By Dana Drugmand
Climate change is not a crisis, according to ExxonMobil’s latest climate risk report to shareholders and the public. Despite ongoing record-setting global temperatures, wildfires, and other impacts, the oil and gas giant contends that growing climate instability does not rule out continued production of fossil fuels.
The firm released its annual “Energy and Carbon Summary” on January 28, in the midst of a two-week slide that saw Exxon’s stock price hit its lowest point in a decade.
Like previous editions of the report, Exxon's latest future-looking assessment outlines its plans for continuing to produce oil and gas while downplaying the risks of changing climate and energy regulations to its holdings. “Over the coming decades, oil and natural gas will continue to play a critical role in meeting the world’s energy demand,” the report states.
But the firm’s stance that continued oil and gas production is a low-enough-risk proposition is misguided, said Andrew Grant, senior oil and gas analyst at Carbon Tracker, a London-based think tank that analyzes the impact of the energy transition on capital markets and fossil fuel firms.
“In thinking about value risks, the danger isn’t just what if [Exxon] can’t develop new assets because they’re obviously uneconomic,” Grant said, “but also what if they do develop assets thinking that they will be economic but that subsequently turns out not to be the case.” The firm is not acknowledging that its oil and gas reserves could become such “stranded assets” over the next several decades, he said, and drop billions in value amidst a likely global transition to cleaner energy sources.
“Ultimately, what Exxon is guilty of is being too certain about an increasingly uncertain future,” said Andrew Logan, senior director of the oil and gas program at Ceres, a nonprofit that advocates for environmentally sustainable investing. “And it is betting billions of dollars in shareholder capital on its ability to be right.”
Exxon’s report suggests that the firm is confident about continuing its core oil and gas business because it is also counting on the world warming beyond the limits set in the Paris Agreement, although it also contends that Exxon supports the accord and its mandates for a transition to low-carbon energy.
Experts including the UN Environment Program say that continued fossil fuel expansion and production is inconsistent with these limits.
“Even under 1.5 degrees C and 2 degrees C scenarios [2.7 and 3.6 degrees F - Ed.] a growing and increasingly prosperous global population will increase energy demand and still require significant investment in new supplies of oil and natural gas,” the report states, in one of several references to increasing energy demand.
Logan cautioned, however, that this demand forecast may not pan out the way Exxon anticipates. “With the rapid evolution of competing technologies, and growing global concern about climate change, a number of analysts and industry leaders are predicting that demand for oil and gas may shrink, rather than grow, over the coming decades,” he said. “Smart companies, like Shell or ConocoPhillips, are hedging their bets, embracing the idea of uncertainty and avoiding investments that lock them into long-term views of fossil fuel demand. Exxon is taking a radically different approach, doubling down on fossil fuels and choosing to be the only major oil company that is still investing significantly in the oil sands of Alberta.”
Exxon is also assuring stockholders that natural gas will be a leading contender for meeting anticipated demand growth. “Natural gas is expected to grow the most of any energy type, reaching a quarter of all demand,” the report states. Although the oil and gas industry defends gas as a cleaner-burning fuel, a growing body of research on methane leaks and life-cycle emissions suggests gas is not as climate-friendly as the industry claims.
“They assume that more production of fossil fuels is good for the climate,” said Tom Sanzillo, director of finance at the Institute for Energy Economics and Financial Analysis. That thinking, he said, “sort of operationalizes climate denial in a way that is becoming increasingly more of an outlier.”
Exxon did not respond to a request for comment.
Dismissing Stranded Asset Concerns
Exxon contends in the report that there is little risk to its portfolio, stating that “trillions of dollars of investment in oil and natural gas will be needed, even considering a 2 degrees C scenario.” While acknowledging that some of its assets may not be developed, the company says it is confident it will continue to produce and replenish its proved reserves.
In a new analysis of oil companies’ exposure to stranded assets, Grant and colleagues considered how a “handbrake turn” of faster and stronger action on climate by governments would affect the value of assets held by major oil companies. They found that companies which fail to plan for an “inevitable policy response” to climate change, and instead plan for business-as-usual investments, risk new projects losing half their value.
Exxon is particularly exposed, according to Grant, with its projects estimated to be 40 percent more vulnerable to such a shift than the rest of the oil production industry.
Grant acknowledged that given the uncertainty around if and when national policies will make that sharp turn to strong climate action, it is difficult for any firm to plan ahead, including Exxon. “However, they risk being left with stranded assets if they assume governments will not take forceful action to limit climate change,” he said.
