A turning point for Big Oil
For Big Oil, May 2021 is set to be the month the wind changed. On Wednesday, activist investors added at least two of their own nominees to ExxonMobil’s board after warning the supermajor faced an “existential risk” from its fossil fuel focus. The same day, shareholders approved a measure for Chevron to set strict emissions targets from products that it sells, while a Dutch court ordered Royal Dutch Shell to cut carbon emissions much faster than it planned. Last week, the International Energy Agency said oil companies must stop all exploration projects from this year if global warming is to be curbed. The petroleum-based economy is beginning to unravel.
Oil’s Black Wednesday shows western oil and gas companies are under pressure not just from governments and their policies, and from parts of the general public. Pressure is coming too from activist investors through shareholder votes, and campaign groups through the courts (the Dutch branch of Friends of the Earth brought the action against Shell). Shell will appeal against the ruling, and beyond its immense symbolic value it is unclear how much short-term impact the board shake-up at ExxonMobil will have. But the legal and investor victories are bound to inspire more, similar actions.
Ironically, the oil groups they are targeting still potentially have some good years ahead. Several years of under-investment in the industry will run up against the failure, so far, to reduce global oil and gas consumption, and economies are poised to bounce back post-pandemic. The result could be an oil price squeeze and some impressive returns.
Longer-term, however, western majors seem set to face unstoppable pressure to shift their business models into new areas such as renewable energy, carbon capture and hydrogen production. European groups such as BP and Shell have gone further towards embracing this future; BP says it will funnel cash flow from its hydrocarbon production into clean energy. Even then, BP may struggle to persuade shareholders it is better placed to use all that cash than specialist companies that have been developing renewables for a decade or more. It is even less clear whether ExxonMobil, built on a century-old belief in ever-growing oil consumption, can reinvent itself.
Yet while this week brought an important victory for climate campaigners, it was not in itself a victory for the climate. As long as oil demand holds up, other producers — namely, state-dominated national oil companies — will be happy to step in to meet it. The IMF says even NOCs, from Colombia to Nigeria to Saudi Arabia, have started to pivot towards renewable energy investments. But the likes of Saudi Aramco or Rosneft are less vulnerable to legal or shareholder pressure. Many NOCs, which together account for more than half of global oil production, privately scoff at what they see as some western majors’ willingness to consign themselves to decline.
Ultimately, fossil fuel consumption — as opposed to western groups’ production — will fall only with the help of government-led transition plans: reducing fossil fuel subsidies, using carbon pricing mechanisms and carbon border taxes, and helping consumers to shift to renewable sources. It will require partnerships, too, between rich-country governments and emerging economies that often rely far more heavily on national fossil fuel companies, so that NOCs eventually face similar pressures to western producers. This remains an uncertain prospect. Legal and shareholder pressure can push companies, and governments, to change. Only government action can ensure that change takes place.