering 0.5 tonnes of high-quality, ultra clean waxes every year that is marketed to 50 countries.
On the downstream side, the group has greatly expanded its retail network and introduced new fuels and lubricants in the country, including its line of V-Power Racing fuel, the only differentiated, premium fuel in the Malaysian market, and FuelSave95, which aim to give users more mileage. Shell is also rapidly increasing its range of convenience products and services to meet the evolving customer lifestyles, to make its customers’ lives easier.
It has a strong presence in the downstream segment, with 13 terminals, about 750 lubricant workshops, seven airport refuelling facilities and more than 950 petrol stations.
All in all, Shell Malaysia is very much a mini version of its parent company, the Royal Dutch Shell, given its significant presence locally, from upstream to downstream operations.
It has also made significant contributions to the community by developing local talent via the Shell LiveWIRE programme, which enables young people around the world to start up and run viable businesses.
Shell Malaysia also undertook the Shell Access To Energy initiative, which aims to provide a continuous supply of electricity from renewable sources for communities without access to energy by building the energy and economic resilience of these communities.
When the Movement Control Order (MCO) was first enforced amid the Covid-19 pandemic, it added to the list of headwinds that were already plaguing the O&G industry, such as the move by OPEC countries to cut production amid low demand for related products to support low crude oil prices.
“During the first MCO, our retail sales of fuel dropped to 10% of the levels at which we were selling pre-Covid-19. That was how bad it was. All our dealers were suffering, so we had to support them to make sure they didn’t go under,” Iain says.
The company’s staff in the upstream segment were also affected, as they had to be quarantined for two weeks before they could work offshore for another two weeks, meaning that they had to be apart from their families for a month at a time.
“We did as much as we could to support them, to ensure their families were well taken care of and that they could regularly communicate with them,” Iain says.
The challenges posed by the pandemic acted as a trigger for most companies to rethink their operations. In this respect, the Shell Group brought its energy transition strategy, “Powering Progress”, into focus.
The Shell Group has the goal of becoming a net-zero emissions energy provider by 2050, aiming to reduce its net carbon emissions to nil. Although its plan to reduce its carbon footprint has been in place for several years, Iain says the Covid-19 pandemic proved to be a “wakeup call” for the group as society expects a quicker transition to low-carbon fuels and renewable energy.
“Shell has always understood that, with the Paris Agreement, our business will need to make very significant changes towards providing lower carbon fuels. But Covid-19 has accelerated the desire of consumers and governments to have cleaner fuels sooner.
“I’m not really sure why the pandemic has had this effect — maybe because all economic activities ground to a halt and people could see how nice it was with no pollution in the air. The amount of carbon dioxide emitted also reduced significantly, which may have reinforced the causal linkage of economic activity with climate change. This shift in public opinion caused us to realise that we had to accelerate the transition.”
The group-wide strategy to reduce emissions can be summed up as a way to help the customers of Shell, and by extension Shell Malaysia, hasten their journey towards eliminating emissions.
Iain says there are four specific goals under the strategy: to generate shareholder returns; achieve net-zero emissions; continue to power people’s lives through its products; and create employment opportunities and support communities.
Shell Malaysia has already taken steps to reduce its carbon footprint, from simple achievable acts such as installing solar panels on more than 100 of its retail stations as of March 2021, to help reduce its demand for electricity, as well as using a greater proportion of solar energy for its offshore activities and using hydropower to power the gas-to-liquids (GTL) Shell MDS plant in Bintulu.
These are part of its strategies to reduce its Scope 1 and Scope 2 emissions, which cover emissions originating from its own operations.
It is also directing more focus on the production and use of gas — a much lower carbon fuel versus oil.
Shell Malaysia has found that the resources for sweet gas — uncontaminated gas, which does not contain carbon dioxide — is depleting, and it is now looking at producing contaminated gas in combination with technologies such as carbon capture and storage (CCS) to unlock this resource potential without adding to carbon dioxide emissions.
“This involves separating the methane from the carbon dioxide and injecting the contaminant into spent gas fields and locking it there. This will unleash the contaminated gas potential in Sarawak,” says Iain.
“These are the kinds of technologies we are looking at and to see whether we can bring in our expertise and technology into Malaysia.”
Meanwhile, the group is looking to address its Scope 3 emissions, which are generated by consumers using its fossil fuel products. About 85% of emissions is under this scope.
The strategies being employed by the group include offering its customers gas instead of diesel to power their generators and, subsequently, the possibility of offering renewable power.
Iain says Shell is also looking into biofuels for the transport industry, as well as other alternative sources of energy such as hydrogen.
