Can ExxonMobil Protect Climate & its Bottom Line?

It’s big news that ExxonMobil (XOM) has agreed to report on the risks to its fossil fuel assets in a world that comes to terms with the reality of climate disruption.  Many investors and others will check out what XOM has to say.  But more important is what XOM will do with its business strategy to minimize both the risks to its current assets and to the climate.

For decades, the strategy XOM and other fossil majors have followed is to delay the development of serious climate protection policies as long as possible in an attempt to minimize near-term impacts on their business operations.  But it is now clear that this strategy is not only harmful to the climate but also to XOM’s interest in protecting its assets. The forthcoming XOM report will show whether its management understands the new imperative for its business strategy.

That imperative is driven by the fact that there is a finite future global budget for carbon pollution that is compatible with avoiding terrifyingly destructive changes to the climate.  The startling news for many XOM investors is that the current proven reserves held by XOM and other fossil-fuel majors are several times the total cumulative carbon budget that can avoid very damaging climate change.  When governments wake up to the true threat of climate disruption, they will act to put a halt to the unlimited release of carbon from the products sold by XOM and other fossil-fuel asset holders.

Until now, XOM and others have acted as if the current attitude of governments to climate change (mostly lip service and token steps) means that fossil-fuel companies can ignore the prospect of future limits on carbon.  But it is becoming obvious that this is an unwise, “bet the company” approach.  The reason is that every year we delay action to reduce the global carbon burn rate, the less of the finite budget will remain when the world’s governments start acting in earnest to protect the climate.  Continued delay in deployment of low- and zero-carbon energy systems assures that the shift when it comes, will pose a greater threat to fossil-company asset values.  The current approach is literally burning up the degrees of freedom that big firms like XOM will need to navigate the transition successfully.

So what should XOM do to manage these risks to its assets?  It needs an action plan to preserve the asset value of the reserves it has already invested in.  XOM’s strategic objective should to assure there is room left in the finite future global carbon budget so it can minimize the fraction of its current reserves that become stranded.

XOM can do two big things: change where it makes its investments and change its stance on public policies to cut carbon emissions.

On changing its investments, it can stop putting more money into additional reserves discovery and development.  Its capital budget should shift promptly to energy options that are sustainable in a carbon constrained world and that will help reduce global carbon burn rates.

But XOM cannot protect its reserves just by acting alone (any more than DuPont could protect its CFC-substitute business just by making new chemicals).  XOM needs policies that constrain the rate at which everybody else is burning up the finite carbon budget.

The way to do that is to actively promote private and public sector technology and policy initiatives to reduce the global carbon burn rate as fast as possible.  That will leave maximum room in the budget for XOM to turn its reserves into salable products.  It is in XOM's interest to get competing uses of the global carbon budget reduced ASAP because continuing today’s massive carbon burn rate means that less of the budget will be left for XOM's products.

Consumption of the budget by coal is probably the biggest threat to XOM's reserves value. Policies to deploy efficiency, renewables, and carbon capture and sequestration (CCS), all can cut the carbon burn rate from coal and leave more room for XOM''s reserves to be used.

XOM's reserves are almost entirely oil and gas and those two fuels have different ultimate carbon footprints: nearly all oil goes into vehicles and CCS is not feasible for vehicles.  But a great deal of gas goes into power and heavy industrial use, where CCS is feasible.  So zero-carbon alternatives and CCS will help there too.

Getting active in the policy arena to protect its interests is not such a novel idea.  XOM and others have long been active in promoting trade, investment, intellectual property policies to create a stable business platform. And XOM has been active in climate policy too; just operating contrary to its long term interests.  Soon it will be obvious that its stance on climate policies needs to change.  

The report it will issue will be the first indicator of whether XOM gets what it needs to do or whether it tries to rationalize continuing what it has been doing.  In either case, XOM's explanation will be subject to intense public scrutiny.  And that will lead to progress.