SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed
by the Registrant ¨
Filed
by a Party other than the Registrant þ
Check the appropriate box:
¨
|
Preliminary Proxy Statement
|
¨
|
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
|
¨
|
Definitive Proxy Statement
|
¨
|
Definitive Additional Materials
|
þ
|
Soliciting Material Under Rule 14a-12
|
Exxon Mobil Corporation
(Name of Registrant as Specified in Its Charter)
Engine No. 1 LLC
Engine No. 1 LP
Engine No. 1 NY LLC
Christopher James
Charles Penner
Gregory J. Goff
Kaisa Hietala
Alexander Karsner
Anders Runevad
(Name of Person(s) Filing Proxy Statement,
if other than the Registrant)
Payment of Filing Fee (check the appropriate
box):
þ
|
No fee required.
|
|
|
¨
|
Fee computed on table below per Exchange Act Rule 14a-6(i)(4) and 0-11.
|
|
1)
|
Title of each class of securities to which transaction applies:
|
|
|
|
|
2)
|
Aggregate number of securities to which transaction applies:
|
|
3)
|
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
|
|
4)
|
Proposed maximum aggregate value of transaction:
|
|
|
|
|
5)
|
Total fee paid:
|
|
|
|
¨
|
Fee paid previously with preliminary materials.
|
¨
|
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
|
|
1)
|
Amount Previously Paid:
|
|
|
|
|
2)
|
Form, Schedule or Registration Statement No.:
|
|
|
|
|
3)
|
Filing Party:
|
|
|
|
|
4)
|
Date Filed:
|
On March 3, 2020, Engine No. 1 LLC issued the press release reproduced in Exhibit 1. Attached as Exhibit 2 is the white paper
referenced in the press release.
EXHIBIT 1
ENGINE NO. 1 RELEASES WHITE PAPER
DETAILING CHANGING ENERGY LANDSCAPE IN RESPONSE TO EXXONMOBIL INVESTOR DAY PRESENTATION
New Analysis by Leading Energy
Market and Policy Expert Sets Forth the Long-Term Risks and Opportunities Facing ExxonMobil and Its Peers
Engine No. 1’s Nominees Have
the Proven Success Across the Energy Industry to Help ExxonMobil Better Protect Long-Term Shareholder Value in a Rapidly Evolving
Industry
SAN FRANCISCO – March 3, 2021
– Engine No. 1, which has nominated four highly qualified independent director candidates to the Exxon Mobil
Corporation (NYSE: XOM) (“ExxonMobil” or the “Company”) Board of Directors (the “Board”),
today released a white paper by a leading energy market and policy expert analyzing the risks and opportunities facing
ExxonMobil in a rapidly changing industry. This analysis details an evolving industry that requires significant long-term
business model innovation to enhance and protect shareholder value, which contrasts sharply with the outlook set
forth by ExxonMobil in its presentation to investors today. Engine No. 1 believes this analysis underscores the need for new
Board members with successful and transformative energy industry experience who can help position ExxonMobil better for today
and tomorrow.
Engine No. 1 stated: “ExxonMobil has
now adopted the language of long-term net zero emissions and dramatically shifted its emphasis from production growth to investor
returns, both of which are remarkable shifts since the start of our campaign last year. However, we believe that reacting to the
threat of a shareholder vote is not the same as a coherent and value-enhancing long-term strategy, and that without real change
these gains could be short-lived. More importantly, we believe that turning these newfound ambitions into action will require leadership,
and that without a diverse mix of successful and transformative energy experience on the Board, ExxonMobil will risk
continued long-term shareholder value destruction.”
The new paper (available here)
was authored by leading expert Professor David Victor of the University of California San Diego, who was a convening
lead author for the Intergovernmental Panel on Climate Change (IPCC), an organization which ExxonMobil today referred to as the
authoritative source on these topics, in association with Engine No. 1. Topics covered in detail which have
direct implications for ExxonMobil include:
|
·
|
Long-Term Demand Risk. While ExxonMobil
continues to plan for long-term growth in oil and gas production (and thus increased overall emissions growth) for decades to come,
this plan carries significant risk of further long-term shareholder value destruction. About 2/3 of world greenhouse gas (GHG)
emissions come from countries that have net zero targets for emissions (mostly for 2050), and achieving those goals (or even coming
close) will likely cause an implosion in fossil fuel demand, yet ExxonMobil’s presentation does not explore this widely-known
range of possible outcomes.
|
|
·
|
Business Case for Actual Paris Alignment.
Companies that claim consistency with the Paris Agreement but whose business models run counter to its goals are risking more
than just inconsistency but are in fact creating significant financial risk, as investors ascribe them an increasing cost of capital
and a declining terminal value. Long-term total emissions reduction goals (including Scope 3 emissions) are thus a financial risk
management imperative. Likewise, reliance on the idea that carbon capture will permit businesses to avoid evolution risks even
greater long-term disruption and value destruction. Nearly all of ExxonMobil’s carbon capture experience is in areas such
as gas processing, which is important but not the type of carbon capture application that research shows will be most important
and transformative as the world makes deep cuts in emissions.
|
|
·
|
Changing Economics of Innovation. Historical
oil and gas returns were consistently high enough, and the dangers of inaction consistently low enough, that oil and gas companies
had a strong economic case for the status quo. While any change in the oil and gas industry will take time, falling project returns
due to structural issues and the rising societal demand for de-carbonization have significantly shifted this dynamic. The risk
of being caught on the wrong side of innovation cannot be understated and long-term success will likely require entirely new types
of innovation, leadership, and proactive positioning.
|
Engine No. 1 today also noted that, “ExxonMobil
today presented a vision of the future that we believe risks continued long-term value destruction, including a lack of serious
diversification efforts and the hope that carbon capture will enable the Company to avoid long-term evolution. Reasonable people
of goodwill can differ as to where the energy industry is going in the decades to come, and there are no easy answers. What we
think is not debatable is that capitalizing on the opportunities and managing the risks created by rapid technological, policy,
and market changes will require successful and diverse energy experience on the Board. We have benefited greatly from this analysis
and our discussions with numerous other experts, and we hope that this paper will be helpful to other ExxonMobil shareholders as
well.”
The full white paper and additional information
regarding Engine No. 1’s campaign to reenergize ExxonMobil may be found at www.ReenergizeXOM.com.
About Engine No. 1
Engine No. 1 is an investment firm
purpose-built to create long-term value by driving positive impact through active ownership. The
firm also will invest in public and private companies through multiple strategies. For more information, please visit:
www.Engine1.com.
About David Victor
David Victor is a professor of industrial
organization and innovation at the School of Global Policy and Strategy at UC San Diego. He co-directs the campus-wide Deep Decarbonization
Initiative, an effort to understand how quickly the world can eliminate emissions of warming gases. He is adjunct professor in
Climate, Atmospheric Science & Physical Oceanography at the Scripps Institution of Oceanography and a professor (by courtesy)
in Mechanical and Aerospace Engineering. Prior to joining the faculty at UC San Diego, Victor was a professor at Stanford Law School
where he taught energy and environmental law. He has been heavily involved in many different climate- and energy-policy initiatives,
including as convening lead author for the Intergovernmental Panel on Climate Change (IPCC), a United Nations-sanctioned international
body with 195 country members that won the Nobel Peace Prize in 2007. His Ph.D. is from the Massachusetts Institute of Technology
and A.B. from Harvard University.
Media Contacts
Gasthalter & Co.
Jonathan Gasthalter/Amanda Klein
212-257-4170
Engine1@gasthalter.com
Investor Contacts:
Innisfree M&A
Incorporated
Scott Winter/Gabrielle
Wolf
212-750-5833
Important Information
Engine No. 1 LLC, Engine No. 1 LP, Engine No. 1 NY LLC, Christopher
James, Charles Penner (collectively, “Engine No. 1”), Gregory J. Goff, Kaisa Hietala, Alexander Karsner, and Anders
Runevad (collectively and together with Engine No. 1, the “Participants”) intend to file with the Securities and Exchange
Commission (the “SEC”) a definitive proxy statement and accompanying form of WHITE proxy to be used in connection with
the solicitation of proxies from the shareholders of Exxon Mobil Corporation (the “Company”). All shareholders of the
Company are advised to read the definitive proxy statement and other documents related to the solicitation of proxies by the Participants
when they become available, as they will contain important information, including additional information related to the Participants.
The definitive proxy statement and an accompanying WHITE proxy card will be furnished to some or all of the Company’s shareholders
and will be, along with other relevant documents, available at no charge on the SEC website at http://www.sec.gov/.
Information about the Participants
and a description of their direct or indirect interests by security holdings is contained in the preliminary proxy statement filed
by the Participants with the SEC on March 2, 2021. This document is available free of charge on the SEC website. The definitive
proxy statement, when filed, will be available on Engine No. 1’s website and the SEC website.
Disclaimer
This material does not constitute an
offer to sell or a solicitation of an offer to buy any of the securities described herein in any state to any person. In addition,
the discussions and opinions in this press release and the material contained herein are for general information only, and are
not intended to provide investment advice. All statements contained in this press release that are not clearly historical in nature
or that necessarily depend on future events are “forward-looking statements,” which are not guarantees of future performance
or results, and the words “anticipate,” “believe,” “expect,” “potential,” “could,”
“opportunity,” “estimate,” and similar expressions are generally intended to identify forward-looking
statements. The projected results and statements contained in this press release and the material contained herein that are not
historical facts are based on current expectations, speak only as of the date of this press release and involve risks that may
cause the actual results to be materially different. Certain information included in this material is based on data obtained from
sources considered to be reliable. No representation is made with respect to the accuracy or completeness of such data, and any
analyses provided to assist the recipient of this material in evaluating the matters described herein may be based on subjective
assessments and assumptions and may use one among alternative methodologies that produce different results. Accordingly, any analyses
should also not be viewed as factual and also should not be relied upon as an accurate prediction of future results. All figures
are unaudited estimates and subject to revision without notice. Engine No. 1 disclaims any obligation to update the information
herein and reserves the right to change any of its opinions expressed herein at any time as it deems appropriate. Past performance
is not indicative of future results. Engine No. 1 has neither sought nor obtained the consent from any third party to use any
statements or information contained herein that have been obtained or derived from statements made or published by such third
parties. Except as otherwise expressly stated herein, any such statements or information should not be viewed as indicating the
support of such third parties for the views expressed herein.
EXHIBIT 2
MARCH 3, 2021
Energy
Transformations:
Technology, Policy, Capital and
the Murky Future of Oil and Gas
DAVID G. VICTOR
in association with ENGINE NO. 1
© 2021 Engine No. 1 LLC
|
i
|
|
Summary
Technology and policy
are transforming the industries linked to fossil energy. Large and growing shifts in capital are following. Oil and gas majors
who wish to survive, let alone prosper, will need to realign their business around a low carbon future. They must become much
more capable of creating and identifying transformative technologies and integrating them into new lines of business. As if that
were not challenging enough, they must do this in ways that understand business evolution as a function not just of technology
but also of policies that are redefining which firms will thrive in a world where emissions must shrink rapidly.
The skills needed to thrive
in this new world do not come naturally to established industrial behemoths oriented for the competitive supply of mature commodities
like oil and gas. The incumbent industry’s track record in identifying and integrating transformative innovations is not
encouraging.
Where innovations have
aligned with the core business model, big oil and gas firms have succeeded. For example, innovations in big data have made it
easier to gather and process the seismic information necessary for oil exploration and drilling, and innovations in predictive
maintenance and systems management have cut the costs of offshore drilling. In such settings, innovation has not much disrupted
business models; oil and gas production has expanded. However, even there, the behemoth industry has failed to anticipate many
important innovations that have come from outsiders, such as shale oil and gas—a striking transformation in oil and gas
production that unfolded over the last two decades and an area where big firms dawdled and then rushed in only after the revolution
was far advanced, with terrible financial results. The decarbonization revolution will be even more disruptive as the track record
of creating and integrating profound innovation is weaker. Even where incumbent oil and gas companies have played a role in innovations
that could thrive and cause big declines in oil and gas use (e.g., batteries or biofuels), they have tended to underweight these
areas of investment.
