Darren Woods, Chairman and CEO of ExxonMobil, speaks
during CERAWeek, an international energy ... [+]AFP VIA GETTY IMAGES
In a pair of recent stories, publicly-held oil majors ExxonMobil and
Shell exploded a pair of the most popular myths that have become a
part of the overarching narrative of the “energy transition,” which is
fast turning out to be more of an “energy diversification” or “energy
addition” than any sort of transition.
ExxonMobil Disputes Stranded Asset Theory
In a May 17 filing with the Securities and Exchange Commission
in response to the 2023 Glass Lewis Proxy Report Feedback Statement,
ExxonMobil takes on the myth that the world is currently on course to
meet the much-publicized “net zero by 2050” target, and as a result,
Exxon and other oil companies are at significant risk of incurring
major “asset retirement obligations (SROs),” or what is commonly
referred to as "stranded assets.”
I have written several times in the past that this stranded
assets narrative is an overblown concern that few executives in the
industry itself take seriously, for good reason. The simple fact is
that the global community is not remotely on a pace to achieve the
net-zero by 2050 goal, and even if it were, a robust level of global
demand for the products supplied by oil and natural gas companies
would continue to exist, perhaps at even higher levels than today.
This is essentially the theme of ExxonMobil’s response to the
Glass Lewis Report, with the company pointing out that even the energy
transition boosters at the International Energy Agency (IEA) admit the
world is not on a pace to meet the 2050 target. Here is the key part
of the company’s response:
“In their analysis, Glass Lewis states that AROs could
represent a material financial risk to the company. We are unable to
understand how they have arrived at this conclusion. In accordance
with GAAP, we do not incorporate into our financial statements those
types of risks that are as remote as the IEA NZE path. Glass Lewis
apparently believes the likelihood of the IEA NZE scenario is well
beyond what the IEA itself contends: that the world is not on the NZE
path and that this is a very aggressive scenario.” The company goes
onto state its belief that “it is highly unlikely that society would
accept the degradation in global standard of living required to
permanently achieve a scenario like the IEA NZE.”
The ExxonMobil reply here reflects precisely the answers I get
back from the variety of industry executives I converse with during
the course of my daily activities. The narrative surrounding stranded
assets is not a driver of investment or strategic decision-making
inside the industry, though it has been used as a tactical talking
point by activists seeking to discourage investment in oil and
gas-related industries and projects.
Shell Pushes Back At Renewables At Any Cost Advocates
Bloomberg reported May 18 on remarks made by Steve Hill,
executive vice president of Shell Energy, during a May 17 internal
town hall meeting. In the meeting, Mr. Hill is quoted as making it
clear to employees in Shell’s renewable power business that their
projects must become more profitable or face defunding and/or
divestment.
HAMBURG, GERMANY - FEBRUARY 24: The coal-fired Moorburg
power plant, which ceased operating at the ... [+]GETTY IMAGES
“Delivery will be the mandate of the organization going forward,”
Bloomberg quotes Hill as telling the gathering. “The things we’ve been
less successful with, we need to scale back or stop.” The story goes
on to cite examples of unprofitable renewables projects the company
has divested in recent months, and indicates the new direction is part
of a strategy designed to create higher shareholder returns and make
Shell more competitive with peer companies like ExxonMobil.
When asked by one questioner on the conference call about why capital
for renewables projects would be reduced considering Shell’s $40
billion in reported profits for 2022, Bloomberg reports
that “Ingrid Button, the finance chief for Shell’s renewables
business, responded by saying that the company needs to use that money
for other purposes, including shareholder dividends and buyback.”
Briton added that the company’s renewables unit “needs to improve
compared to competitors and demonstrate discipline with financial
choices.”
Bottom Line
Shell’s strategic shift is similar to
the announcement in
February by BP CEO
Bernard Looney that his company would dedicate increased capital
investment away from less-profitable renewables investments back to
its core oil and gas business in order to make the company more
competitive. Taken together, the actions by these three oil majors
reflect growing willingness in the industry to defend itself against
critics and speak positively about the undeniable benefits its
investments and products provide to the public.
After years of comparative timidity in the industry’s willingness to
tell its own story, these stories represent a welcome change in
direction.
Green Play Ammonia™, Yielder® NFuel Energy.
Spokane, Washington. 99212
www.exactrix.com
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exactrix@exactrix.com