Funding the transition
While the group’s goal of generating shareholder returns via its existing O&G business may seem counterintuitive to its ultimate goal of net-zero emissions, Iain says it is necessary, as the group has to generate capital to fund the energy transition.
It is important for Malaysia to exploit its hydrocarbon resources now, as there is a limited period for the country to do so, he says. Therefore, he believes it is incumbent on the nation to accelerate its exploitation of these resources, as the market may no longer want these resources in the next two decades.
“It is important today, while we have the infrastructure and players, to really go after the remaining reserves in the country and extract them to generate the revenues to fund the changes in the energy system. By changes, I mean electrification — how do we invest the money that we make in O&G in renewable power? How do we phase out coal by replacing it with gas, which is a much lower carbon fuel, and in the future replace that with renewables?” says Iain, adding that Malaysia has to think about its future energy requirements.
Shell Malaysia is looking more at value investments versus volume to ensure superior returns to fund its transition. The company is looking to repurpose its major refining and chemical sites to produce biofuels, performance chemicals as well as the use of more recycled materials in its products.
Apart from that, it is eyeing to grow its downstream business in the form of investments in e-mobility, renewable power and biofuels, as well as looking at how hydrogen can become part of the energy mix.
Fossil fuels will still be needed
Despite its zero-emission target, Iain points out that it is impossible — at this point in time, at least — to completely move away from fossil fuels, as many energy-intensive industries will still require these energy sources. “You cannot get rid of oil and gas altogether. There are sectors that find it very difficult to go fully electric. You cannot electrify big ships, planes, steel mills. These areas still require high energy intensity,” he points out, adding that there is also the requirement for petrochemicals to produce synthetic materials used on a daily basis, such as plastics and polyurethane.
To offset the emissions from the residual demand for O&G, Shell Malaysia is looking at investments in nature-based businesses, which could take the form of investments in conservation and rehabilitation of degraded rainforests. Iain highlights Sarawak as a good potential for this segment — not only can it produce more gas, but it also has vast reserves of forests that could become a revenue stream for Malaysia.
Outgoing chairman’s perspective
Iain has served the group for three decades in roles ranging from construction and field development, LNG and chemicals, to eventually serving as the vice-president for Asia Pacific new business development and Country Chairman of Shell Malaysia
He will be retiring from his post within the next month, but he says he will not be “doing nothing”, as that would be bad for the mind, and he will need to find a way to serve a purpose. He was hoping to travel, although the current pandemic makes it seem like that will not be possible in the next one to two years. In the meantime, he aims to serve other corporates in a non-executive director role.
Iain has been on the board of RHB Bank for the last six months, which he says has opened his eyes to the banking world. He hopes to be able to serve as a director in other sectors as well.
“Shell has been really awesome in giving me purpose. It has kept me going for 30 years,” he says, adding that the group has also contributed greatly to the community in terms of creating jobs and developing human capital in Malaysia.
He points out that the group has very much taken the approach of letting locals manage the domestic business, as 95% of its workforce comprises Malaysians. “That is one of the most important contributions that Shell has made — to develop and equip the people with the necessary skills to run the business. And we have seen many Shell executives go on to lead other companies in Malaysia.”
Looking ahead, Iain hopes that Shell Malaysia will be able to make the energy transition go smoothly and at an accelerated pace. While he notes that speed is not something large corporations are known for — he likens them to super tankers, which require three kilometres to get to a full stop from cruising speed and take a significant amount of time to turn — he hopes the reorganised group will be more agile, as there is an urgent need for more aggressive action as the pressure for a lower-carbon future continues to mount.
“Companies such as ours — which want to work with customers, industry players and governments — are the ones that I think will make this change happen, but we can’t do it alone. I’m hopeful that Shell will be able to move faster,” he says.
“Locally, I hope that we can find a way to make CCS happen in Malaysia, as it will help us in decarbonising the Malaysian LNG value chain.”
Asked whether he thinks humanity will be able to successfully address the issue of climate change, Iain seems confident that we will be able to do so, pointing out that humans “are very good at dealing with a crisis”.
Citing the Covid-19 pandemic as an example, he says if a pandemic of this scale had been mentioned to someone three years ago, the consensus might have been that it could not be dealt with. “In a crisis, when survival is at stake, mankind will act — not just alone but in concert.
“Climate change is a problem that doesn’t care about national borders and Covid-19 is also a problem that disregards borders. There isn’t yet a sense of urgency today on climate change, as we have yet to feel the pain, although our children and their families will.
“At some point, there will be an event that will hit everyone, which will trigger them to take action. They will know that we need to act now, and we need to act aggressively — be it an extreme weather event or something else. Whenever that happens, I hope it won’t be too late.”