© 2021 Engine No. 1 LLC
|
ii
|
|
As the decarbonization
revolution advances, it will, most likely, radically reduce demand for oil and gas. Gone is the assumption, prevalent in the industry
until just the last few years, that demand will always rise. A growing number of credible projections see steep and possibly discontinuous
declines, principally due to growing pressure to cut emissions of warming gases. Indeed, about two-thirds of world emissions come
from countries that have net zero targets for emissions, most of which are focused on the year 2050.
Under severe environmental
pressure, the Western coal industry has already imploded. Oil is likely to feel the next blow. Policy and technological advances
are creating niches of energy services that do not require oil at all—most strikingly, electric vehicles, whose market shares
are climbing rapidly. The effects of vehicle electrification, other replacements for oil and the ongoing tightening of energy
efficiency standards could cut demand for oil in half or more in the next two decades. Because transformative technologies, such
as electric vehicles, are such a tiny share of the market today, they are easy to overlook, much as the U.S. coal industry ignored
shale gas in 2005 when shale accounted for merely 2% of the U.S. gas supply—only to find themselves crushed after a decade
of compound growth in shale gas production. As the technologies of the deep decarbonization revolution improve and expand outside
their niche markets, the political winds will shift and so will capital. These reinforcing patterns will beget even stronger polices,
bigger market shares and better technological performance.
With flattening and then
shrinking demand for the incumbent product, oil, the need for new supplies will lessen. Less demand will shift supply away from
the places where Western incumbent oil and gas firms have traditionally made the most of their economic returns. Similar patterns
will plausibly unfold for gas but with implosion delayed. Gas is cleaner than the other fossil fuels and is exceptionally useful
in electric power, an industry that will grow as the world cuts emissions. Nevertheless, even there, the conventional wisdom of
a rosy future for high demand is turning darker.
Some firms, headquartered
mainly in Europe where the policy pressures are most acute, have begun to respond. They have announced increasingly bold emission
reduction goals, such as net zero emissions by 2050. Firms that are taking the decarbonization challenge most seriously have set
goals for cutting emissions not only from their operations but also from the much larger volume of emissions that come from burning
their products, such as gasoline, diesel and jet fuel. Making operations cleaner is a familiar challenge for the industry and
one that many firms have already proven to be adept at doing. Making the product they sell emission-free is not.
A challenge is that no
incumbent firm, no matter how seriously they are taking the decarbonization challenge, has a clear blueprint for how to thrive
in a low carbon world. That information, including whether there is a role for these incumbent firms, is unknowable today.
Firms that succeed will
be those that have “worked” solutions—the ability, earned through visceral experience and reorganization, to
identify and integrate new technologies and business practices that allow them to compete in viable clean industries of the future.
In other industries, like much of IT, this kind of disruption has often inspired strategies of “fast following”—watching
the leaders bear the cost of failure and then quickly joining the slipstream by choosing the options that work. In oil and gas,
where watching is less important than learning how to reorganize, that approach is likely a recipe for a fast death. By the time
leaders have demonstrated effective worked models, they have moved on to explore even better prospects.
© 2021 Engine No. 1 LLC
|
iii
|
|
The firms that have been
most aggressive in their response have redirected only about 5% of capital budgets, although the share is rising quickly. All
this new investment is going into new businesses that have one (or all) of these attributes: being much riskier than the traditional
business; yielding lower returns; involving much bigger roles and exposure to government policy; and being completely unfamiliar
with the organizational culture of integrated oil and gas firms and their employees and investors.
Most of the reallocated
capital has gone to renewables, in particular to solar and wind electric generation. This approach seems unlikely to be a winner
by itself, for the solar electric industry is already highly competitive and maturing. The oil and gas industry has arrived late
to the renewables revolution. Total capital investment by large oil and gas companies in solar and wind electricity was just 0.6%
of the global total investment in renewable electricity in 2019. Outside of offshore wind platforms, the construction and operation
of which require skills that overlap with those of offshore drilling, the incumbent oil and gas industry is struggling to find
its niche.
Just a decade ago, some
of the better managed oil and gas firms were seeing returns on capital that reliably exceeded 20%, with wide variation across
the industry that set the best performers apart in a league of their own. Today, variation across the industry has narrowed massively,
and returns have imploded. The end of supernormal returns means that the opportunity costs of change are much smaller than before.
At the same time, the risks of inaction have risen.
All western oil and gas
firms face a common question of how to successfully create value within an industry that is experiencing profound change. Answering
that question is not merely a matter of identifying the right new lines of business—a task that will be hard enough, for
the answers are unknown at present—but also a matter of reconfiguring leadership and culture within these firms so they
are more capable of navigating profound changes, executing well in new areas of commercial operations that are unfamiliar, and
managing exposures to risk. In addition to cultures and management that emphasize operational excellence, there is already a rapid
increase in the need for cultures and management systems that can search for and identify new purposes and directions for these
incumbent oil and gas firms. Success will require new kinds of leadership, including board engagement, to help realign business
units with new missions and also identify and manage the right kinds of partnerships with units outside each firm.
Oil and gas have always
been capital-intensive industries. Decarbonization technologies all share the attribute that they have even lower operating costs
than today’s fossil fuel systems, but, nearly everywhere, those savings in operating costs are offset by higher capital
intensity. For an industry that has thrived on managing capital to avoid the stranding of assets, the challenges are now becoming
significantly harder as energy systems become even more capital intensive. The assets most likely to be stranded are those that
are most familiar. The assets likely to generate the greatest value amortized over long periods of reliable operation are those
that are least familiar to the incumbent oil and gas industry. Brave or not, that is the new world.
© 2021 Engine No. 1 LLC
|
iv
|
|
Part
I: The End of an Era?
For decades, nearly all
energy analysts have assumed that demand for oil and gas would rise inexorably into the future.[1] A growing world
population and expanding economy would need energy; most of that energy must come from fossil fuels, as it had since the 19th
century. For oil in particular, a rich future was assured because the liquid had a monopoly on an essential service in the
modern economy: transportation. Nobody flew airplanes powered by coal or onboard nuclear reactors; liquid jet fuel was a lot easier
to store and much cheaper than all the alternatives. Electric vehicles were playthings for the rich and had been since the 19th
century.[2] Ships ran on oil and nothing else. Petrochemicals came from oil and, to a lesser degree, natural
gas. Meetings in Davos and exhortations on op-ed pages talked about the need for an “energy transition,” but not much
transitioning was actually happening, for, even now, the global economy still depends on fossil fuels for about 85% of total energy.[3]
For decades, nearly every
oil and gas supplier subscribed to these beliefs, and the whole industry was organized to meet the inexorably rising demand. More
demand meant more supply; natural declines in existing oil and gas wells meant there was a need for even more supplies to offset
that decline. Since the “easy” oil and gas deposits in the world were being tapped out, more supply meant venturing
into new geologies and locations with a lot more risk. Managed well, that meant more profit.
Often this belief was
wrapped in a mantle of goodness and necessity. Fossil fuels were the cheapest way to power the world economy and lift humanity
from poverty, as ExxonMobil’s boss from 1993 to 2005, Lee Raymond, said in a 1996 speech to the Detroit Economic Club.[4]
The future was hard to predict and thus laden with risk, but most people in the industry and most policy makers worried
primarily that not enough capital would be mobilized for investment to meet the growing demand.
That picture is now
changing. The consensus that oil and gas demand will continue to grow is ending. The markets have already
seen this reality, which helps explain why, over time, the total value of large integrated oil and gas companies has been
shrinking.[5] Since 2010, the top four oil and gas companies have seen their market capitalization shrink
more than half from 894B to $433B. At the same time, the value of the largest green energy specialists—all
electric companies—has nearly tripled from $111B to $299B (Figure 1). The largest pure play supplier of
green energy equipment, Tesla, has risen in market capitalization from $1.7B at its IPO in 2010 to nearly $700B at the start
of 2021.
Figure 1: The market
capitalization of the largest oil & gas continues to decline, while clean energy is on the rise
Over the
last decade, the four largest oil and gas companies lost market cap while green energy specialists grew.
Source:
FactSet
@ 2021 Engine No. 1 LLC
|
1
|
|
New
outlook for oil demand
For oil demand and prices,
there is a long history of wrong forecasts.[6] In the midst of the oil crises of the 1970s, most projections envisioned
exponential growth in demand, only to be surprised when people had a strong incentive to become more frugal thanks to high prices
and strong energy policies that kept working even when energy prices abated in the 1980s and 1990s. From the late 1990s, surprises
appeared in the opposite direction: surging demand from the rapidly industrializing Asian Tigers, led by China.[7]
However, one thing was constant: the assumption that demand would always rise. All told, in the 35 years since 1974, which marks
the end of the first oil embargo, the year-on-year consumption of oil dropped just six times, always briefly and always in the
context of a global economic downturn.[8] For decades, oil analysts have, for the most part, been debating about rates
of growth—not whether growth would happen.
At no point since modern
forecasting of oil demand began in the 1960s has the range of possible futures been wider than it is today. Figure 2 shows
a history of demand forecasts, with a healthy spray of alternative futures. Today’s spray is different, for it is not just
wider but includes a large number of credible projections with discontinuous steep declines, indicating implosions that could
happen much faster than has been widely appreciated.[9]
Figure
2: Rising uncertainty around the future of oil demand.
The
main figure shows the history of demand for oil (heavy black line) and projections (light colored lines) for four organizations:
the International Energy Agency (selected years, including 2020 scenarios), BP (2020 scenarios), Shell (selected years, including
2021 scenarios) and ExxonMobil (2019 Outlook for Energy). At no point in the history of oil demand forecasting has the range of
possible futures been larger than today, and at no point has there been more attention to rapid declines in total demand.[10]
Source: International Energy Agency, BP, Shell, ExxonMobil.
When concerns about oil
consumption were rooted in energy security, as they were from the 1970s until recently, demand mattered less than reliable supply.
Keeping demand in check was important, but the real work of energy security involved worrying about whether too much oil was coming
from unsavory and unreliable places. Reliable supply meant diversity in supply, with extra weight on supplies close to home. That
mindset is what created policies to support environmentally catastrophic programs, like the generation of synthetic oil from coal;
this created preferential leasing and tax programs aimed at boosting supplies of oil from the deep waters of the Gulf of Mexico
and from remote Alaska—all places thought to be reliable in supply. However, ultimately, ingenuity in production along with
policy support meant that new supplies were always found. As Sheikh Ahmed Zaki Yamani, the Saudi oil minister from the 1960s to
the 1980s, reportedly said, “The stone age did not end for lack of stone.”[11] For most of modern history,
that quip has been a reminder never to question the supply of stone. Today, it means something different: the end of carbon.
Fear of climate change
transforms that mindset.[12] No longer is the central problem adequate supply but excessive demand; policy, in
this new mindset, focuses on eliminating demand where possible and switching to alternative technologies, such as electric vehicles,
that serve the needs provided by oil today.
Thanks to the big decline
in oil demand in 2020 as a result of the pandemic, a range of forecasts have oil demand peaking this current decade.[13]
Even OPEC, which has a strong interest in painting a future of higher demand, now offers credible scenarios with little
growth and a steady decline in the 2030s.[14] BP, which has the longest and most transparent history of sharing data
and forecasts, published new projections in October 2020 that are consistent with a long and accelerating decline in oil demand.
For more than a decade, the BP forecasting team envisioned rising demand; this year that consensus cracked.[15] Shell
has offered similar futures of waning need for oil.[16]
@ 2021 Engine No. 1 LLC
|
2
|
|
What remains is a shrinking
group of oil majors, notably ExxonMobil, that still cling to old forecasting methods and results. At its annual investor day in
March, 2020, which was held as the pandemic started gripping the world economy, ExxonMobil painted a future unaware of how the
world of policy was changing: rising demand, a big gap in necessary investment and a litany of concerns about mobilizing the investment
needed to fill that gap (see Figure 2, inset).[17] Although other companies also see a continued need for new production,
at least in the short term, their outlooks are much less bullish for traditional oil supply.[18]
Demand implosion must
be taken seriously because rapid technological change now points in the same direction as policy. The place to watch is electric
vehicles, including the emergence of autonomous vehicles (which are likely to be electric). Nearly half of the global oil demand
of about 100 mbd currently goes into mobility services that electrification can replace. Figure 3 shows a highly credible industry
forecast, with electric vehicles accounting today for just 2.3% of global new car sales but exploding in volume and share.[19]
Many other projections similarly see that share rising to approximately 30% by 2030, a date by which some markets from California
to major segments in Europe plan to ban new internal combustion car sales.[20] General Motors recently announced that
it aimed to phase out petroleum powered cars by 2035; Ford has similarly announced big shifts in its capital expenditure toward
electric vehicles.
