Few companies matched the impact of Exxon Mobil. For nearly a
century, it was the world's largest publicly traded Oil
Company. Exxon Mobil's 1999 merger brought together
descendants of the most prolific oil and gas company in US
history. The giant is the world's sixth heaviest carbon
emitter, according to an open secrets investigation that's
weighing on the performance of its stock. When you
control for all other sources of risk, you'll find that the
company with higher carbon emissions has lower market
value.
Oil prices are back up on surging consumer demand, raising
the company's short term prospects, but regulators want
to reshape the business long term. Institutional Investors
are bracing for impact.
serious conflict now, because we're trying to reduce
emissions. But at the same time, we want to stop economic growth,
and the economy needs energy to be able to function.
market experts see government's moving to punish companies that
burn more fossil fuels. Some call this phenomenon green
premium. Others call it the carbon premium. That carbon
premium is rising over this time period when years ago we had
Exxon Mobil largest most profitable company. Today it's
Tesla fossil fuel
companies. They recognize that a certain amount of writing is on
the wall holding accountable
after facing activist pressure. Exxon Mobil is now saying it
will reduce flaring and take more carbon out of the
atmosphere. And it's disclosing a much more comprehensive
accounting of its emissions. Those aren't the only plans it
has in store
think about carbon capture and storage biofuels hydrogen,
the fossil fuel giants fate may depend on its ability to pivot
can Exxon Mobil reduce emissions and stay profitable? ExxonMobil
Mobil descends from John Rockefellers legendary Standard
Oil
and the oil truck, making its rounds deliveries to farms and
factories to homes and service stations.
Standard Oil was founded in the 1870s. Within 20 years, the
company had seized the important domestic oil trade
in reference books for investors. There are abundant
and impressive statistics on Standard Oil as a corporate
unit.
Standard Oil was the poster child for the antitrust
movement, and one of the reasons why antitrust laws were
introduced in the US.
In 1911, the Supreme Court ruled that Standard Oil had violated
monopoly laws, the company had to break into 34 new groups, one
would eventually become Exxon, and one would become mobile. In
the century that followed, the company's fueled the US building
boom, that meant constructing massive refineries near cities
to convert crude oil into gasoline, plastics and
chemicals.
The country's rich petroleum resources have made the United
States the prosperous and progressive nation that it is.
It also meant building networks of gas stations to serve as
drivers and they introduce products like rubbing alcohol
and synthetic motor oil. But the core of the business revolves
around oil exploration and production. Their engineers
pioneered in 3d seismic analysis in deepwater exploration. As
excellence footprint grew, so did its environmental impact.
For example, in 1989, an Exxon shipping vessel accidentally
released more than 10 million gallons of oil products into
Alaska's coastal waters,
crude polluted hundreds of miles of what had been pristine
coastline 1000s of people's livelihoods were ruined as well.
The company says it paid $4.3 billion to clean up the mess.
That's the price of business in the oil industry to manage the
high capital costs and risks from unexpected shocks. Oil
companies have a natural tendency to consolidate. Here's
another example. The oil business depends on the
cultivation of resources found all over the world. Sometimes
that means operating an unstable political environment.
The reason these companies are so big is because of the risk of
expropriation. So if you have reserves in Africa, or in Russia
or in China, and there is a very strong risk that the government
was expropriate, it makes sense for you to vertically integrate
it which explains why we have these huge giants.
In the late 1990s, Exxon and Mobil settled an antitrust
challenge from the Federal Trade Commission. And on November
30 1999, the two companies merged and an $81 billion deal.
They were immediately the largest oil and gas company on
public markets.
Exxon isn't nearly in the same monopoly position today than
Standard Oil was at the end of the 19th century, there's a fair
amount of competition in the oil market.
As companies across the world race to control the supply of
oil. Exxon Mobil dominated US markets. It has assets around
the world, but most operations are in North America. It's been
a long time pick for public investors, ranking in the Dow
Jones Industrial Average for most years since 1928. But it
fell out in 2020. That's because investors see long term risks on
their Horizon in oil and gas.
