Running a major oil company means not having to say you’re sorry. Or at least that’s what ExxonMobil’s managers seem to believe. Earlier this week the oil giant posted a report on how it plans to reconcile the need to sharply limit fossil fuel emissions to protect the climate with its continuing gargantuan investments in additional oil and gas reserves. Its answer? We aren’t changing course. We’re going to keep drilling and spilling (carbon pollution at least); the world will just have to live with it.
People are used to chutzpah from ExxonMobil but even hardened oil baron watchers are wide-eyed at the brazenness of the company’s stance this time out. It is telling its investors no matter what happens to the climate, the world is in thrall to our products and no governments will dare to adopt policies that will provide alternatives in meaningful amounts. So we plan to keep spending billions every year amassing more oil and gas properties and we assure you dear shareholders, there will be willing buyers for every last barrel we decide to sell.
Exxon’s rationale for its position is that the world’s largest economies have not taken serious steps yet to curb carbon pollution so the company can assume they won’t act in the future in a way that will reduce dependence on oil and gas. From a risk-management standpoint, the company’s position is as irresponsible as the father who tells his children, “don’t bother with the seat belts, kids. We haven’t had an accident yet and I don’t see any cops around. Chill and enjoy the ride!”
Exxon’s report was produced to avoid a vote on a shareholder resolution that would have directed Exxon to prepare a report that identified the risks of the company’s fossil reserves becoming stranded due to the adoption of climate protection policies that would accelerate the use of alternative low-carbon energy resources. Rather than answer that question, the report the company just issued declares no such policies are going to happen, at least until after the period to 2040 that they discuss. This is akin to being asked, "what are your fire safety procedures" and answering, “there aren’t going to be any fires.”
Exxon’s report tries to talk its way around the widely-recognized finding that the carbon in current proven fossil fuel reserves is more than three times the permissible carbon budget compatible with preserving a 50% chance of staying within a sane limit of a 2-degree centigrade temperature rise above pre-industrial levels. Thus, unless the world decides to abandon a 2-degree climate safety net, there is a growing risk that large amounts of current reserves will become stranded assets.
Exxon’s response is clear, if not shocking in its bluntness: the countries of the world will abandon the 2-degree objective because it they will not adopt policies that will bring carbon pollution down fast enough. By Exxon’s logic, that means the company’s reserves are safe and investors should relax and keep buying the company’s stock.
Exxon’s argument boils down to one simple claim: that living within a low-carbon budget will cost “too much” and politicians just won’t act to drive alternatives, no matter how bad the impacts of climate disruption may become. Exxon’s claim that sane climate protection policy will cost too much rests on cherry-picked, dated modeling that conflicts with numerous more recent studies. While Exxon cites the International Energy Agency (IEA) to support its claims about energy growth, it ignores IEA’s findings about the true economic impacts of pursuing a low-carbon energy path. IEA finds that the biggest impact of the low carbon path is to reduce investment in energy supply activities and increase investment in smarter, more efficient vehicles, buildings, and factories (fig 6-10). IEA finds (p 257) that another major economic impact of the low-carbon path would be world oil prices that are $25/barrel lower than with the higher-carbon energy path, which would cut the oil import bills of the five largest importing countries in 2035 by nearly a trillion dollars per year. Who wouldn’t like that? (Umm, maybe a company that depends on continued high oil prices to justify its investments?)
Notable in the report is what Exxon does not argue. It makes no attempt to argue that the climate change will only have modest impacts and therefore there will be no need for sharp cuts in carbon pollution. Perhaps its in-house scientists told management that there is just no valid support in the scientific literature for such a claim. In fact, all the published literature establishes that the world is in store for serious negative impacts due to climate disruption and science cannot rule out a truly calamitous future.
So Exxon’s claim that serious climate policies won’t happen is little more than hand-waving: the world needs energy; nothing competes with our product on price and availability; it’s going to stay that way for decades to come; no matter how bad the climate impacts are shown to be, governments will ignore them, so our products are safe. It does not take a very astute investor to observe that this is an argument built on a house of cards. ExxonMobil’s answer to the question, “how are you managing against the risk that governments will act seriously on climate before your reserves are monetized,” is we’re assuming they won’t act, so we don’t need a plan.