The electrification of
vehicles is a marriage of technology and policy—a story that will repeat many times in the decarbonization revolution. Policy
has opened market niches for electrification in which the technology—batteries principally, but also drivetrains, system
controls and marketing—gained a footing and improved. Since 2013, the cost of battery packs has declined by nearly 80%,
and battery systems are likely to continue getting cheaper and more reliable. In 2020 alone, for example, batteries fell 13% in
cost.[21] Now, in a growing number of markets, electric technology can compete on its own with little or no subsidy,
which means that it will take off even faster—up the steep slope of typical S-shaped technology diffusion curves—and
erase larger volumes of oil demand.
Figure
3: Electric vehicles (EVs) taking off, this time.
|
The
main chart shows WoodMac projections to 2040 for electric vehicle sales by region, following a characteristic S-shaped technology
diffusion curve as the technology becomes competitive (used with permission). The inset, from a 1992 Shell Scenario
that saw EVs growing to a market >10x the actual size of today’s market, is a reminder that forecasting at the early
stages of a technological revolution is filled with peril. Source: Wood Mackenzie, Shell.
|
|
@ 2021 Engine No. 1 LLC
|
3
|
|
Why
stopping climate change requires near elimination of conventional fossil fuels
Before further examining
how energy transitions will unfold, it is worth pausing to understand why stopping global warming requires such radical changes
in industry. This is unlike pollution problems of the past, which have been often solved with cleanup devices that did not implicate
the existence of the polluting industry. Coal power plants that spewed sulfur, for example, became coal power plants with sulfur
pollution controls. Climate change is different.
According to the latest
major assessment of climate science from the UN’s Intergovernmental Panel on Climate Change, about 77% of all emissions
of warming gases come from industrial activities.[22] (The rest come mainly from farming and deforestation.[23])
Nearly all those industrial emissions are linked to the burning of conventional fossil fuels. Burning is a chemical process that
intrinsically releases carbon dioxide (CO2). Moreover, the production of fossil fuels, with conventional methods, involves
the leakage of methane (CH4), a potent greenhouse gas that is trapped inside coal and oil (and thus prone to release)
and is the main ingredient in natural gas. Pound for pound, CH4 is up to 120x nastier for the climate than CO2.[24]
However, because the total quantity of CO2 is so much larger, serious climate policy has the most profound implications
for the activities that cause CO2 emissions.
CO2 is known
as a “stock pollutant” because its lifetime in the atmosphere is very long—the geophysical processes that remove
excess CO2 once and for all work over many decades and even centuries. Therefore, what matters for warming is not
the flow into the atmosphere but the accumulation of those flows over years, much as the water level rises slowly in a bathtub
when the drain is mostly clogged.
Once pollutants of this
type have accumulated, radical action is needed to reverse course. Today, the concentration of CO2 in the atmosphere
is about 415 parts per million (ppm), nearly 50% higher than the pre-industrial level of 280 ppm. Just stopping that buildup requires
cutting global emissions by at least 80% so that the flow does not exceed the slow drain’s ability to drain the excess.
However, the real world is a collection of governments that do not align their policies to global climate models, which means
that some nations will keep emitting. Taking into account these realities and the uncertainties in how ocean chemistry and the
biosphere will respond to big shifts in emissions, the longer the wait, the greater the risks.
These is the logic, rooted
in the geophysics of CO2 pollution and the realities of what the whole world can and will not deliver, that define
the goal of net zero by 2050. Because what works in the energy system in 2050 depends on what is built today, that has huge
implications for immediate investment. Many stones must be left in the ground.
@ 2021 Engine No. 1 LLC
|
4
|
|
Uncertainty
about demand for gas, and increasing downside risks
Fears about climate change
mean that conventional coal production must shrink rapidly. Oil will follow. However, the future for gas is still hard to pin
down. Currently, most mainstream energy projections see a strong demand for gas because the chemical composition of gas is
intrinsically cleaner than all other fossil fuels. When burned, natural gas releases a lot more energy for every molecule of CO2
pollution. Moreover, gaseous fuels tend to have lower levels of other pollutants like sulfur, a noxious source of local
air pollution. This is good news when fuel must be burned in places such as in dense cities that are already struggling to keep
the air clean. For the last two decades, most of the global growth in demand for gas has come from generating electric power,
where these properties of cleanliness and flexibility are a huge advantage.[25]
Not only does gas have
intrinsic advantages of relative cleanliness and flexibility, but the cost of tapping the world’s huge deposits of gas have
tumbled, driving gas prices down. Most notably, the revolution in horizontal drilling and fracturing has unlocked vast quantities
of gas from shale. In the United States, where the revolution began, this method of supply accounted for just 3% of natural gas
drilling activity in 2005; today, it is approximately 85%.[26] This tremendous success in opening supplies explains
why the industry benchmark projection for natural gas prices conducted in 2005 envisioned gas prices would rise to $7.30 per MMBtu
by 2019. In a landmark of atrocious forecasting, the actual gas prices that year were less than half that level, at $2.88 per
MMBtu.[27] Standard models used for projecting energy systems perform horribly—especially when technology and
policy change quickly—a fact that should give pause when those same models are used to project smooth transitions in the
future of decarbonization.
Cheap gas has created
many new demands for gas—for example, new gas-using petrochemical plants—which is one reason why analysts stubbornly
assume that demand will always rise. Most strikingly, electric power generators have opted for cheaper (and fortuitously cleaner)
gas instead of dirtier coal. From 2005 to 2019, the share of coal in generating electricity was slashed from about half to one
fifth, while the market share for gas nearly doubled, and emission-free technologies (i.e., nuclear, renewables, hydro) rose by
one third.[28] Cheap gas created more demand; more demand created more supply and experience with drilling technology,
which begot more cheap gas.
A new wave of shale production
may unfold in Argentina and southern Africa where there are similar shale rich geologies. Furthermore, competition from shale
has forced costs lower in other parts of the gas supply industry, such as the conventional supplies from Norway, Russia and other
places that feed Europe. The result is that coal is now essentially dead or near death in Western nations. In the UK, the heart
of the coal-fired industrial revolution, coal has been crushed steadily and decisively by gas and now wind and solar energy.[29]
The revolution of inexpensive gas is spreading globally, thanks in part to innovations in technologies such liquefied natural
gas (LNG) that make it possible for most countries to gain access to reliable, inexpensive gas even if they do not have big shale
supplies and experience themselves.[30] However, LNG remains costly for many importing countries, especially the rapidly
growing emerging economies of China and India, where rival fuels for electric power, such as coal, wind and solar, are more competitive.
The same gas boom that has been observed in the Western nations (which may now be fading) seems unlikely to occur in the powerhouse
economies of the next century.
This story of clean gas
and abundant supplies has created a blind spot in the industry and most analyst groups, which have assumed that the narrative
of the past will continue. Assuming that these warm chestnuts of a gas-rich future would define the future, nearly every published
scenario from the International Energy Agency (IEA) saw growth in gas as inevitable until just last year.
For the moment, the future
of gas is a lot less certain, as illustrated in Figure 4. With growing concerns about climate change, the spray for global gas
demand projections is bigger than ever before, principally because the downside risks of imploding demand have become more apparent.
What has changed is the realization that gas replacing coal, where it happens, only delivers shallow decarbonization—a few
tens of percent in lower emissions, not net zero by 2050. Gas, even when burned in the most efficient modern power stations, still
emits a large amount of CO2. Moreover, poor drilling and piping practices can result in leaks of methane, the potent
warming gas, and even a small leak can cause significant harm to the climate.[31]
@ 2021 Engine No. 1 LLC
|
5
|
|
Figure
4: Future demand for gas.
Gas
has risen inexorably since the 1960s, and the history of gas forecasting has included underestimates of future demand, including
in the IEA’s 2010 World Energy Outlook (blue lines starting 2010) and ExxonMobil’s 2019 Outlook for Energy. That may
now be changing, as shown in projections by IEA released in 2020, Shell (2018 “sky” scenario and 2021 “waves,”
“islands” and “sky 1.5” scenarios) and BP’s three projections released in 2020.[32] Source:
International Energy Agency, BP, Shell, ExxonMobil.
Unlike oil, where most
climate policies and technological advances point to lower demand, the effects of policy and technology on gas are still harder
to parse. Some technologies could allow for a much larger use of natural gas through the deployment of new power stations with
carbon capture and storage (CCS) and aggressive programs to control methane leaks and vents.[33] Those policies and
technologies are highly visible to the industry and help reinforce the mindset that conventional fossil fuels will always be needed
in large volumes.
Meanwhile, there is much
more rapid growth in policies aimed at outright bans on the usage of natural gas, such as in new residential and commercial construction.
These policies do not withstand most conventional cost-benefit tests yet are often politically very popular. Initially, these
policies came from the usual sources, namely fringe agitators against big companies and fossil fuels, such as Berkeley, California.
However, they are now spreading.[34] The possibility that demand for gas will shrink in the future—a heresy for
decades—is no longer so remote.
Lower
demand means radical changes in supply, the traditional moneymaker for oil and gas companies
In a world where it was
assumed that demand for oil and gas would expand, every Western supplier followed more or less the same model: expansion of supply,
focusing on fields where risks were high and thus returns from good technology and management were generous. In a world where
the need for new supplies is reduced radically, the traditional business model falters.
The effects of this shift
will be most pronounced in oil supply because that is where downside demand risks are greatest and where most oil and gas firms
make most of their financial returns. With oil demand flat and plausibly on the cusp of big declines, the risk of stranding production
assets is rising quickly.
@ 2021 Engine No. 1 LLC
|
6
|
|
Every firm, to varying
degrees, plans its investments in new oil supplies (“upstream,” as it is known) by compounding two factors. One is
an estimate of the total global need for oil. The other is an estimate of the rate at which existing fields would decline. While
people outside the oil industry mostly focus on total demand, this second factor—the decline rates—actually has a
bigger impact on investment planning. With steep declines in existing fields, the industry has been able to assume, reliably,
that there will always need to be a lot of drilling.
Figure 5 demonstrates
the IEA’s scenarios for oil supply as a function of these two compounding factors.[35] Where total demand and
decline rates are high, there is a huge wedge that must be filled with investment in progressively riskier (and more profitable)
types of field. The first layer of investment is mere expansion of production at existing fields—including enhanced oil
recovery, where flooding a field with substances such as CO2 boosts output. Beyond that is the discovery and opening
of new frontier fields.
As the industry has tapped
fields with high decline rates—most striking, oil from shale—the wedge between demand and baseline supply has grown.
Decline rates on shale wells—which are gushers when first drilled and then plummet quickly—are about ten times the
rate of conventional oil wells.[36] A survey of drilling activity in the U.S. Permian basin (in west Texas and southeastern
New Mexico), completed shortly before the pandemic cratered demand and supply, showed that decline rates, already high compared
with other oil fields, were rising to about 40% annually.[37] In contrast, decline rates in large Middle Eastern fields
appear to be much lower, at 1% to 2% (with the caveat that reliable data from governments that require secrecy for survival are
scarce).[38]
Therefore, even the oil
firms most committed to deep decarbonization have been able to tell a story, framed by Figure 5, of ongoing needs for drilling
and expansion. However, that story is a lot less robust than it seems. With growing downside risk for total oil demand, the loss
in necessary supply comes disproportionately from new fields. When total world demand for oil drops, more of the supply can
be provided by traditional workhorse fields not operated by Western oil companies. Moreover, the decline rates on these fields
are typically lower than frontier production.
