June 2021

The last barrel

Reality versus la-la-land
Craig Fleming / World Oil

ExxonMobil received a wake-up call by shareholders, when a small activist investment firm, Engine No. 1., managed to capture three board seats and indicated they would push the company to diversify beyond oil and fight climate change. The loss of confidence was a blow to CEO Darren Woods, who had aggressively opposed the insurgents. The vote accentuates how vulnerable the industry has become, as governments demand an acceleration of a shift away from fossil fuels. It’s also a sign that institutional investors are increasingly willing to force corporations to actively participate in the transition.

BlackRock, the second-largest holder of ExxonMobil, voted for the three new directors. The firm said it was concerned about ExxonMobil’s strategic direction and that the new directors would bring a fresh perspective to the board. A major concern is ExxonMobil’s energy-transition strategy, considered by many shareholders to be well behind those of its European peers.

Full speed ahead. Investors have made it clear that the energy transition is going forward at warp speed, and there’s no turning back. Previously, environmental activists were limited to waving placards outside of annual meetings and to the odd shareholder proposal, inevitably rebuffed by management teams. However, in addition to the three ousted Exxon directors, Chevron shareholders voted for a proposal to compel the company to reduce pollution, and Shell was ordered to slash emissions faster than planned by a Dutch court.

These events have set a new precedent for the industry’s powerful executives, who have traditionally set their agendas with little need to take advice from shareholders on how to run their businesses. For much of the decade before the 2014 oil crash, energy companies were among the stock market’s best cash providers and the cornerstone of most major pension funds. But over the past decade, the U.S. shale boom and the climate movement disrupted the established supply-and-demand balance, and Exxon missed them both.

Besides being late to shale, the majors also failed to understand what the massive new supply meant for the global crude market. From 2008 to 2014, the world was moving from a perceived oil shortage to an abundance. But as fields in Texas were being revived by fracing, the majors continued to pursue capital-intensive projects in the Arctic and Canada’s oil sands. This damaged financial returns, but it also put ExxonMobil and its peers firmly in the crosshairs of a movement that was increasingly targeting corporate America. “The link between climate change and financial investments is undeniable,” said Aeisha Mastagni, a fund manager at California State Teachers’ Retirement System.

Whack-a-mole. While the environmental activist movement has been successful in targeting the majors, it has not yet solved the far bigger problem of tackling the world’s consumption of crude. Exxon, Chevron, Shell, BP and Total, together, produce less than 15% of global crude supply. Even if the majors retreat, other companies that are less environmentally attuned will step in to fill the gap, unless consumers are willing to make some hard choices about their lifestyles.

Green’s big problem—hypocrisy. A mind-boggling example of green’s naivete came into clear focus, when The North Face apparel company denied a Houston service company’s order for branded jackets, saying it does not support the oil and gas industry. Innovex Downhole Solutions CEO Adam Anderson said he was stunned by the reaction. Anderson responded by saying, “we recently contacted North Face to buy jackets with an Innovex logo for our employees. Unfortunately, North Face would not sell us jackets, because we are an oil and gas service company. The irony in this statement is NF jackets are made from the oil and gas products the hardworking men and women of our industry produce. Without hydrocarbons, there would be no ability to create the products NF sells.”

Demand will remain strong. The energy transition represents $14 trillion of uncertainty for upstream, according to a Wood Mackenzie report. Drilling for hydrocarbons is risky, but the uncertainties have been tempered by a single tenet—that demand would continue to rise indefinitely. However, as the energy transition gathers momentum, that belief has come into question. Oil demand may continue to grow for another decade or more. Conversely, if the world acts decisively to limit global warming, oil demand and prices might fall later this decade. While this range of outcomes has major implications for the industry, in either scenario a significant amount of upstream value remains to be captured. “The industry finds itself having to supply oil and gas to a world in which future demand—and price—are highly uncertain. But the world will still need oil and gas supply for decades to come, and the scale of the industry will remain enormous.”

Reality vs la-la-land. In May, IEA stated, “ending new oil and gas exploration today is the only viable climate path to achieve net-zero carbon emissions by 2050.” The world’s largest producers quickly rejected this call for a rapid shift away from oil and gas, warning that starving the industry of investment would harm the global economy. If we followed IEA’s controversial road map, “the price of oil would skyrocket to what, $200?,” suggested Russian Energy Minister Alexander Novak. Novak’s warnings were echoed by the energy ministers of Qatar and Saudi Arabia, who said they will keep expanding their oil and gas facilities and warned others against the consequences of starving the industry of cash. The euphoria around the transition to clean energy is dangerous, said Qatar’s Saad Sherida Al Kaabi. “When you deprive the business from additional investments, you will have large spikes in prices.” The Saudis dismissed IEA’s road map, calling it a “la-la-land” scenario. When asked about oil’s future, authorities said the kingdom is increasing its production capacity, while Qatar recently launched its $29 billion expansion of LNG facilities.

About the Authors
Craig Fleming
World Oil
Craig Fleming Craig.Fleming@WorldOil.com
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