Remarkably, the Exxon report cites IEA to argue that even if a low-carbon path is adopted, there will still be a very large market for oil. It points to an IEA projection that in 2035 global oil supply will amount to 78 million barrels per day, even under the 2-degree (450 ppm), low-carbon energy path (p. 458). But Exxon ignores the critical IEA finding that this amount of oil consumption is compatible with a 2-degree carbon budget only if the world adopts policies right now to dramatically reduce emissions from coal use.
What IEA showed in its report was that it would be possible to leave space in the carbon budget for large amounts of oil and gas use in the next few decades only if emissions from coal were cut dramatically through adoption of ambitious climate protection policies.
IEA’s numbers are striking and it is no wonder that Exxon completely ignores them in its report because they indict the company’s current policies rather than support them. Under the 2-degree, low carbon path that Exxon cites, the IEA concludes that coal use would need to drop from a projected 6.4 billion metric tons a year in 2020 under the current policies case to 5.3 billion metric tons to get on the 2-degree glide path. (p. 571) In the years after 2020, the reduction in coal use under the 2-degree path from business as usual (BAU) is even more dramatic: by 2030, coal use would drop to 3.9 billion metric tons, only 53% of projected BAU coal use; and by 2035, it would drop further to 3.6 billion metric tons, less than half of projected BAU coal use. (p. 571)
CO2 emissions from coal use under the IEA projection relied on by Exxon, drop even faster than coal use, due to the widespread use of carbon capture and storage (CCS) under IEA’s 2-degree path. (p. 141) Under the IEA 2-degree case, global coal emissions would peak at today’s levels (about 14 billion metric tons of CO2) and start to decline as soon as 2020. Under the 2-degree path global coal CO2 would drop to 7.6 billion metric tons by 2030 and to 5.7 billion metric tons by 2035. (p. 575) These emissions are only a fraction of the projected BAU coal emissions of 18.7 billion metric tons in 2030 and 19.6 billion metric tons in 2035.
It is these dramatic reductions in coal’s consumption of the cumulative carbon budget (more than 100 billion metric tons between 2020-2035) that leaves room for continued use of oil at the level cited by Exxon.
But—here’s the kicker. These reductions in coal carbon pollution only happen at the scale relied on by Exxon if the world acts today to adopt ambitious climate protection policies. Unfortunately, that is not reality as Exxon well knows but chooses to ignore. Every year that the current failure to act on climate protection continues, more and more long-lived investments in high-carbon energy sources, especially coal, are locked in and the carbon budget is consumed ever faster.
The implications for Exxon investors should be obvious but let's spell them out since Exxon has not. The company is telling its investors that even if the world adopts a 2 degree budget, there will still be a strong market for all of its planned investments in fossil fuels. But it is not telling its investors that the math supporting this claim rests on the world acting today to get on the low-carbon glide path. In short, Exxon is basing its claim on a policy path the world is not following today and something that the company is making no effort to get the world to follow. Indeed, the constant theme of Exxon’s climate “policy” since it abandoned its “denial” stance has been take it easy, no rush, let’s just wait for improved technologies to emerge and miraculously solve our carbon problem in time.
So there is a giant disconnect between one of the company’s central arguments to its investors – that even a low-carbon path has room for all of the company’s planned fossil fuel investments—and reality. The claim hangs together only if the world immediately does something it is not now doing and that Exxon has argued it should not be doing: embracing an ambitious set of policies to get us on a low-carbon path without delay. And, in case that argument is unpersuasive (as it should be to anyone who thinks clearly) Exxon’s second argument is don’t worry; the world will never embrace a serious low-carbon path.
Exxon’s first argument is demonstrably false today and its second argument becomes demonstrably less plausible as the evidence of climate disruption mounts and the attractiveness of low-carbon alternatives becomes more and more obvious. The world will act; the only question is how fast.
The company’s reports this week demonstrate that the management has set a course with mounting risks to its investors with every passing day. It is steaming toward a reef whose location is uncertain but that gets closer with every added dollar the company puts into boosting its fossil reserves. It can continue to deny that the reef exists but those denials will not change reality. The reef will have the last word.