Figure 5: Oil supplies
from existing and new fields.
|
The
figure, reprinted from IEA (all rights reserved), shows total demand for oil (million barrels per day) under existing
policies scenario (“STEPS”) and a sustainable development scenario (“SDS”). A wedge is
created between the decline from existing fields in the absence of new investment and total demand. About one
third of that wedge is filled readily with investment in existing fields. Another
third is the necessary frontier (i.e., new field) for discovery and production under SDS.[39] Source: International
Energy Agency.
|
|
As the wedge varies in
size, the core business model of Western oil companies is in play. A big wedge is where Western oil companies traditionally made
their money. While even the lowest demand scenarios in Figure 5 suggest that the wedge will not disappear, an oversupply of skilled
drillers and equipment will be chasing a much smaller eudaimonic pie. The volume of new field discovery and production is more
than halved when demand shifts from existing policies to a more climate-friendly scenario.
In filling the wedge,
the Western oil companies made their biggest returns through excellence in managing risk. Ever since waves of nationalization
spread across the oil industry in the early 1970s, the world’s most lucrative hydrocarbon provinces have been locked up
by state-owned firms in countries such as Saudi Arabia or Iran where it was hard or impossible to do business. Therefore, the
best-performing Western companies did the opposite—rather than specializing in a particular country, they built a global
portfolio of projects on the confidence that the demand for new supply would exist. Exceptional financial performance came from
excelling in managing that portfolio. The business favored large companies with technical and political prowess of a special type,
namely companies that could make huge bets on whole countries as they emerged (e.g., Equatorial Guinea) or re-emerged as producers
(e.g., Iraq) and on particular kinds of geologies that required special technological skills where they had nurtured the skills
to excel (e.g., the ultra-deep water with complex geology in the Gulf of Mexico or off Brazil or Angola).[40] Within
reason, the riskier the better.
@ 2021 Engine No. 1 LLC
|
7
|
|
When the wedge shrinks
or disappears, this model evaporates.
The consequences of this
for gas suppliers are harder to parse. Long before the most profound implications of climate change for demand and supply were
apparent, most firms were already rebalancing away from oil toward a larger role for natural gas because demand for gas, especially
in generating electricity, was rising.
If gas demand shrinks
then the impact on upstream production will be similar to oil, but the effects will play out regionally. Each gas market has its
own characteristics, and, despite advances in LNG that allow the shipping of gas across long distances like oil, it is still costly
to move big volumes of gas around global markets. Shipping costs for oil are typically a small fraction of the value of the delivered
product. Shipping costs for gas via LNG can account for half or more of the product value. There is thus, more or less, convergence
in oil prices in a single global market but a weaker convergence in gas.
Within regions that seem
to offer huge opportunities for expanded production—for example, shale gas in North America—the structure of the industry
is not particularly rewarding for huge incumbents because it is easy for new entrants to join.[41] If demand softens
then the pressure on suppliers will mount even further, and the returns from bulk gas supply infrastructure—a capital intensive
network of pipeline and delivery systems—will shrink as well, except where regulation allows continued returns to incumbents.
What had been an obvious bet for a future of climate and environmental awareness—namely a shift by all the major firms
to boost their dependence on gas—is no longer so obviously rewarding.
Transformation
in demand and supply is already evident in capital returns
When the portfolio of
conventional, global oil and gas production was well-managed for long-term risk, the financial returns were often stupendous.
One widely used measure, return on capital employed (ROCE), saw returns in excess of 40% some years—especially when global
oil prices were high, and supersized returns came from keeping costs under control and earning windfall rents. Not surprisingly,
ExxonMobil’s Lee Raymond implored the whole industry to use ROCE as the right measure of performance, for his firm seemed
optimized at the time to deliver.[42]
A sign of how the business
is already changing is that the flattening of demand for oil and the softening of prices globally since the financial recession
of 2008 and the spreading expectation of serious climate policy have seen ROCE tumble (Figure 6). Firms that used to stand out
for exceptional management, like ExxonMobil and Chevron, have seen their ROCEs converge with other firms. The exceptionalism of
good management focused on maximizing the value of liquids has, for the most part, ended.
@ 2021 Engine No. 1 LLC
|
8
|
|
Figure 6: Return
on capital employed (ROCE) for the five Western oil majors, 1995--2019
|
Supersized
returns, which peaked with high oil prices in the middle and late 2000s, have now come
back to Earth to sub-10% levels; the large variation across the industry has also narrowed.
Source: Goldman Sachs
|
Part 2:
The Dangers of Inaction
Every few years since
the first oil crisis woke up energy strategists to the importance of oil supply, a new vision for the “end of oil”
has appeared. Some of these visions see coal or nuclear power, both geopolitically more secure, replacing oil; indeed, they have
where it was easy to switch from expensive oil to these alternatives, such as in generating electric power. Other visions saw
the sheer exhaustion of oil as the problem.
All of these visions for
the end of conventional oil and gas have come and gone without making much of a fundamental dent in the industry. Doing better
at what is familiar for oil and gas production has always been easy; despite periodic panics, new oil and gas supply has always
come online, new technologies have radically lowered the cost of production and fears of energy insecurity have abated. Over the
last decade, for example, the cost of some frontier offshore oil drilling has plummeted nearly threefold due to technological
and business innovations.[43] Supplies of stones were always ready, often cheaper than the last batch.
This time will be different.
What is new is that the decarbonization revolution is being led by technologies and policies that will drive lower demand. It
is dangerous to look to history—where forecasts of declining demand have passed like a seasonal flu—as the method
for understanding the new future for demand. The industry is particularly poorly equipped to grapple with shocks in demand because
they involve synergies across factors (i.e., policy, innovation, the decentralized rise of new industries) that are far outside
the industry’s normal scope of competence. All of these factors are changing simultaneously. It is easy and incorrect
to believe that inertia will prevail.[44] Moreover, the effects of technology and policy reinforce each other. A push
from policy often makes new technologies that compete with oil cheaper; in turn, that drives oil demand lower while creating bigger
markets for rival technologies. Success in that market expansion also creates new expectations, and it makes the new rivals more
powerful politically and more capable of passing still more policies that accelerate the shift away from oil and gas. The greater
the success of the policy, the lower the cost of the rivals, and the easier it is, politically, to take even more dramatic steps.[45]
Looking across the industry,
there is huge variation in whether and how firms are responding to the decarbonization challenge. This can be seen, as illustrated
in Figure 7, by examining responses along two dimensions. The first dimension is the aggressiveness of goals for deep reductions
in emissions, with the most aggressive goals all stemming from European companies, including Repsol (headquartered in Spain),
Total (in France), Equinor (Norway), BP (United Kingdom) and Shell (United Kingdom and the Netherlands).[46]
The other dimension on
Figure 7 is significantly harder to identify: the extent to which firms are readying themselves for the transition by investing
in—and learning about—new clean energy options. If those options were known and available “off the shelf”
then transforming an oil and gas company into a clean energy company would be straightforward. However, since they are not, these
options must be worked through to be understood—practical experience through real operations is needed to comprehend what
is possible and how to organize and manage new lines of business. The horizontal axis in Figure 7 is a measure of that working—a
measure of the level of experimentation by the firm (and by the firm’s partner governments, where the firm has those supportive
relationships) in clean energy futures.
@ 2021 Engine No. 1 LLC
|
9
|
|
Figure 7: Commitments
and readiness for clean energy futures.
The
vertical axis is a measure of the breadth and depth of corporate pledges to reduce emissions, with the highest scores for specific
commitments to net zero emissions across scope 1, 2 and 3 emissions. The horizontal axis is a measure of relative preparedness
for deep decarbonization, with the lowest scores for firms that are essentially unchanged and the highest scores for firms that
have the largest and most diverse clean energy portfolios (e.g., as reflected in shifts in their capital budgets, and their corporate
efforts to experiment with diverse response strategies in places most likely to yield value.) Such assessments necessarily involve
subjective factors. The vertical axis is coded by the author with adjustments to pledges tabulated and assessed by Carbon Tracker.
The horizontal axis scoring is based on the totality of assessments by PwC, S&P Global, CDP and IEA.[47] Source:
David G. Victor.
CO2 is unlike
other pollutants and social concerns that the industry has grappled with in the past. Those tended to link directly back to the
operations of producer firms themselves, thus implicating the need to change behavior and technology inside firm boundaries, such
as cutting local oil pollution from operations, reducing payments to unsavory governments or curtailing harmful effluents from
refineries. Assessing readiness for a world of deep decarbonization requires the opposite: looking far beyond a firm’s
boundary.
Figure 8: Emissions
from operations and products supplied by large oil and gas firms.
|
|
The emissions that matter are not just those caused by the firms themselves
(known as “scope 1” emissions) or even the energy services, such as electricity, that firms purchase to help with
production (known as “scope 2” emissions). Instead, most of the emissions from the oil and gas industry come from
how the products are used: scope 3 emissions. As shown in Figure 8, nearly 90% of the total emissions associated with oil
and gas operations comes from scope 3.[48]
|
The
chart shows emissions from S&P 500 firms by segment: plant operations (scope 1), purchased energy services (scope 2) and the
use of the produced product (scope 3).
Source: Urgentum.
@ 2021 Engine No. 1 LLC
|
10
|
|
Success requires not simply being clean inside the firm’s fence line but
also changing potentially all the core products currently offered by the oil and gas industry, along with how those products are
used. On the one hand, complete transformation implies massive creation of new value. On the other hand, there is no reason to
suspect that most or any of the skills needed for that value creation exist within today’s incumbent firms. Finding answers
to that challenge requires experience rather than waiting for the best industry-wide strategies to become apparent. Nevertheless,
gaining that experience is costly, and the best approach will likely vary by firm and market.
Learning
to be clean: Five strategies in search of a solution
So far, firms have deployed
five major strategies in response to the climate challenge; these are summarized and illustrated in Table 1. To varying degrees,
all these strategies overlap. Even firms that are doing a lot to move away from oil, for example, still bet on continued core
oil and gas operations to varying degrees. As of yet, silver bullets remain elusive.
Table
1: Five iconic “solutions” to the decarbonization challenge.
The
table summarizes what industry leaders think attracts them to the solution, along with the risks. Both the attractions and the
risks require applying the solution in context—that is, they require investment and experimentation. Source: David G. Victor.
First, firms could
invest in carbon capture and storage (CCS). This approach is probably the easiest to graft onto the upstream oil and gas production
skills that the major oil and gas companies already have. Some CCS projects involve separating CO2 that has formed
naturally and is often co-mingled in large volumes with methane underground. Drillers want the methane—the combustible ingredient
in natural gas—and thus must separate and remove the comingling CO2 because it dilutes the potency of natural
gas. That separated CO2 is usually vented to the atmosphere, but, with better practices, it could be compressed and
injected underground. Drillers already have all the skills necessary to undertake this because putting CO2 (or other
fluids) downhole is commonplace in the industry. Two European companies have done this at scale: Equinor (in the North Sea) and
BP (in Algeria). Chevron is conducting large scale separation and CO2 injection at its Gorgon gas field in offshore
northwest Australia, and many other projects are under way, typically at locations where (as in Australia) government policy requires
it. A plan by ExxonMobil to do something similar in Wyoming, which would have accounted for 1% of the company’s global capital
expenditure in 2020, was shelved in 2020 due to the financial turmoil created by the pandemic, although it seems likely to be
revived.[49]
The problem with simple
CO2 removal from natural gas is that it doesn’t have much impact on deep decarbonization. Compared with simply
venting the CO2 to the atmosphere, emissions are lower, but the natural gas produced in this way still generates CO2
when burned.
@ 2021 Engine No. 1 LLC
|
11
|
|
To have a bigger impact
requires different skills, much more risk and supportive government policy. Those skills include capturing CO2 from
industrial processes (e.g., cement kilns, refineries) or building power plants so that they capture the CO2 somewhere
during the combustion process. Those skills must then be linked with expertise in managing the piping of gases and downhole injection.
Equinor has led a team that includes Shell and Total to launch the “Northern Lights” project, which will collect industrial
CO2 emissions from many sources around the North Sea, liquefy and transport them by boat to a common location (near
Oslo) and then inject them underground.[50] Despite having some of the world’s most stringent climate change
policies, these firms could not justify moving forward with the project financially until the Norwegian and EU governments offered
support. First of a kind projects are expensive; they create revolutions only when firms, often with the cultivated support of
governments, invest in early projects with an eye to many future projects—futures where experience can drive down costs
and create new markets.[51]
The most profound benefits
of CCS may transpire when it is combined with electric power generation. For example, a promising technology that would capture
CO2 from burning natural gas is being tested in Texas. It has modest backing from a consortium of energy companies
that includes an oil operator (Oxy), although whether this approach scales depends not just on technology but also on reliable
policy support.[52] Making these projects work requires entraining skills outside the core industry and also managing
the political support needed for large financial and policy backing.