So what it means for Exxon is that to the extent that it is a
meeting more, and it is relative to its peers in its industry, it
will take a bigger hit in terms of market valuation.
In the 2000s, Exxon Mobil invested heavily in oil
production and exploration
until the early 2000s. A lot of the reserves were what we call
conventional reserves, and they're located somewhere in the
Middle East Africa, and the Gulf of Mexico. After that, we had
these shale revolution that really change the oil and gas
industry, at least in North America.
The shale revolution in the US is all about fracking.
Extraction of shale oil using the controversial fracking
technique has led to massive oil production in America
in the late 2010s. Exxon Mobil saw an opportunity, they wanted
to seize on advances in technology to produce vast
assets trapped in hard to reach places like deep layers of the
Permian Basin in western Texas. Researchers say that the
drilling costs for these more expensive sites can range from a
few $100 to millions of dollars for a deep well, in 2019, Exxon
was producing 4 million barrels of oil and gas per day, the
company plan to increase production through 2025. Here's
CEO Darren Woods speaking to CNBC in 2019.
What was probably the most exciting discussion we had
though, was the upside that we've done identified over the
course of last year to improve upon that base plan that we put
out last year, and that's $4 billion of additional capex from
2019 to 2025.
One year later, demand for oil was in a freefall, as the
Coronavirus momentarily froze the world, oil prices briefly
went negative. In US fossil fuel producers stock took a nosedive.
Exxon suffered four straight quarters of losses, then the
company started to pivot. It now says it will keep production
flat through 2025. That's because the world has fresh
demand for energy, whether it's renewable or fossil based,
so it will take a while for us to switch to you know carbon
neutral capital.
One estimate suggests that Exxon will be pumping far more oil out
of the ground than its competitors over the next
decade. This chart was made by an activist firm named engine
number one. In 2021. The firm launched the challenge to
Exxon's board, saying that the company was positioned to
underperform
obviously we disagree with that recommend recommendations.
engine number ones report says that Exxon chased risky
production growth, leaving it more exposed to demand declines
than its peers. Institutional Investors agreed with the take
which one the group three company board seats, the
investor community is anticipating new regulations
that target production and refining. Here's Security
Exchange Commission chair Gary Gensler in the summer of 2021.
I've asked staff to make recommendations about how
companies might disclose scope one and scope two admissions
along with whether to disclose scope three, and if so how and
under what circumstances,
let's break down what he means by scope, one, two, and three.
Here's an example of each from the oil and gas production
process.
So scope, one is the emissions that are generated from the
extraction and refining. Now to run your refinery, you're going
to have to consume electricity, all the carbon that's gone into
producing that electricity, that's scope two. And then scope
three is all the emissions that come from the burning of oil and
gas from you know, driving a car, heating the house producing
plastics. And that's by far the biggest Chair of emissions.
Many companies including Exxon Mobil had reported the more
narrow scope one and two emissions for years. Exxon Mobil
produces the most emissions from these categories according to
MSCI. But these numbers pale in comparison to the scope three
estimates. Many companies, including Exxon are reporting
these numbers for the first time. Exxon self reported scope
three emissions were roughly 540 million tons of carbon dioxide
equivalent in 2020. External estimates of emissions from
Exxon products are even higher. The company has criticized the
quality of scope three emissions reporting, saying that many
aspects of the counts are out of their control. By comparison,
their competitors and British Petroleum reported roughly 374
million tons of carbon dioxide emitted in 2019. But that number
didn't include BP stake and Rosneft, a Russian energy
company. Analysts say that companies are being pushed to
disclose more about how their products contribute to global
warming. 2021 Even before the board shakeup, Exxon Mobil's
leadership was working to repair the company's public image.
If you are a company, if you're a CEO, if you're a shareholder,
if your model was one that's invested heavily in the fossil
fuel sector, you know, then obviously dealing effectively
with climate breakdown does work Present an existential threat to
your business model.
