Exxon activist Charlie Penner on the energy transition’s false narratives

Lots of news to start:

1. The World Bank is “missing in action” on climate change, say critics.

2. And the stand-off over Nord Stream 2 deepened yesterday, when Germany’s foreign minister said the natural gas pipeline, which is almost ready to begin shipping fuel to central Europe just as winter bites, could not be permitted in its current form under EU law.

3. Plus, the oil price surge is being very kind to Saudi Arabia, the world’s largest crude exporter, which is forecasting its first budget surplus since 2014. And EU carbon prices have hit another record high.

Welcome back to Energy Source.

First up in today’s newsletter is an op-ed from Charlie Penner, the man who led activist hedge fund Engine No 1’s successful proxy campaign against ExxonMobil earlier this year. He takes issue with what he considers false narratives about the energy transition, including one that blames activists like him for the recent surge in fossil fuel prices.

Also today: Myles explores which parts of America are most vulnerable to the effects of the energy transition. A new paper from Resources for the Future finds it is a more complex question than it might first seem.

Data Drill shows which energy stories mattered to Americans in the past year — and how their political stripes shape which ones they noticed.

If you missed Myles and Justin’s sketch from the big oil conference in Houston, no longer the energy capital of the world but apparently the energy transition capital of the world, do read it (and the comments beneath).

Thanks for reading

Ignore the misleading claims about the energy transition, says Penner

ExxonMobil’s strategy update, released earlier this month, maintained its current focus on disciplined spending on fossil fuel production while laying out more on emissions reduction. This was Exxon’s first strategic update since the election of new directors following a campaign I ran in my previous role at Engine No 1, and the FT has asked me to share thoughts on the company’s progress since that vote.

Any changes six months after the election were likely to be gradual, particularly given that Exxon earlier this year had already forsaken its aggressive multiyear spending plans and boosted low-carbon spending. There has, though, been a clear shift in tone, and large investors are watching to see how that rhetoric translates into reality over the long term.

But to do so, they will need to look through tactics designed to stifle debate about long-term change.

First off, some have pointed out that cutting fossil fuel production doesn’t change demand. This is, of course, a valid argument against cutting spending on near-term production, as others are likely to merely pick up the slack. But this argument does not address the wisdom of spending on new projects that typically would not start producing for many years, would not even begin to deliver a return for many years after that, and would often keep producing for decades after that. This in turn incentivises continued resistance in the fossil fuel industry to long-term change.

Even in times of demand growth — which is no certainty in future decades — large fossil fuel projects have frequently failed to deliver enough returns. While the industry expresses confidence about future demand, such claims are belied by its heavy lobbying against change, which threatens to harm long-term investors by deepening future industry disruption.

The second such tactic is to suggest that energy prices are the result of debates about the future. A recent example was when a news anchor asked whether investors who voted to replace a quarter of Exxon’s board with directors with successful energy experience were to blame for global oil and gas price inflation. As experts such as the head of the International Energy Agency and the chief financial officer of Chevron have noted, energy market squeezes result from actual events, including this year’s rapid demand recovery coupled with supply disruptions resulting from Covid, and weather events such as Hurricane Ida (which will grow worse as climate change does).

The third tactic is to argue that only unknown breakthroughs can enable a true energy transition. It is true that continued advances in areas such as battery capacity and advanced carbon capture (versus the type of basic gas separation Exxon currently does, which does not reduce Scope 3 emissions, or those from the products it sells) will be required.

However, the technologies needed for a substantial shift away from fossil fuels exist today, and carbon capture alone will not obviate the need for such a shift. While projected investment in oil and gas is — at least for now — largely aligned with reaching net zero by 2050, public spending on renewable power is only at a third of the levels required, the head of the IEA has noted. Some argue that this spending will never materialise, even though it would save trillions in energy and climate-change related costs. But if that turns out to be true, it will not be because the necessary technologies do not exist.

A legitimate debate can be had about how far and how fast the energy transition will go — and what role oil and gas companies have to play. At its core, the Exxon campaign was about better equipping its board to participate in this debate and plan for an uncertain energy future. But for investors to judge whether companies are pursuing their long-term best interests, they will need to set aside misleading arguments that cloud this debate.

Charlie Penner was head of active engagement at Engine No. 1 and originated and led its activist campaign against ExxonMobil. He left the firm in November.

Who will suffer most in the energy transition?

As American politicians look to usher in a greener future, talk is often heard of a “just transition” in which communities most reliant on fossil fuels are supported in making the leap to clean energy.

But which regions stand to be hit hardest by a rapid shift away from carbon-intensive energy? A new paper out this morning from Resources for the Future finds it is not as simple as pointing to those areas that produce the most coal, oil or gas — or those with the most power plants.

Some parts of the country where local economies rely heavily on fossil fuels will have an easier time pivoting away from their traditional industries than others, the report finds. Factors such as population, education, isolation and environmental risks mean some regions that are less reliant on fossil fuels at first glance could be hit hard.

“No two places are alike,” said Daniel Raimi, RFF fellow and lecturer at the University of Michigan, the report’s author.

“Some places — like Los Angeles — produce and consume enormous amounts of fossil fuels but will be resilient because of a diverse economy. But drive a couple of hours north to Kern County, which is a major oil producer, more rural, and more economically distressed, and the implications of an energy transition are much starker.”

Another example: Campbell County in Wyoming produced about a third of America’s coal output in 2019 — and stands to be hit hard by the transition. But the blow could be just as significant for some rural communities in Appalachia that produce less coal but suffer from significant socio-economic deprivation.

“The ways that counties interact with fossil fuels differ significantly,” Raimi said. “But many are facing problems beyond an economic shake-up. It’s important that policymakers recognise distinct local circumstances so they can tailor their solutions accordingly.” (Myles McCormick)

Data Drill

The February snowstorm that caused widespread power outages in Texas was the top US energy and climate story of the year, according to a new analysis.

Sixty-three per cent of registered American voters surveyed report that they saw, read, or heard “a lot” about the event, more than any other energy and climate story, according to findings from Morning Consult. Senator Ted Cruz’s holiday escape to Cancún during the storm ranked second, with nearly half of voters reporting being aware of the event.

The company also found that, despite growing concerns about climate, the news that resonated most with voters were economic. News about President Biden’s actions on climate failed to garner much attention from voters, with less than a quarter of registered voters reporting being aware of the 2030 emissions pledge and the executive order on EVs.

Democrats were more likely to report greater awareness about nearly every energy and climate event than Republicans. However, awareness of Biden’s climate actions was low even among Democrats, with less than 30 per cent of Democrats reporting having heard of his pledges. One exception was notable. When it came to news about rising petrol prices, Republicans reported being more aware by a gap of 20 per cent. (Amanda Chu)

Power Points