Big Oil Aims To Win Back Investors With Green Oil

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By Alex Kimani

Last month, the Biden administration dealt the fossil fuel industry yet another blow after it proposed the introduction of a carbon tax in a bid to address the greenhouse gas emissions that contribute to climate change. White House National Climate Advisor Gina McCarthy went to great lengths to make it clear that the Biden Administration is not fighting the oil and gas sector, but rather wants to deploy emissions reduction technologies to create union jobs, fuel the American economy and strengthen American manufacturing. Interestingly, executives from 10 of the biggest oil and gas companies, including CEOs of Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), bought into Biden’s plan with Occidental (NYSE:OXY) CEO Vicki Hollub being the only high-profile dissenter. Why is this important? Because it has probably sounded the death knell for high-carbon industries such as coal. According to S&P Global Platts, coal’s current 21% share of the generation mix is likely to fall to just 5% by 2030, assuming that a federal carbon price starts in 2026 while wind and solar generation could increase from the current 11% of the generation mix to 30% in 2030. Indeed, mothballing half of the country’s coal-burning electricity plants will open the doors for 122,000 megawatts of wind and solar while also cutting greenhouse gas emissions by some 600 million metric tons by 2025. An aggressive push towards 100% clean energy could also save Americans as much as $321 billion in energy costs, according to a new study. Hardly surprisingly, Big Oil executives have come up with a radically different solution: Greening their operations without necessarily sacrificing oil and gas output. Lowering emissions, not nixing fossil fuels Speaking at last month’s CERAWeek by IHS Markit energy conference, the overriding theme that emerged at the conference is that Big Oil wants to focus not so much on curtailing oil and gas production but rather on mitigating the impact of its carbon and greenhouse gas emissions. According to Exxon Mobil CEO Darren Woods and Occidental Petroleum’s Vicky Hollub, reducing carbon emissions from fossil fuels—and not the actual use of fossil fuels¬—offers the best way to combat climate change. Interestingly, both CEOs have stressed that the world still needs oil and gas, and governments need to focus on mitigating global warming using technologies such as carbon capture and storage (CCS) instead of attacking fossil fuels. Nevertheless, even the biggest hardliner of them all, Exxon Mobil, has markedly changed its tune from just a few years back. During the company’s 2021 Investor Day, CEO Darren Woods outlined the company’s energy transition strategy, including plans to trim production growth and boost cash flows in a bid to support a growing dividend. Exxon revealed that it plans to hold production flat from 2020 levels through 2025 at 3.7M boe/day, good for a 26% cut from the 5M boe/day estimate for 2025 it released just a year ago. Still, Exxon plans to continue ramping up production at the Permian Basin and Guyana, with Permian production averaging 400K boe/day this year before rising to 700K boe/day by 2025. Exxon also sees Guyana quickly becoming a key cash cow, but has indefinitely suspended other major projects such as the $30B Mozambique LNG export project. Woods announced plans to increase investments on carbon capture and storage to ~3% of new spending, an improvement from the 1% it had previously earmarked for CCS but still a far cry from the double-digit levels from European majors Total SE (NYSE:TOT) and Royal Dutch Shell (NYSE:RDS.A). Woods urged governments to stop picking winners and losers but instead establish carbon markets so as to “make sure we’re using market forces to try to most cost effectively reduce CO2 emissions.” Deep-pocketed investors are not buying it. The 145-member Coalition for a Responsible Exxon that oversees $2.5T in assets said that Exxon Mobil must change direction and not merely appoint new board candidates. Occidental Petroleum’s Vicky Hollub pretty much echoed Darren Woods’ views: “What I think that people don’t understand is we should not be talking about eliminating fossil fuels. What we really need to be talking about is eliminating emissions and if we can provide and we will. Net carbon zero oil, that is what the world needs and the world cannot achieve the goals … of the Paris accord without the oil industry helping with that. We can be leaders in that.” Hollub said OXY’s goal was to not only become a net-zero oil producer but also help other companies lower their carbon footprint: “We’re going to be building what will be the largest direct air capture facility in the Permian and partnering with us to do that is United Airlines because they also have a commitment and focus on getting to net zero by 2050.” Hollub revealed that Occidental has signed up to take carbon from two ethanol plants and a steel plant in Colorado and sequester it in the Permian Basin. Last week, Occidental Petroleum announced that its Oxy Low Carbon Ventures subsidiary plans to build and operate a bio-ethylene pilot plant that will apply technology using human-made carbon dioxide instead of hydrocarbon-sourced feedstocks. Bio-ethylene is currently produced from bio-ethanol mainly derived from sugarcane. The pilot plant is expected to begin operations in 2022. OXY is also against a carbon tax: “A carbon tax would be bad for a lot of the industry, a carbon tax would be bad for the consumers and especially for those consumers who are more disadvantaged from an economic standpoint,” OXY’s CEO told a virtual summit of the Texas Independent Producers and Royalty Owners Association. OXY has become the quintessential poster-child of an M&A deal gone bad after its $55B acquisition of Anadarko left it saddled with a massive $38.5 billion debt pile. A fight for survival Stewart Glickman, CFRA energy analyst, says Big Oil is spending a lot of time marketing its efforts on a low carbon future and technologies such as carbon capture because they are literally embroiled in a fight for survival. In 2020 alone, ESG funds attracted $51.1 billion of new money, and not having a low-carbon strategy in these times is a recipe for disaster. Sure, fossil fuel investors still want to hear the usual things: How healthy is your balance sheet? Can you sustain your dividend? What’s your operating cash flow look like? Can you maintain the production you want without spending too heavily on capex? These considerations will always be paramount. But in the same breath, they also want to hear about your investment in renewables and low carbon solutions businesses. And changing a few board seats no longer cuts it. So far, oil and gas companies appear to be doing a good job placating jittery investors, with the Energy Select Sector SPDR Fund (XLE) up 26.2% vs. 9.8% YTD gain by the S&P 500. That said, merely greening your legacy hydrocarbon business remains a risky and untested strategy at a time when the majority of oil companies are pivoting towards renewable energy investments.

Crude Oil

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