Figure
9: Life and death of CCS projects.
The figure shows the bold plans for
CCS projects over time (grey stacked lines). By 2020, these plans, had they
been realized, could have sequestered about 100 million tonnes of CO2 annually
and rising. Instead, actual performance (blue stacked lines) was one fifth
of that level. The biggest failures have been in the projects that could
be most transformative, namely power plant CCS.[53] Source: David G. Victor.
|
|
|
These risks explain why,
as shown in Figure 9, a large fraction of the CCS projects proposed over recent years have all died, most of them long before
any firm invested much and gained practical experience. The lowest-risk CCS projects—like removing CO2 from produced
natural gas—tend to be successful, partly because they are required by governments and do not require much new skill. However,
they are not transformative for a deep decarbonization future. The most transformative projects—those involving CCS at
power plants—have the highest rate of failure. To date, 95% of the power plant CCS projects that have been imagined
have failed to operate.[54]
The risks are huge, and
the business models for CCS success are not yet apparent. Where CCS is used to advance the core industry—such as through
injecting captured CO2 underground in ways that enhance oil production or using CCS power plants to burn natural gas
in cleaner ways—the political backing that this nascent industry needs for policy support is more fragile than appears on
the surface. Many well-organized interest groups, along with an increasingly powerful zero-carbon industry, seek cost-effective
alternatives that move beyond oil and gas completely. This uncertainty helps explain the tentative takeoff of CCS globally. With
a few exceptions, reluctant investors, mindful of the risks and how they hinge on policy, have not yet treated CCS as similar
to an innovation that they believe is on the cusp of takeoff: a loss leader that, for early movers, will scale to a bigger and
more profitable future. Too many CCS projects occur as “one-off” ventures rather than early, sustained steps in learning
through experience.
Second, oil and
gas companies could focus downstream—on the products, which account for nearly 90% of emissions—and identify low-carbon
replacements that, ideally, are “drop in” substitutes. The logic for this approach is based, in part, on existing
marketing relationships. For oil products in particular, incumbent companies have existing networks of sales relationships to
provide gasoline, diesel and jet fuel, along with trading desks that allow for a degree of optimization at scale that confers
some commercial advantage to large, incumbent firms. Moreover, if drop-in fuels are viable, they will minimize disruption for
users, which could be extremely valuable—with some or all of that value accruing, perhaps, to fuel suppliers.
@ 2021 Engine No. 1 LLC
|
12
|
|
This playbook is familiar
already. In the United States, about 10% of gasoline sold is actually bioethanol, nearly all made from corn. In Sweden, where
policy pressure to act on climate change is stronger, about 30% of all diesel fuel sold is a biological substitute, blended with
fossil fuel diesel.[55] In 2005, the Swedish blending fraction was just 5%, yet policy and technology combined to quickly
change the status quo. A familiar playbook means that many firms know how to do this; the special advantages for large oil and
gas firms will be few unless they prove particularly adept at the innovation and delivery of biofuels in new ways.
To a lesser degree, there
is some blending of conventional fossil natural gas with biomethane captured mainly from landfills and from livestock manure lagoons
and injected into the gas pipeline system where fossil and biomethane molecules are indistinguishable. That, too, is a mature
industry. Many firms know how to spread a tarpaulin over a landfill, and in markets where those incentives exist, the readily
tappable sources have been tapped. Users of natural gas that are under pressure to show that they are reducing emissions purchase
biomethane credits that, today, trade for about three times the cost of conventional gas. Prices are expected to rise quickly
because the supply of cheap biomethane is nearly tapped out, and alternative methods, such as the gasification of biomass, remain
relatively costly.[56] In aviation, biojet—made usually from oilseeds but with a growing volume of “sustainable
aviation fuel” (SAF) that is synthesized—has also found a niche market, with the potential for scaling similar to
biodiesel because, chemically, jet fuel and diesel fuel are similar.
Turning these product
segments into a viable industry requires overcoming several challenges. One is the evidence that many biofuels are not particularly
good for the environment; their life-cycle emissions of CO2 are not zero, as often claimed, and the land uses and nutrient
imbalances required to grow these crops cause a variety of ecological harms. Oilseed biodiesel and corn-based bioethanol have
received a particularly harsh beating by scientists in this regard. Sugar-based bioethanol performs much better, but that biological
fact is politically inconvenient. Sugar growers based primarily in Brazil are not big voters in U.S. elections; corn growers are.
Advanced biofuels with lower ecological footprints hold promise, but they have yet to scale. ExxonMobil poured $100m into algae-based
biofuels, prospect that still appears to be commercially quite remote. Many other oil and gas firms invested heavily in advanced
biofuels with mixed results. SAF will be a key test because its market is poised to grow quickly, with SAF requirements taking
hold in Europe as a growing number of governments plan mandates for clean aviation fuel.[57]
Because these fuels utilize
existing infrastructure and end-use devices, it is plausible that innovation will generate huge value and returns to investors.
The key tests will lie with whether they can be made, simultaneously, truly clean and scalable. It seems likely that this will
depend on fundamental innovations that will come from outside the conventional industry—perhaps in the form of a completely
new approach to the biology or engineering of production. Those skills seem aligned with startup modes of experimentation,
rather than big incumbents. A related challenge is that if these clean fuels are anchored in agricultural methods of production
then the farming, feedstock and chemical management strategies needed for success may not map well onto the skills of most oil
and gas companies. Drilling and farming share few core skills.
So far, as illustrated
in Figure 10, the market for oil and gas product replacements is tiny. Only about 3% of the global refined products market is
biofuels; an even smaller fraction of natural gas sold globally is biomethane replacement for fossil natural gas. There might
be a regional supply story that is more robust and lucrative—for example, supplying biomethane into California (a market
that is saturated already)—but the global picture has yet to emerge.[58] The potential for scaling is enormous,
and the advantages that accrue to early movers who learn how to develop and deliver products that vary by market could be substantial.
For example, biofuels producer Neste has built a massive business from small early pilot investments, with products whose formulations
vary by climatic and policy contexts along with consumer needs.[59]
@ 2021 Engine No. 1 LLC
|
13
|
|
Figure
10: “Drop-in” replacements for oil and natural gas.
The
pie charts (which are roughly proportional to the energy value of the different market segments) show the size of conventional
oil-based land transportation fuels (left), aviation jet fuel (middle) and conventional natural gas (right). The wedges show the
current market sizes for drop-in fuels, which are largest for gasoline (ethanol), diesel (biodiesel) and biomethane.[60]
Source: International Energy Agency, BP, IHSMarkit.
While the scalability
and cleanliness of biofuels is unknown, there is an additional challenge in aviation. It remains unclear whether drop-in replacement
liquid fuels of any type will be decisive because a liquid fuel, when burned, still produces water vapor, and at some altitudes,
seasons and flight routes, that vapor becomes contrails. The latest science suggests that most of the warming effects from aviation
are actually contrails, not CO2.[61] Some science and operational experience indicates that modest changes
in routing could reduce contrail impacts, but the efficacy of that approach (and its impact on fuel consumption, which denotes
more CO2) is yet unknown.
Because of these contrail
effects, one of the most interesting responses to climate change concerns hydrogen. Hydrogen is an energy carrier, like electricity,
but it is potentially much more flexible because it is easier to store, can be supplied directly to industries as a replacement
for natural gas and for use in chemical processes and can be blended (with limits, given current knowledge) into the pipeline
system. Hydrogen is, at present, extremely expensive, and the only substantial large-scale investments are happening in places
where there is also strong policy support for decarbonization—such as in Europe and Japan.
A third strategy would
focus on clean infrastructure, such as electric vehicle charging networks and advanced gas networks that could convey pure
hydrogen to customers. This approach is attractive, probably in combination with the second approach above, due to the ability,
in principle, to build on existing customer relationships. EV charging might be located alongside gasoline refueling systems,
with the balance shifting as EVs rise; the electrons used for charging might be managed alongside power storage systems (that
use hydrogen); hydrogen, in turn, might be used for fueling heavy trucks where electrification seems possibly less practical.
Hydrogen might help ensure that existing gas pipeline networks continue to have value in a world of deep decarbonization—thus
avoiding the write-down of massive sunk costs in infrastructure.
The EV revolution has
put this opportunity—and the risk of inaction—into sharp relief. Plausibly, the world is in the early stages of explosive
growth in a new technology; it is situated at the bottom of the S-shaped curve of logistic growth that characterizes so many technologies
(see Figure 3 above). At plausible rates of explosive growth, EVs will account for 30% of global vehicles in 2030—a pattern
driven by new technologies and supportive policies in many diverse markets from China to California to the UK and most of continental
Europe. In 2019, the 7.2 million EVs on the road accounted for 2.6% of global car sales, with total share of cars on the road
at 1%. Year-on-year growth in electric cars before the pandemic was 40%, and there are no signs that pandemic disruption will
significantly alter that trajectory.[62] Rapid growth in buses and delivery vans, and likely soon other heavy vehicles,
is also evident.[63] While there is much attention to the role of Western countries in this revolution, the combination
of policy and investment in China has been the single most decisive factor.
@ 2021 Engine No. 1 LLC
|
14
|
|
A growing number of countries
have announced dates to ban sales of new internal combustion engine (ICE) vehicles—for example, Korea (proposed for 2035),
Norway (2025), Ireland (2030) and the United Kingdom (2035). If those stick, the light duty vehicle market will turn decisively
to EVs. Some caution is needed, because this future has been forecast before. In the early 1990s, Shell painted an S-shaped, explosive
growth for EVs that would have 120 million vehicles on the road by today; California regulators created policies aimed at pushing
10% of new cars on the road as “zero emission vehicles,” a concept they initially defined as synonymous with electric.[64]
The technology and markets were not ready; grand visions faltered. This time, the technology is a lot more mature and is
still improving rapidly.
The challenge in this
approach remains the lack of reliable financial return. Governments have focused subsidies on the purchase and leasing of EVs
but not, to the same degree, on building the infrastructure. The EV infrastructure business is open and competitive, with standards
and business models still being determined. It is a place for oil and gas companies to experiment, but with caution. In the long
term, hydrogen may be much more promising in places where firms can work with the government to support the necessary investment,
especially while costs come down. Success, though, may require that oil and gas companies build and own more of the gas infrastructure
itself—a costly fixed asset that, in most of the biggest markets, is currently owned and operated by other entities.
Fourth, oil and gas
companies could invest outside their industry and into renewable electricity supplies: solar and wind. Both technologies are
improving rapidly, and both are politically popular and zero carbon. Not surprisingly, many firms have made big pledges to add
renewable electricity to their capital investments.[65] Those pledging firms have now started shifting their capital
budgets to modest but rapidly growing investments in clean energy. As shown in Figure 11, the biggest of those investments is
in solar and wind.
Figure
11: The modest but growing investment in clean energy by oil and gas companies.
Total
capital investments by large oil and gas companies in clean energy projects are rising rapidly, but from a very small
base. The data here are from IEA (all rights reserved) and are consistent with other sources that track capital redirection
company-by-company.[66] Source: International Energy Agency.
|
|
What remains to be determined
is how to add unique value to solar and wind energy. Both are electric technologies; success in that business requires skill at
managing electric markets or electric utilities that are, for the most part, alien to oil and gas companies. Five of the major
oil and gas companies are, at present, making especially prominent pushes into electric power—BP, Equinor, Repsol, Shell
and Total. The experience will be familiar (if forgotten by the generational expanse of time that has passed) because many oil
and gas companies explored becoming electric companies in the 1990s when they had large volumes of gas that they wanted to monetize.
For most, this did not end well, in part because the electric industry, which is highly regulated, is a very different type of
industry from conventional oil and gas.