Exxon seems to be counting on continued delay in government climate action. The Paris goals, which the company claims to support, are based on the consensus, by an overwhelming majority of climate scientists worldwide, that the global energy supply must be nearly free of fossil fuels by mid-century for the world to have any chance of avoiding a rise of 2 degrees C or more in average temperatures.
But in its climate risk report, Exxon terms “2 degrees C scenarios” to be “theoretical” or “hypothetical,” and misrepresents the Paris Agreement goal, which is to limit warming to well below 2 degrees C. Instead Exxon says its activities are generally aligned with current emission reduction pledges by countries, which are widely acknowledged to be too weak to meet that goal.
“The Paris Agreement does not contemplate or require individual companies to decrease production to align with the goal of maintaining global temperature rise to below 2 degrees C,” the report states.
But according to another analysis by Carbon Tracker, released in November, oil and gas majors must make production cuts to meet international climate targets. Exxon in particular would need to cut production by 55 percent by 2040 to be aligned with the Paris Agreement.
“It’s disappointing that [Exxon] implies that its business plan is going to be sound because it expects us to blow past the temperature targets in Paris Agreement,” said Kathy Mulvey, climate accountability campaign director at the Union of Concerned Scientists.
A "Result of the Choices Consumers Make"
While saying it is committed to reducing emissions from its operations, including cutting methane emissions and reducing flaring, Exxon also seeks to place responsibility for carbon pollution onto the demand side. Emissions from its products, Exxon states in the report, “are not within its direct control” and are the “result of choices consumers make.”
Technological breakthroughs will be key to solving climate change, the company argues, not emissions cuts, emphasizing that it has spent $10 billion since 2000 on research and development of low-carbon energy alternatives, such as carbon capture and storage (CCS) and algae biofuels.
But as Mulvey points out, that investment pales in comparison to the more than $500 billion the company spent on oil and gas in the last 20 years.
At the same time, the report acknowledges that mass production of algae-based fuels is decades away, and that only 7 of 45 important technologies and sectors are on track to help society reach the Paris treaty’s goals.
“The company has made clear that it doesn’t see climate change as a crisis, but as one of many challenges facing the global energy sector,” said Logan. “That explains why it is continuing to invest so heavily in oil and gas, and why the clean energy investments it is making — like algae — won't be commercialized for decades, in the best case.” That directly contradicts the scientific conclusion underlying the Paris climate accord, he said, that the world must effectively zero out fossil fuel emissions within the next 30 years.
“The track record of ExxonMobil and others in the oil and gas industry of failing to acknowledge what they knew about climate change decades ago is well documented,” added Mulvey. “But it is significant that the current communications are also far from forthright, and could be argued are misrepresenting how the companies’ business model is aligned with addressing the climate crisis.”
Blue-chip Reputation on the Line
Investors and financial analysts appear to be taking note of Exxon’s relatively poor financial performance in recent years, as well as the climate-related lawsuits targeting the firm. Over two weeks in late January, Exxon’s stock price dropped to a 10-year low. Goldman Sachs downgraded the company to a “sell” status.
Moody’s Investors Service also downgraded Exxon’s financial outlook from stable to negative in an analysis that noted the company’s exposure to rising litigation risk related to climate change. Moody’s also cited Exxon’s negative free cash flow and reliance on debt as factors leading to the negative downgrade.
"ExxonMobil’s financial results for 2019 were hurt by a poor margin environment for refining and chemicals, and low natural gas prices,” Moody’s senior vice president Peter Speer said in a statement. “Along with taking on more debt, these trends continue to pressure the company’s credit metrics as captured in our negative outlook."
“We’re starting to see the financial sector show its concern for the business model of the oil and gas companies,” said Mulvey. “Exxon and Chevron came out with their earnings reports [and] they were disappointing even to investors who were all in on the companies’ business-as-usual strategy.”
Sanzillo believes this is evidence that Exxon’s business-as-usual strategy is failing as the climate change crisis deepens. “Their plans to increase production in the Permian, increase production in Guyana, as if there’s going to be a world there to take the oil and gas, is just without foundation,” he said. “I don’t see how any of this works from a climate point of view or from a financial point of view.”
The Permian Basin is an oil-and-gas-rich geologic formation straddling the Texas-New Mexico border that has become one of the nation’s top areas for fossil fuel extraction.
Mulvey said that growing public pressure will be key to forcing the company to change course, suggesting investors could resort to litigation or divestment if it doesn’t.
“Some of what we’re hearing from the investor community," she said, "is looking for additional levers of pressure to convey the urgency and concern.”