As the largest oil company in the United States, ExxonMobil will be looked to as a model for how to adapt in the oil and gas sector to sustain profitability in the face of climate change. The company must confront huge challenges in adapting its far-reaching, dispersed and capital-intensive set of assets to the new legislative and environmental situations that climate change is shifting the world towards.
First, the physical manifestations of climate change put Exxon’s business practices at risk. Rising and warming oceans will be the most dangerous symptom of climate change that Exxon will have to deal with directly. Rising oceans will affect the global network of ports which are the means by which a huge portion of the international oil trade is carried out. The degradation of this network of deep draft ports presents a significant challenge for Exxon’s long-term product distribution plan. In addition to the risks associated with rising sea levels, warming oceans make the oil refining process costlier. As sea water is often used to cool the refining process, warmer sea water makes cooling more difficult. Exxon splits its business lines into Upstream, Downstream and Chemicals. The percentage of revenues those business line generate are 9.3%, 79.9% and 10.8%, respectively (source: http://revenuesandprofits.com/how-exxonmobil-makes-money/). The Downstream segment is comprised mainly of transportation, refining and marketing of petrochemical products. It is particularly worrisome for Exxon that its largest business line is the one that is most threatened by the long-term effects of climate change.
Secondly, the regulatory environments that Exxon operates in across the world are likely to make it harder for Exxon and the oil industry at large to remain competitive. Specifically, carbon taxes and cap-and-trade regimes are likely to reduce dependence on fossil fuels and shift public consumption to renewable sources through price mechanisms. Furthermore, government-imposed emissions limits on vehicles and financial incentives for consumers to buy electric vehicles will threaten Exxon’s gasoline businesses over the coming century.
Exxon has only formally acknowledged the effects of climate change for two years so its approach to dealing with the issue is relatively new. It has undertaken three notable initiatives, including working with industry partners to create a voluntary framework for companies to report the risks associated with climate change. According to their 2015 Corporate Citizenship Report, the “resulting framework, which International Petroleum Industry Environmental Conservation Association (IPIECA) will pilot during 2016, covers a wide range of climate-related issues and provides a consistent reporting methodology for the oil and gas industry. This framework should enable interested stakeholders to understand an individual company’s views on the issues central to addressing climate change risks.” Another avenue that Exxon is pursuing is the development of more sustainable biofuels. The long-term implications and profitability of this type of technology are hard to predict and Exxon’s corporate communications don’t indicate to what extent they believe the biofuels business can replace lost oil, gas & petrochemical revenue. The last notable initiative Exxon is working on is the reduction of greenhouse gases either through improving their own process efficiency or by providing products and solutions to enable customers to reduce the amount of greenhouse gases emitted into the atmosphere. While cutting emissions is the main short-term goal, the 2015 Corporate Citizenship Report cites that for “the medium term, we are deploying proven technologies such as cogeneration and carbon capture and sequestration where technically and economically feasible.” The least detail from Exxon came from their plan for the long-term, for which the same report states that in the “longer term, we are conducting and supporting research to develop breakthrough, game-changing technologies.”
I think Exxon’s current strategy does not adequately address the threats its business lines face, particularly in the medium- and long-term. It is difficult to know exactly what Exxon means by “breakthrough, game-changing technologies,” though I think they owe it to their shareholders, and arguably the industry & general public, to better articulate the nature of those technologies and how they plan to address them. A main concern of mine is that they will face the phenomenon that Professor Christensen laid out in The Innovator’s Dilemma, where large established firms fail to properly embrace disruptive technologies and end up losing out to new entrants who are better equipped to succeed with the new technology and do not have to pivot the way an established firm would. As an industry leader, I’d like to see Exxon spell out a more detailed plan for what types of technologies they plan on using to drive growth and the process they plan to use to embrace such new technologies. (761 words)