@ 2021 Engine No. 1 LLC
|
15
|
|
This time, the search
for success in electricity is lot more diverse and, it appears, careful. The companies that are most poised to act on climate
change—those shown in the upper right quadrant of Figure 7 and, not surprisingly, also those who have made the strongest
renewable power pledges—have invested in a diverse array of options. Solar and wind supplies have dominated the investments,
although compared with $311 billion in global investment in solar and wind, the $1.8 billion that large oil and gas companies
put into these technologies in 2019 is still tiny.[67] (The 2020 data, when they come in, will be filled with pandemic
noise and hard to parse.) Nonetheless, there may be room for big oil and gas companies because, with explosive growth, there is
room for everyone.
Solar and wind power accounted
for 10.6% of total global power generation in 2019; by 2040, as they travel steeply up the S-shaped curve of technology diffusion,
mainstream projections see them accounting for 32% and still rising steeply (Figure 12). Moreover, those projections are plausibly
underestimated because the same models that yield them have, historically, mostly missed the profound revolution in renewable
power, notably solar power.
Figure 12: Solar
explosion.
The
main figure shows the takeoff of total electric power generation (terawatt hours) by solar energy, while coal flatlines. Projections
are from the IEA’s World Energy Outlook 2020 with insightful analysis and visualization by Carbon Brief. The inset shows
the persistent lagging of these IEA models in estimating accurately the annual new installations of solar power (real capacity
additions in heavy red line; the IEA estimates from “stated policies” scenarios 2009–2020 in jagged horizontal
lines). This historical disconnect, which is being updated slowly, suggests that the surprises for solar deployment may still
be large and upside. The expected exponential takeoff for non-hydro renewables (nearly all of which a wind and solar) may happen
even faster than the IEA now projects.[68] Source: International Energy Agency (data); Carbon Brief (visualization).
This growth is being driven
heavily by policy, along with technological advancements that are so profound and rapid that the same agency projecting big growth
in the future has underestimated that growth every year for decades. It takes time for models to catch up to reality when the
latter is changing so quickly.
Because they are small
players in a huge, mature field, the incumbent oil and gas companies must be careful to identify what, if anything, they offer
to the renewable electricity revolution that is valuable. The answer may lie with offshore wind. Equinor and BP, for example,
have successfully repurposed skills in building offshore platforms in harsh environments into a winning strategy for building
large offshore wind turbines.[69] Many companies are integrating renewables into field and refinery operations—places
where electricity and heat are needed and where, often, grid service is nonexistent, unreliable or expensive—but this market
will, at most, reduce scope 1 and 2 emissions. It will not address the much larger problem of scope 3 emissions. Other possible
answers may lie with intelligent energy systems and smart grids. For example, Total is investing in this area using a venture
capital arm that recognizes that key innovations will arise outside a large incumbent oil and gas firm. Most large oil and gas
incumbents have similar venture arrangements, though they vary widely in the size and importance of the investment.
Integrating renewables
with hydrogen may also prove promising as the places that are shifting to the highest levels of renewables—for example,
Hawaii and California—are quickly learning about the high value of generators that are not as sensitive to exactly when
the wind blows and the sun shines because they have built-in storage. Big oil and gas companies are experts in hydrogen, which
they already use in refineries, but the hydrogen revolution for renewable electricity will probably require different skills that
none of the majors currently possess. For example, it may require operations of large scale electrolyzers (where technology is
advancing rapidly) along with the integration of hydrogen and other forms of electric storage into electric grid operations. Other
formidable competitors are likely—among them, the green giants shown in Figure 1. Hydrogen integration with electricity
is currently extremely costly and thus hinges on policy support—an area where the European firms are furthest along because
the EU has included hydrogen in its European Green Deal and other infrastructure support. The UK and Norway are also among big
policy supporters.
All four of these strategies,
if they are to add value, will require a massive investment in R&D and searching outside the incumbent firms for solutions.
@ 2021 Engine No. 1 LLC
|
16
|
|
Fifth, if all these
strategies seem daunting, firms can do the most familiar: just keep pumping. This strategy would involve shoring up investments
in well-established oil fields that have low risk and low pumping costs—an area where integrated oil companies have, in
fact, very little comparative advantage because many firms can do this. It would involve providing a shrinking market with
the conventional oil and gas that it needs, although that market will be marked by many suppliers and huge state-owned oil companies
that have exclusive access to most of the world’s least costly oil to produce. It seems unlikely that Western oil and gas
majors—who are fine-tuned to be seekers and managers of risky frontier production—have special skills in this world
of a commodity death march to be the last man pumping. Firms that follow this strategy will plausibly find it more attractive
to simply decapitalize before everyone in the markets recognizes what has changed.
All the major oil and
gas companies, today, envision a continued role for oil and gas production. Where they differ is the size of that role and their
outlook on what should be done about the remaining emissions associated with the continued combustion of hydrocarbons. All the
firms that have set strict limits for their volume of total emissions—scope 1, 2 and 3—envision, to varying degrees,
the need for offsets that would compensate for emissions from any remaining production of oil and gas. Indeed, the growing number
of net zero emission goals set by firms has spurred rapidly, rising demand for these offsets. Also growing are calls for the standardization
of offset protocols so that firms know the level of offset credit they can earn from different projects, such as protecting forests,
planting trees or capturing CO2 from the atmosphere and injecting it underground.[70]
It is easy
to understand why so many firms now seek large volumes of offsets. However, it is also important to recognize that the prodigious
use of offsets must soon confront growing evidence that a large fraction of offset credits reflect activities that do not actually
cause the promised net reduction in emissions.[71] Firms that want to extract value as the last man pumping while still
cutting total emissions must provide better answers to the problem of poor-quality offsets.
@ 2021 Engine No. 1 LLC
|
17
|
|
Part
3: What to Watch as the Industry Responds
With so much in flux,
it is hard to take the pulse of change. It is even harder to manage a firm within an industry that has been optimized in a world
that, quickly, will no longer exist. Each firm that is taking the climate problem seriously is making strategic choices under
conditions of huge uncertainty. Each response strategy is marked by upside and downside risks. Inaction—or tepid action—has
no long-term upside and catastrophic long-term downsides.
How can we distinguish
firms that are preparing for and shaping the decarbonization transition from those that, by default, will try their luck to be
the last man pumping?
One place to watch
is learning and adjustment. If the best response strategies to the challenge of climate change were obvious, firms that are
taking the problem seriously would all be doing the same thing and learning how to follow that single playbook better. That, more
or less, describes the world that is now ending—a world in which all the major oil and gas companies, to varying degrees,
sought supernormal returns from globally managed, risky upstream production plays. Today, the firms that are taking this new
challenge seriously are not all striving to perfect the same playbook because nobody—not firm managers nor sage analysts—reliably
knows what is best. In this context, success must be measured not simply by allocation of effort but by whether firms are
designing their strategies to learn quickly.
Part of the learning is
internal to the firms and is revealed by their diversity of response strategies—such as those documented above—and
their mechanisms for rapid evaluation. In effect, these firms are running a series of experiments. Some are within domains that
the firms control, such as businesses producing SAF or solar power that they acquire or build. Many of the experiments that seem
likely to be most consequential are in domains that the firms share with other firms and with governments, such as the Equinor-led
Northern lights project or a BP-led project at a longstanding industrial center in Teesside, a coastal community in northeastern
England that used to be a center for steel and chemical production. The project aims to use hydrogen and CCS technologies to deliver
clean gas fuel while storing CO2 underground in the North Sea. That project involves four other companies and the UK
government. The measure of these efforts is not just that they are occurring but also that they are designed for adjustment, namely
enhancement where the experiments work and closure where they do not bear fruit.
Part of the learning is
collective. Of note is an industry-wide effort organized under the Oil and Gas Climate Initiative (OGCI) to invest in early-stage
technologies and improved business practices that are likely central to any decarbonized future for the industry. In particular,
OGCI pools capital and expertise to invest in CCS and strategies for cutting emissions of methane.[72] The former is
essential if fossil fuels are to have any significant role in an economy that otherwise has near-zero overall emissions—OGCI
helped organize the Teesside project, for example. The latter is vital if natural gas in particular is to have any role in a decarbonized
future. OGCI members have made the strictest methane control pledges of the industry, essentially to eliminate leaks of the potent
warming gas, and OGCI technologies have helped give the members the confidence to deliver. While OGCI members have collectively
and individually set ambitious goals for cutting methane emissions, what ultimately matters is excellence in operations and independent
verification. Here the experience with the new reporting framework under the Oil and Gas Methane Partnership (OGMP 2.0) is instructive,
for it establishes rigorous standards (which are voluntary for now but are likely to inform binding European rules) for methane
accounting and verification.[73] All the large European oil and gas firms adhere to OGMP 2.0; none of the U.S. firms
do.
@ 2021 Engine No. 1 LLC
|
18
|
|
A central part of the
learning process must be laser-like attention to the risks of stranded assets. Many of the potentially transformative experiments
are organized as collectives that involve governments because this helps stabilize policy expectations and reduce the risks that
shifts in policy will strand assets. The risks are extraordinary, even in a capital-intensive industry that is already highly
sensitive to the dangers of stranded assets.
To reveal the risks, it
is instructive to look at the plan from the UK government. This plan has been among the most aggressive in planning deep cuts
in emissions and also the most transparent about how it intends this transformation to occur with the costs and disruptions that
remain publicly acceptable and thus politically durable. The plan, as shown in Figure 13, is to reduce the long-term costs of
energy services by shifting from energy systems with high operating costs to those with high capital costs and amortize those
capital costs over long time periods.[74] This approach is consistent with many modeling studies, such as those examined
by the IPCC, that show how decarbonization will move economies away from fuels, with their attending operating costs, to infrastructures
such as electricity and hydrogen where most of the cost is fixed.[75] Put simply, economies that decarbonize are economies
that electrify and capitalize.
That maxim of capitalization
is the new reality for the energy industry. With that reality comes massive risks and the need for active strategies to learn
quickly and manage the risks associated with dead ends and stranded capital. Those skills require learning through experimentation
and, perhaps most crucially, the ability to work with other partners and governments that face the same challenges. The European
firms are pioneering that approach, often at a near-term cost, because they see the realities of deep decarbonization looming.
Globally, many others are doing the same. What is striking in this shift is that the biggest firm and the caboose is ExxonMobil;
this is especially striking, perhaps, because for so long it was a leader of the industry.
Figure
13: The UK’s climate change plan—shifting to capex to save, in time,
opex.
The
chart shows, by major segment of energy-related activity, the annual expenditure on capital costs (top) and savings in
operating costs (bottom) to achieve net zero emissions by 2050.[76] Source: Committee on Climate Change, 2020.
Visual adapted from original chart.
|
|
The transformation that
is under way is laden with risks and will require a wide suite of new technologies. Nearly all of those technological options
are so unfamiliar to the oil and gas industry of today that it seems likely that much of the creation of value in a deeply decarbonized
world will come from new firms. Existing firms will need either to manage their own decline or to find strategies to integrate
new ideas from outsiders and new entrants.
The challenges for successful
management of incumbent oil and gas firms are immense because what’s needed is, in time, the identification of potentially
wholly new lines of business and reorientation of talent, culture and organization for excellence in those yet-unknown new purposes
and directions. Success will require new organizational forms that can search widely for new business models and also widely for
new kinds of partners. Success will also require highly active roles for boards—to support and steer executives who must
take risks in reframing corporate missions and organizations, along with aiding in the evaluation of new lines of business that
may be quite different from traditional oil and gas functions.
This is a familiar problem
in many industries that, over history, has mostly seen the death of the incumbents. Whether that happens here will hinge on a
completely new set of technological and organizational skills, all acquired under conditions of extreme risk that uninformed large
investments will strand capital.
@ 2021 Engine No. 1 LLC
|
19
|
|
About
David G. Victor
David Victor is a professor
of industrial organization and innovation at the School of Global Policy and Strategy at UC San Diego. He co-directs the campus-wide
Deep Decarbonization Initiative, an effort to understand how quickly the world can eliminate emissions of warming gases. He is
adjunct professor in Climate, Atmospheric Science & Physical Oceanography at the Scripps Institution of Oceanography and a
professor (by courtesy) in Mechanical and Aerospace Engineering. Prior to joining the faculty at UC San Diego, Victor was a professor
at Stanford Law School where he taught energy and environmental law. He has been heavily involved in many different climate- and
energy-policy initiatives, including as convening lead author for the Intergovernmental Panel on Climate Change (IPCC), a United
Nations-sanctioned international body with 195 country members that won the Nobel Peace Prize in 2007. His Ph.D. is from the Massachusetts
Institute of Technology and A.B. from Harvard University.
