May 31, 2021

“ExxonMobil and Its Rivals Learn They Can’t Ignore Climate Activists”: 

Reasonable Investment Strategy, Misguided Zealotry, or Something Else?

This May 27 article in Texas Monthly described an oil industry “smackdown of cinematic proportions”.  Over a single one-day period:

  • A judge ordered Shell to “respect human rights” by more than doubling (from 20% to 45%) its commitment to reduce energy emissions by 2030;
  • Chevron’s shareholders pushed through a resolution to reduce customer emissions as well as its own; and
  • Activist investors captured two board seats at ExxonMobil.

Other oil industry firms have faced similar pressure.  And earlier in May, the International Energy Agency (IEA) opined that climate change cannot be stopped unless investment in new fossil fuel projects also stops.

What are we to make of all of this?  There are many factors at work, some more visible, some more opaque.  But let’s start with two pressure points that came together about 6-7 years ago – fracking and the Paris Climate Agreement.

With fracking, the US became the largest oil and gas producer in 2014, flooding the market.  Prices dropped 40%.  Many investments made in the pre-fracking era – when oil and gas prices were higher – were written down, and others now yield poor financial returns.  Investors have a right to be edgy.  And yet, notwithstanding BP’s new strategy for a “greener” business model, BP’s stock price response has been lackluster.  Investors appear skeptical about whether an industry anchored in the 20th century can compete successfully via yet-to-be proven skills in renewables and services.   

And then there’s the 2015 Paris Climate Agreement.  In a last-minute communique, government leaders vowed to work together to hold the increase in global warming to 2 degrees Celsius above pre-Industrial levels.  A stretch target of 1.5 degrees was also included.  The initial 2015 commitments of the signatories would never have yielded 2 degrees, let alone 1.5 degrees.  But somehow over the years the conversation morphed, so that for many, 1.5 degrees has become a red-line, beyond which lies potential catastrophe for the planet. 

Between 2015 and 2019, CO2 emissions continued to rise and did not correlate to a 2-degree target.  Emissions will rise again once economies recover from the pandemic.  Why?  Because it’s easier to set aspirational targets than to change the huge and complex global energy system.  So, activists have a right to be strident.  Their stridency has led to more government target-setting, to up the tempo on reducing carbon emissions to net zero.  (Net zero would be achieved if any residual emissions were fully offset by other activities, like planting trees.) 

Where does this leave us?  Without a doubt, Shell will appeal and likely win.  Chevron will find a way to “deal with” the latest shareholder resolution.  And like many firms before them, ExxonMobil now has a couple of activist board members inside the tent.  None of these firms would have wished for these outcomes, but they have not suffered mortal wounds.

But if I take a couple of steps back from this industry-investor-activist bun fight, I see four things in tension:

  1. Consumer demand:  Despite the statement from the IEA, it is hard to see countries reducing their own oil and gas supply before they reduce consumer demand.  While demand for oil and gas may be flat or declining in the US and Europe, it is nowhere near zero.  And in the decades ahead, global oil and gas demand is on course to continue to increase as the rest of the world adds more people and as economies improve. 
  2. Decarbonization:  Based on reliable sources, the 2-degree target is no longer achievable.  Perhaps 2 degrees might have been achievable if action had begun with the Earth Summit in Rio de Jannero in 1992 – but no longer.  But if we can’t stop 2 degrees of climate change, we surely should try to stop 3 degrees of change.  And the “business-as-usual” approach to decarbonization will not deliver a 3-degree maximum.  So, we really do need to change the course of global fossil fuel emissions.
  3. Customer relations:  The relationship between the general public and the oil and gas industry has never been warm and cuddly – and it will probably get worse.  The activist mantra now equivalates selling gasoline to selling addictive drugs, where the “user” in each case is an innocent.  ExxonMobil in particular is vilified by progressives.  In this vortex of rising emissions, the need to reduce them, and the public need to find someone to blame and “pay up”, the oil and gas industry is very much on the back foot.
  4. Geopolitics:  Any gap in the oil and gas majors’ ability to provide oil and gas will be quickly filled by others, in particular, OPEC and Russia.  China is a major buyer.  As long as the US and Europe are consuming oil and gas, their governments should keep the big picture in mind.

The oil and gas majors have assets, skills and technologies that could play a very important part in the global energy transition.  But whether they can innovate their way through the many challenges that lie ahead remains to be seen.

Whether the general public will be able to come to terms with the notion that climate change can’t be avoided completely, but perhaps can be curtailed and adapted to, is another matter altogether.

David C. Nagel