- Oil companies are facing pressure from western societies to reveal how they intend to contribute to societal goals of net zero carbon emissions by 2050.
- In many parts of the energy chain, cleaner energy is more costly and that’s the challenge many companies face.
- Government policy is an important tool that can influence the rate of change at oil companies and alter consumer demand patterns.
After surviving a steep collapse in oil prices in 2020, major oil companies are being pressed by louder calls to figure out their contributions to societal goals of net zero carbon emissions by 2050.
In recent months, activist shareholders led by hedge fund Engine No. 1 elected three new members to the board of Exxon Mobil; Royal Dutch Shell was ordered by a Dutch court to reduce global net carbon emissions by 45% by 2030; and Chevron shareholders voted in favour of the company cutting its total greenhouse gas emissions. (As a reminder, net zero refers to the balance between the amount of greenhouse gas produced and the amount removed from the atmosphere.)
Clearly, Western society is voting for lower emissions. That said, the path to reducing carbon emissions remains somewhat opaque and in the interim, society will need hydrocarbons for transportation, energy, chemicals, plastics and lubricants.
As ‘Big Oil’ faces unprecedented structural and societal pressures, we spoke with two of our equity oil analysts to get their views on recent developments and their thoughts on some potential implications and outcomes in the short and long term.
What do these latest developments tell you?
Darren: There's this incredible tension in the world right now, primarily taking place in Western societies. We want affordable energy, and we also want clean energy. Sometimes you don't have to make a choice - for instance, onshore wind and solar are both affordable and clean. But in many other parts of the energy chain, cleaner energy is more costly.
And as costs escalate, so do the challenges. This is possibly less true for relatively wealthy regions, but for the global economy as a whole, that's a real tension. All these companies are trying to walk a fine line, to varying degrees. You have the European majors that sit at the epicentre of this and have solid plans to try and work with society to decarbonise. The major US oil companies have been less proactive.
I would be a huge proponent of a carbon tax that sets a price on carbon. I think that would help level the playing field. Right now, we are dealing with a byzantine set of subsidies and regulations and different sets of risks.
BP, for example, is moving aggressively into renewables, setting up the possibility that the company may not make good returns on those investments. Chevron and Exxon Mobil, on the other hand, have been less willing to move into what have been so far unprofitable areas of alternative energy, but they might run the risk of society saying that is just unacceptable.
And if the Royal Dutch Shell court ruling is an example, companies are being asked to take action to reduce emissions ahead of changes to existing laws and policies. It means that they will have to reduce their carbon footprint – both in emissions and in carbon intensity – at a more rapid pace.
All three equity units at Capital voted for the activist shareholders to join the Exxon Mobil board, and it was widely supported by most asset managers. What is that telling us?
Darren: It is as much about the transition to a business model emphasising sustainable energy sources as it is about profitability. The two have become inextricably linked. A company cannot have industry leadership and a sustainable bottom line if it does not have a long-term, strategic and well-articulated plan for investment in lower carbon energy.
Craig: Exxon Mobil shares have been under pressure for several years. I supported the slate of new directors, but I also believe that the successful action of the activist fund had to do with more than just climate change. Exxon’s financial performance has lagged in recent years, resulting in increasing debt, credit downgrades and questions about its ability to sustain the dividend.
What does this mean for legacy oil assets?
Craig: We’ve already seen several years of reduced investment by the oil majors in their legacy businesses and demands placed on many of them to divest certain fossil fuel assets.
One ramification is that some traditional oil assets could move from publicly traded oil companies to less environmentally focused producers where there is less intense scrutiny of emissions. While individual companies may make progress to net zero carbon goals, the world’s balance of emissions might not change.