About
Engine No. 1
Engine No. 1 is an investment
firm purpose-built to create long-term value by driving positive impact through active ownership. The firm invests in public and
private companies through multiple strategies. For more information, please visit: www.engine1.com.
@ 2021 Engine No. 1 LLC
|
20
|
|
Notes
[1]
Amory Lovins, 1976, “Energy Strategy: The Road Not Taken?” Foreign Affairs (October). https://www.foreignaffairs.com/articles/united-states/1976-10-01/energy-strategy-road-not-taken
[2]
David Kirsch, 2000, The Electric Vehicle and the Burden of History (Rutgers University Press).
[3]
For example, see the work of Vaclav Smil channeled into Michael Cemblast’s annual energy letter. Tenth Annual Energy Letter
(JP Morgan, 2020). Related, using data through 2015 managed by Resources for the Future shows long term decarbonization of the
energy system has barely changed for decades. See www.rff.org/geo And for the long term trend starting in 1850 see: https://phe.rockefeller.edu/docs/HeresiesFinal.pdf
[4]
http://www.climatefiles.com/lee-raymond-collection/1996-exxon-raymond-moving-forward-together-economic-club/
[5]
Kingsmill Bond, 2020, Decline and Fall: The Size & Vulnerability of the Fossil Fuel System, Carbon Tracker (4 June). https://carbontracker.org/reports/decline-and-fall/
[6]
Brad Plumer, 2014.
https://www.vox.com/2014/5/29/5761944/this-chart-shows-why-its-so-hard-to-make-predictions-about-energy
David G. Victor,
2020, “Forecasting energy futures amid the coronavirus outbreak,” Brookings (3 April). https://www.brookings.edu/blog/order-from-chaos/2020/04/03/forecasting-energy-futures-amid-the-coronavirus-outbreak/
[7]
Missing that reality helped explain why The Economist’s cover on March 6th 1999 was “Drowning in Oil”
and nine months later on December 16th the lead essay proclaimed “We woz wrong,” and explored the perils
of forecasting—in this case, forecasting that involved the behavior of Saudi Arabia and other oil rich exporters whose production
behavior was hard to observe.
[8]
Total liquids consumption, as reported by BP Statistical Review of World Energy (2020), the best and most convenient source of
reliable energy information.
[9]
Global Future Council on Energy, 2019. “The Speed of the Energy Transition: Gradual or Rapid Change?” World Economic
Forum (September 2019).
[10]
Data sources: Historical oil (liquids) data from BP Statistical Review; projections from Shell (2013 Mountains and Oceans scenarios
plus 2018 Sky scenario and the 2021 Waves, Islands, and Sky 1.5 scenarios), BP (three scenarios released in 2020), the International
Energy Agency (baseline projections since 2000 plus three scenarios in 2010 and three in 2020). And ExxonMobil sole Outlook for
Energy scenario (2019). Online ExxonMobil has also “evaluated” the EMF27 two degree scenarios.
[11]
The quote is so perfectly revealing that, it appears, it may never have been said by Yamani; certainly many others have said more
or less the same thing. For example, see The Economist’s 2003 vision for an end to oil—a vision that did not pass.
https://www.economist.com/leaders/2003/10/23/the-end-of-the-oil-age
[12]
This shift in mindset—from supply uncertainty as the key to oil security to demand uncertainty as the key to ecological
security—is evident by looking at two of the iconic books from Dan Yergin, the most visible chronicler of the industry’s
past and future. His epic The Prize (Simon and Schuster, 1990) told the industry’s history through the lens of corporate
and political ventures that opened new fields for production and struggled to re-established production when, as in the Arab oil
embargo, the spigots were shut. His latest book, The New Map (Penguin, 2020) explores how new priorities, climate centrally, will
reshape the whole industry. As chairman of the world’s leading energy conference—CERAWeek, held every March in Houston—this
shift in wind direction identified by Yergin is a reflection that the industry, to some degree, now sees that same shift.
[13]
Simon Evans, 2020, “The world has already passed ‘peak oil’ demand, BP figures reveal” CarbonBrief. https://www.carbonbrief.org/analysis-world-has-already-passed-peak-oil-bp-figures-reveal
[14]
OPEC, 2020, World Oil Outlook 2045. (Vienna: OPEC). https://woo.opec.org/index.php
[15]
Two out of BP’s three scenarios see 2019 as the peak for total liquids consumption (at ~100 million barrels per day). One
scenario (“Business as Usual”, which is a concept increasingly fraught for energy modeling because little is “usual”
in the industry) sees tiny rises in oil demand before a long slow slide. BP Energy Outlook 2020. https://www.bp.com/en/global/corporate/energy-economics/energy-outlook.html
[16]
See Shell, “Sky” scenario, which is designed as a plausible vision for a future, not a projection, and thus be design
assigns no probability to that vision. https://www.shell.com/energy-and-innovation/the-energy-future/scenarios/shell-scenario-sky.html
[17]
See ExxonMobil “2020 Investor Day,” New York Stock Exchange (5 March 2020). https://corporate.exxonmobil.com/-/media/Global/Files/investor-relations/analyst-meetings/2020-ExxonMobil-Investor-Day.pdf
[18]
For example, in BP’s “Net Zero” projection, which envisions the most aggressive decline in emissions, the
company says, “implies that several trillions of US dollars of new oil investment is needed over the next 15 years or
so to ensure adequate supplies”. See BP Energy Outlook 2020, p.137.
@ 2021 Engine No. 1 LLC
|
21
|
|
[19]
https://www.woodmac.com/our-expertise/capabilities/electric-vehicles/2040-forecast/
[20]
https://www.iea.org/reports/global-ev-outlook-2020
https://www2.deloitte.com/us/en/insights/focus/future-of-mobility/electric-vehicle-trends-2030.html
[21]
BloombergNEF, 2020 “Battery Pack Prices Cited Below $100/kwh for the first time in 2020, While market average sits at $137/kWh”
(December 16). https://about.bnef.com/blog/battery-pack-prices-cited-below-100-kwh-for-the-first-time-in-2020-while-market-average-sits-at-137-kwh/
[22]
See figure 1.3a in: David G. Victor and Dadi Zhou et al., 2014, “Introductory Chapter,” in: Climate Change 2014: Mitigation
of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate
Change (Cambridge: Cambridge University Press).
[23]
For the latest land use estimates, which suggest that problem needs a lot more attention (but is outside the scope of this essay)
see c. Hong et al., 2021, “Global and regional drivers of land-use emissions in 1961-2017,” Nature. https://doi.org/10.1038/s41586-020-03138-y
[24]
See figure 5 (mass-based global warming potentials by time horizon) in: [Balcombe et al (2018)]
[25]
Inês Azevedo, Michael Davidson, Jesse D. Jenkins et al., 2020, “The Paths to Net Zero: How Technology can save the
planet,” Foreign Affairs (May/June). https://www.foreignaffairs.com/articles/2020-04-13/paths-net-zero
[26]
On the supply revolution see: Michael Shellenberger, Ted Nordhaus, Alex Trembath, and Jesse Jenkins, 2012, “Where the Shale
Gas Revolution Came From,” Breakthrough. https://thebreakthrough.org/issues/energy/where-the-shale-gas-revolution-came-from
On drilling activity, which I measure in footage, see data from US Energy Information Administration and IHS Markit at: EIA, 2018,
“Monthly Crude oil and natural gas gas well drilling footage by type (2000-2016). The data here co-mingle gas and oil drilling;
the story began with gas.
[27]
Estimates are from table 8b in the biennial retrospective at the quality of forecasts by the Energy Information Administration,
an informative if somewhat embarrassing exercise: EIA, 2020, Annual Energy Outlook Retrospective Review. (December 29, 2020).
https://www.eia.gov/outlooks/aeo/retrospective/ The generally horrible performance of these “closed” energy systems
models is now widely recognized, except by the purveyors of those models. See https://openenergyoutlook.org/ And see Adam Reed
et al., 2019 “Interrogating uncertainty in energy forecasts: the case of the shale gas boom,” Energy Transitions,
vol 3, pp. 1-11.
[28]
See figure 9 in: Energy Information Administration, 2020, U.S. Energy-Related Carbon Dioxide Emissions, 2019. (Washington: EIA).
https://www.eia.gov/environment/emissions/carbon/pdf/2019_co2analysis.pdf
[29]
See Figure 27 (“The UK Electricity generation mix, 1998-2019”) in Peter Low, 2019, Oil Majors: Lost in Translation
(London: Redburn).
[30]
Alan J. Krupnick, Raymond J. Kopp, Kristin Hayes, and Skyler Roeshot, 2014, The Natural Gas Revolution: Critical Questions for
a Sustainable Energy Future,” Resources for the Future. https://media.rff.org/documents/RFF-Rpt-NaturalGasRevolution.pdf
[31]
Paul Balcombe et al., 2018, “Methane emissions: choosing the right climate metric and time horizon,” Environmental
Science: Processes & Impacts, vol 20, pp. 1323-1339. https://doi.org/10.1039/C8EM00414E
[32]
Data sources: see figure 2.
[33]
On the policy front, notably the 45Q tax credits for CCS for which the Internal Revenue Service recently provided supportive guidance
that will help unleash investment. On technology, see discussion below on CCS for gas, including: https://netpower.com/
[34]
Mike Henchen, 2020, “Why States Need to Ban New Gas Hookups in Buildings (in 5 charts). Greentech Media (17 Feb). https://www.greentechmedia.com/articles/read/5-charts-that-show-why-states-need-to-eliminate-fossil-fuels-from-buildings
[35]
See also Figure 28 in Kingsmill Bond, 2020, Decline and Fall: The Size & Vulnerability of the Fossil Fuel System, Carbon Tracker
(4 June). https://carbontracker.org/reports/decline-and-fall/
[36]
See the hyperbolic decline rates modeled here: https://www.eia.gov/analysis/drilling/curve_analysis/
[37]
https://pubs.spe.org/en/jpt/jpt-article-detail/?art=6355
[38]
https://financialpost.com/commodities/energy/saudi-arabias-biggest-oil-field-is-fading-faster-than-anyone-guessed
[39]
International Energy Agency, 2020, World Energy Outlook (Paris: IEA)
[40]
For the logic of a risk adjusted global portfolio, with equity roles for western majors at different stages in the development
of an oil province, see Pete Nolan and Mark Thurber, 2012, “On the choice of oil company: risk management and the frontier
of the petroleum industry,” chapter 4 in: David G. Victor, David R Hults, and Mark C. Thurber, eds, Oil and Governance:
State-Owned Enterprises and the World Energy Supply, (Cambridge: Cambridge Univ Press).
