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US majors dismiss carbon ‘beauty competition’

Firms regard the ambitious climate change targets and renewables investments of their European rivals as largely cosmetic

US oil firms are taking a very different strategy to their European counterparts when it comes to climate change. ExxonMobil, Chevron and ConocoPhillips have largely rejected the ambitious mid-to-long term emissions pledges and forays into renewable energy of firms such as Shell, BP and Total.

ExxonMobil chief executive Darren Woods says his company will not be drawn into a “beauty competition” with rivals. “Individual companies setting targets and then selling assets to another company so that their portfolio has a different carbon intensity has not solved the problem for the world,” he said at an annual investor day in March.

Chevron’s chief executive Mike Wirth has echoed this in public comments, saying his company preferred short-term measures and investing in new technology—rather than setting long-term “aspirational” goals with no clear path to achieving them.

Exxon is still fighting historic allegations that it misled investors over the potential impact of climate change on its business, although Woods is quick to point out that he asked President Donald Trump to back the Paris climate change agreement. The US is set to withdraw from the pact in November 2020, one day after the presidential election.

US majors have little appetite for diversification into renewables beyond providing clean energy to edge their own operations towards carbon neutrality. Instead, they say they will focus on what they are good at—getting hydrocarbons out of the ground and selling them into global markets that they believe will demand them decades.

“Selling assets to another company so that their portfolio has a different carbon intensity has not solved the problem for the world” Woods, ExxonMobil

While they expect tougher climate change requirements, the companies argue these actions need to be coordinated globally and across all sectors. 

The underlying pitch to investors—and the US public—is that they will be profitable, competitive and efficient enough to be among the last oil producers standing as oil demand flattens out, while doing it as cleanly as possible.

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It is an irritation to the US producers that they are portrayed by some as the bad apples, given that European firms remain among the world’s leading hydrocarbons producers.  

Europe’s five largest oil companies—Shell, BP, Total, Eni and Equinor—have together spent a total of $7.5bn on renewable energy projects to date, or around three-quarters of renewables spending by all major oil companies, according to consultancy Rystad Energy.

But that compares with combined upstream capital investment for those five companies of c.$53bn in 2019 alone, rising to around $100bn if operational expenditure is included.

However, many large investors are now putting climate change centre stage and will be seeking evidence from oil companies that they are actively planning for lower hydrocarbons demand, rather than trying to perpetuate it.    

$7.5bn - spending to-date on renewables by Europe’s big five

Investment giant Blackrock stated in mid-March it would hold directors of companies in which it held stakes accountable for failings in environmental stewardship. While it says it will remain exposed to the hydrocarbons sector, CEO Larry Fink has written to industry leaders warning “our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors”.

The US giants have been betting that the promise of improved returns from hydrocarbons operations and investment in technologies such as carbon capture and storage will satisfy investors. But this will require driving production costs down to more profitable levels—a task compounded by the March oil price crash.

Vulnerable assets

The impact of another prolonged period of low oil prices could result in further consolidation within the oil industry, which could work out well for the producers able to stay the course which less-prepared competitors fall by the wayside.

However, many big producers are still developing assets with high production costs that would struggle to be viable in an era of lower-than-anticipated oil demand.

A January report by think tank Carbon Tracker modelled the impact of a sudden tightening of global climate change policies, leading to price falls, on projects due to enter production in 2019-25 and concluded that ExxonMobil, ConocoPhillips and Chevron were at most risk of being left with uneconomic assets.

Such a ‘handbrake turn’ on climate policy may not happen. But, with the coronavirus crisis having already dragged down the oil price, producers may not have long to put their houses in order either way.

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