Exxon Mobil's pivot relies heavily on new research into
carbon capture and sequestration. In these schemes.
Engineers capture emitted carbon using gigantic vacuums, Exxon
and others are also developing methods like fuel cell carbon
separation. Now the company is launching an effort with 11
partners and the Houston refinery cluster to share a
carbon capture system. Congressional researchers say
that oil and gas companies have mainly used the captured carbon
to further boost production of fossil fuels. engine number ones
analysis of exons carbon capture program suggests it captures
less than 1% of its total emissions, including the broad
scope three category, and then there are methane emissions. Oil
and gas companies across the board, including Exxon Mobil say
they want to reduce flaring oil and gas producers flare excess
natural gas when wells are producing because sometimes,
prices on the market make storing the gas unprofitable
methane in the short run is much more potent as a greenhouse gas
than carbon. And if you can control methane emissions and
bring them down, you can have a big impact in the short term on
global warming.
Exxon Mobil says it will reduce routine flaring by 2025 and work
to cut its absolute emissions as well. But that's difficult to do
without cutting production.
It's possible to lower your intensity substantially, even
though you're increasing your overall emissions. So people
caught on to that said, that's not really a great commitment
that's not very serious.
ExxonMobil says it's back to carbon pricing in the US for
more than a decade. It's a popular idea among economists.
If you put a price on emissions, it will give businesses and
consumers an incentive to emit less
many would say that carbon pricing, you know, while it has
a role to play, it's just one small piece of the puzzle. What
I would say is the devil is in the detail. But often the the
prices are so low, that they're nowhere near where they need to
be. And fossil fuel companies know this.
The company likes to tout its research in algae cultivation
for cleaner biofuel production. It's also lobbying for the
ability to use flyovers to track methane leaks rather than
conduct on the ground analysis and leadership is rolling out
new projects to reduce aspects of its footprint.
We recently announced a new business low carbon solutions.
We recently announced a concept of a very large scale carbon
reduction opportunity and Houston ship channel area. And I
think you know, people are interested in that.
Exxon CEO has also said the company needs to put more
capital towards green investments.
I think today's technology can start to abate high
concentrations, co2 streams. But frankly, as you move to more and
more dilute sources, you're going to require more capital,
we're very focused on how do we do that at the lowest overall
cost to society.
Experts say that companies like Exxon need to think ahead, as
legislators around the world call for change. Decisions made
today could affect wells that will pump many years later.
It is pretty much a sunk investment in the sense that
once you open the well you cannot close it, you just have
to back up the oil. Regardless of the oil price since the early
2000s. The risk was coming from government expropriating
reserves. Now the risk comes from places like Norway, or
Germany or the UK or New Zealand.
The future outlook for Exxon Mobil is uncertain. The
company's plan to keep pumping oil comes with a lot of risk.
For starters, researchers say that assets like untapped fossil
fuel reserves could suddenly become liabilities,
there have been good technological developments that
have allowed it both in the US and in Canada, the oil change to
be extracted profitably in the long run, you would expect that
those reserves that are more expensive to attract, like oil
sands and shale are the ones who are going to be a standard
first. That's just
one example of a wave of uncertainty rippling through
entire industries.
The one word that will describe the oil and gas sector in the
future is volatility. Because we are rolling in more and more
restrictive policies to limit the burning of fossil fuels and
emissions.
Experts say there are essentially two paths forward.
One is more regulation on fossil fuel production. The other is a
planet warming at a dramatically faster pace. The UN says fossil
fuel production is dangerously out of sync with global climate
targets.
Exxon Chevron, some of the American companies. They're
notorious for being the worst of the worst in terms of, you know,
obstructionist policy resisting what needs to be done
I quote, Exxon was publicly promoting views that its own
scientists knew were wrong.
When we look at Covid and the recovery packages that the
largest economies in the world are putting in place, research
has shown that basically those recovery packages are going into
fossil fuel intensive and energy intensive sectors for our
recovery. So it's not a green recovery. It's business as
usual. There are good things happening, but we're nowhere
near where we need to be.