@ 2021 Engine No. 1 LLC
|
22
|
|
[41]
The full experience is complex and generally more positive (at least until the pandemic) for shale oil than shale gas, where the
latter has seen the supply industry suffer from long-term low prices and lots of entry from small drillers. For example: Ed Crooks,
2019, “The week in Energy : Big Oil Getting Bigger in Shale,” Financial Times. (8 March). https://www.ft.com/content/4d4401f8-41ed-11e9-b896-fe36ec32aece
[42]
Steve Coll, 2012, Private Empire: ExxonMobil and American Power (New York: Penguin)
[43]
David G. Victor and Kassia Yanosek, 2017, “The Next Energy Revolution: The Promise and Peril of High-Tech Innovation”
Foreign Affairs (July/August). https://www.foreignaffairs.com/articles/2017-06-13/next-energy-revolution
[44]
World Economic Forum Global Future Council on Energy, 2018. Transformation of the Global Energy System, WEF (January). http://www3.weforum.org/docs/White_Paper_Transformation_Global_Energy_System_report_2018.pdf
[45]
Inês Azevedo, Michael Davidson, Jesse D. Jenkins et al., 2020, “The Paths to Net Zero: How Technology can save the
planet,” Foreign Affairs (May/June). https://www.foreignaffairs.com/articles/2020-04-13/paths-net-zero
[46]
While there is extensive reporting and spinning of these goals, the reporting on how these goals add up (or not) is usually more
reliable. See, for example, David Roberts, 2020, “On climate change, oil and gas companies have a long way to go,”
Vox (25 September). https://www.vox.com/energy-and-environment/2020/9/25/21452055/climate-change-exxon-bp-shell-total-chevron-oil-gas
[47]
For the first draft of the vertical axis scores see: https://carbontracker.org/reports/absolute-impact/ For the raw information
used by the author to make horizontal axis assessments see: a) https://www.iea.org/reports/the-oil-and-gas-industry-in-energy-transitions
b) PWC, 2020, Sustainability Strategies for Oil and Gas: Industry Perspective. C) https://www.cdp.net/en/articles/investor/beyond-the-cycle-whats-on-the-horizon-for-oil-and-gas-majors
d) https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/path-to-net-zero-climate-change-takes-center-stage-at-more-us-oil-companies-61440277
[48]
Data on scope 1, 2 and 3 emissions are for S&P500 members in “Energy” as estimated by Urgentum.
[49]
https://corporate.exxonmobil.com/News/Newsroom/News-releases/2021/0201_ExxonMobil-Low-Carbon-Solutions-to-commercialize-emission-reduction-technology
[50]
https://www.equinor.com/en/what-we-do/northern-lights.html
[51]
David G. Victor, Frank Geels, Simon Sharpe, 2019, Accelerating the Low Carbon Transition. London: Energy Transitions Commission.
https://www.energy-transitions.org/publications/accelerating-the-low-carbon-transition/
[52]
https://netpower.com/
[53]
A. Abdulla, R. Hanna et al., 2021, “Explaining successful and failed investments in U.S. carbon capture and storage using
empirical and expert assessments,” Environmental Research Letters, vol 16. Doi: https://doi.org/10.1088/1748-9326/abd19e
[54]
Data on death rates of different projects are based on a global databased (anchored in the NETL dataset) as reported in Ahmed
Abdulla, Ryan Hanna, et al., 2021,”Explaining successful and failed investments in U.S. carbon capture and storage using
empirical and expert assessments,” Environmental Research Letters vol 16. https://iopscience.iop.org/article/10.1088/1748-9326/abd19e
[55]
See figure 25 in: Peter Low, 2019, Oil Majors: Lost in Translation (London: Redburn).
[56]
The question of costs for natural gas replacements is very hard to pin down right now. My statements are based on current technology
and pessimism about the ability of biomethane technologies to scale once the easy-to-tap sources (eg, landfills) in the United
States are tapped. But the uncertainties must be recognized, and some visions for natural gas replacement see a huge role for
innovation in biomethane alongside a roughly equal role for hydrogen blending while conventional natural gas shrinks by two-thirds.
See a roadmap for Europe (where demand for decarbonization in gas is much more reliably seen by industry today): Daan Peters et
al., 2020, Gas Decarbonisation Pathways 2020-2050. Gas for Climate and Guidehouse (April).
[57]
Alex Dichter, Clemens Kienzler, and Daniel Riefer, 2020, Clean Skies for Tomorrow: Sustainable Aviation Fuels as a pathway to
net-zero, McKinsey. https://www.mckinsey.com/industries/travel-logistics-and-transport-infrastructure/our-insights/scaling-sustainable-aviation-fuel-today-for-clean-skies-tomorrow
. On emerging SAF blending mandate in Europe: https://www.euractiv.com/section/aviation/news/eight-eu-countries-call-for-green-fuel-to-be-mandatory-in-european-aircrafts/
[58]
See generally Ernest Moniz et al., 2019 Optionality, Flexibility and Innovation: Pathways for Deep Decarbonization in California,
Energy Futures Initiative. https://energyfuturesinitiative.org/efi-reports
[59]
https://www.neste.com/products/all-products/renewable-road-transport/neste-my-renewable-diesel
[60]
Biogasoline and Biodiesel as reported in BP Statistical Review of World Energy (2020). Conventional gasoline, diesel and jet fuel
products as reported by the IEA and converted using BP conversions. Biojet as reported in an industry survey by leading analyst
firm IHSMarkit: https://ihsmarkit.com/research-analysis/biojet-for-aviation--a-growth-story-for-the-2020s.html Biomethane as estimated
by IEA: https://www.iea.org/reports/outlook-for-biogas-and-biomethane-prospects-for-organic-growth
[61]
David S Lee et al., 2020, “The Contribution of global aviation to anthropogenic climate forcing for 2000 to 2018,”
Atmospheric Environment doi: https://doi.org/10.1016/j.atmosenv.2020.117834.
[62]
https://www.iea.org/reports/global-ev-outlook-2020
[63]
Gregor Macdonald, 2021 “ICE Melt” (19 January). https://gregor.substack.com/
[64]
On the Shell Scenario see: Shell, 1992, Global Scenarios 1992-2020. linked at: https://www.shell.com/energy-and-innovation/the-energy-future/scenarios/new-lenses-on-the-future/earlier-scenarios.html
On the CARB vision for the 1990s see Charles F. Sabel and David G. Victor, 2021 Fixing the Climate: Strategies for an Uncertain
World (Princeton Univ Press, forthcoming)
[65]
For example, see “Climate goals of the top 30 oil and gas companies,” compiled by S&PGlobal: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/path-to-net-zero-climate-change-takes-center-stage-at-more-us-oil-companies-61440277
@ 2021 Engine No. 1 LLC
|
23
|
|
[66]
Data from International Energy Agency, 2020, The Oil and Gas Industry in Energy Transitions (Paris: IEA, January). https://www.iea.org/reports/the-oil-and-gas-industry-in-energy-transitions
See also the terrific analysis by the Carbon Disclosure Project, but which has not been updated publicly since 2018: Luke Fletcher,
Tom Crocker, James Smyth and Kane Marcell, 2018, Beyond the Cycle: Which oil and gas companies are ready for the low-carbon transition?
Carbon Disclosure Project (November).
[67]
Large oil and gas company investments in solar and wind as reported in figure 10 (see sources there). The total investment for
2019 in renewable power (nearly all solar and wind) as reported by IEA, 2020, World Energy Investment. https://www.iea.org/reports/world-energy-investment-2020/key-findings
[68]
Sources: figures are visualization from Carbon Brief using data from various years of the IEA World Energy Outlook. Main figure:
see https://www.carbonbrief.org/solar-is-now-cheapest-electricity-in-history-confirms-iea Thanks to Auke Hoekstra for help identifying
the sources. And for additional commentary on why the systematic errors in forecasting see Adam Whitmore in 2017: https://onclimatechangepolicydotorg.wordpress.com/2017/09/26/underestimating-the-contribution-of-solar-pv-risks-damaging-policy-making/
[69]
https://www.greentechmedia.com/articles/read/new-yorks-new-green-push-includes-2.5gw-of-offshore-wind-contracts-for-equinor-and-bp
[70]
On the push for volumes of offsets and standardization see, for example, Leslie Hook and Patrick Temple-West, 2020, “Carney
calls for ‘$100bn a year’ global carbon offset market,” The Financial Times (2 Dec). https://www.ft.com/content/8ed608b2-25c8-48d2-9653-c447adbd538f
[71]
Ben Elgin, “The Real Trees Delivering Fake Climate Progress for Corporate America,” BloombergGreen (17 Dec). https://www.bloomberg.com/news/features/2020-12-17/the-real-trees-delivering-fake-climate-progress-for-corporate-america.
And see chapter 5 in: Danny Cullenward and David G. Victor, 2020, Making Climate Policy Work (Cambridge: Polity Press).
[72]
https://oilandgasclimateinitiative.com/
[73]
https://www.ccacoalition.org/en/resources/oil-and-gas-methane-partnership-ogmp-20-framework
[74]
Committee on Climate Change, 2020, The Sixth Carbon Budget: the UK’s path to Net Zero. https://www.theccc.org.uk/publication/sixth-carbon-budget/
[75]
Cite Leon Clarke et al., 2014, “Assessing Transformation Pathways” chapter 6 in: Climate Change 2014: Mitigation of
Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change
(Cambridge: Cambridge University Press).
[76]
Source: figure 3 in Committee on Climate Change, 2020, The Sixth Carbon Budget: the UK’s path to Net Zero. https://www.theccc.org.uk/publication/sixth-carbon-budget/
@ 2021 Engine No. 1 LLC
|
24
|
|
Important
Information
Under
no circumstances should any information or materials presented in this document be used or construed as an offer to sell, or a
solicitation of an offer to buy, any securities, financial instruments, investments or other services. Furthermore, no information
in this presentation should be construed or relied upon as investment, legal, accounting, tax or other professional advice or
in connection with any offer or sale of securities. Funds and investment vehicles managed by Engine No. 1 may currently beneficially
own shares of certain of the companies discussed herein, including ExxonMobil. These funds and investment vehicles are in the
business of trading – buying and selling– securities and intend to continue trading in the securities of such companies.
You should assume such funds and investment vehicles may from time to time sell all or a portion of their holdings of these companies
in open market transactions or otherwise, buy additional shares (in open market or privately negotiated transactions or otherwise),
or trade in options, puts, calls, swaps or other derivative instruments relating to such shares. Consequently, Engine No. 1’s
beneficial ownership of shares of, and/or economic interest in any of these companies’ shares of common stock—including
ExxonMobil—may vary over time depending on various factors, with or without regard to Engine No. 1’s views of these
companies’ businesses, prospects or valuations (including the market prices of these companies’ shares of common stock),
including without limitation, other investment opportunities available to Engine No. 1, concentration of positions in the portfolios
managed by Engine No. 1, conditions in the securities markets and general economic and industry conditions. Engine No. 1 also
reserves the right to change its intentions with respect to its investments in these companies, including ExxonMobil, and take
any actions with respect to investments in such companies as it may deem appropriate, and disclaims any obligation to notify the
market or any other party of any such changes or actions. However, neither Engine No. 1 nor any of its affiliates has any intention,
either alone or in concert with another person, to acquire or exercise control over any company discussed herein, including ExxonMobil
or any or any of its subsidiaries.
This
document may contain forward-looking statements, which reflect Engine No. 1’s current views with respect to, among other
things, Engine No. 1’s operations and performance. You can identify these forward-looking statements by the use of words
such as “anticipate” “approximately,” “believe,” “continue,” “estimate,”
“expect,” “intend,” “may,” “outlook,” “plan,” “potential,”
“predict,” “seek,” “should,” or “will,” or the negative version of these words
or other comparable words. Forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or
will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements.
Engine No. 1 undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information,
future developments or otherwise.
Past
performance is not indicative of future results; no representation is being made that any investment or transaction will or is
likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided.
Engine
No. 1 LLC, Engine No. 1 LP, Engine No. 1 NY LLC, Christopher James, Charles Penner (collectively, “Engine No. 1”),
Gregory J. Goff, Kaisa Hietala, Alexander Karsner, and Anders Runevad (collectively and together with Engine No. 1, the “Participants”)
intend to file with the Securities and Exchange Commission (the “SEC”) a definitive proxy statement and accompanying
form of WHITE proxy to be used in connection with the solicitation of proxies from the shareholders of Exxon Mobil Corporation
(the “Company”). All shareholders of the Company are advised to read the definitive proxy statement and other documents
related to the solicitation of proxies by the Participants when they become available, as they will contain important information,
including additional information related to the Participants. The definitive proxy statement and an accompanying WHITE proxy card
will be furnished to some or all of the Company’s shareholders and will be, along with other relevant documents, available
at no charge on the SEC website at http://www.sec.gov/.
Information
about the Participants and a description of their direct or indirect interests by security holdings is contained in the
preliminary proxy statement filed by the Participants with the SEC on March 2, 2021. This document is available free of
charge on the SEC website. The definitive proxy statement, when filed, will be available on Engine No. 1’s website and
the SEC website.
Exxon Mobil (NYSE:XOM)
Historical Stock Chart
From Mar 2024 to Apr 2024
Exxon Mobil (NYSE:XOM)
Historical Stock Chart
From Apr 2023 to Apr 2024