ExxonMobil(ize) on Climate Change?

Amidst allegations of misleading the public over climate change, questions remain for the role that energy giant ExxonMobil will play in the climate change debate. Responsibilities to the planet aside, climate change will have an impact on ExxonMobil’s supply chain. The positive or negative impact is up to ExxonMobil.

Allegation

In November 2015, ExxonMobil, the world’s largest publicly traded oil company, received a subpoena from the Attorney General of New York. The subpoena sought to determine whether ExxonMobil misled the public on climate change research and failed to make adequate disclosures to investors about the potential risks related to fossil fuel use. ExxonMobil denied the allegations. However, a representative for ExxonMobil stated that “[the company] recognises climate risks are real and responsible action is warranted”. [1] The world’s changing climate shows responding to a subpoena is not enough, considering the future impact to ExxonMobil operations amidst geopolitical uncertainty

Impact to Operations

At least two major climate trends are relevant to ExxonMobil’s supply chain: (1) increasing intensity and frequency of storm events, flooding and rising sea levels, and (2) decreasing water availability. As hurricanes, storm surges and flooding increases, both the Company’s onshore and offshore physical assets, and therefore their reliability and profitability, are at risk. ExxonMobil utilizes water throughout its end-to-end value chain of conventional oil and gas exploration, shale gas production, transportation of crude and oil and gas refining, and delivering finished products to consumers. [2]

Geopolitical Uncertainty

With 195 countries signing The Paris Agreement in 2016, the world is pushing toward air carbon concentrations below 450 ppm. Some studies estimate that if burned, the reserves on the world’s balance sheets would be double that which is allowed by such a mandate. This would have a significant impact on ExxonMobil, who manages a substantial reserve of fossil fuels. Many experts fear that current valuations of major energy companies do not consider assets and reserves that may be “stranded” by such geopolitical moves. One study estimated that this impact may be 40-60% of current market value.[3] With this shift, Exxon would have to substantially rethink its value chain and reserve allocation across the world. Based on a recent vote, ExxonMobil shareholders agree that this is a significant risk to the company. Shareholders historically voted (62% voting “yes”) for ExxonMobil to analyze a “2-degree scenario,” or an emissions plan that limits the global temperature limit to two degrees per year. This analysis would seek to understand the risk to projects and reserves that would be unfeasible or unrecoverable if the 2016 Paris Agreement were implemented. [4]

ExxonMobil’s Response

At an organizational level, ExxonMobil has recently appointed a leading atmospheric scientist to its board as it seeks to understand climate change’s impact on its business and supply chain. This is a bold move for a company that has shown a consistent resistance to recognizing the impacts of climate change. [5] One of the most direct ways that Exxon is limiting its carbon footprint is by expanding cogeneration within its operations. In traditional steam plants, efficiency is typically held at 50%. In cogeneration, heat that is generated from the production of electricity is used in processing operations, and efficiency is increased to around 75%.[6]  ExxonMobil currently has interests in 5,500 megawatts of cogeneration capacity internationally, an increase of 25% in the last decade.[7] Through the Global Energy Management System in their Downstream business and Production Operations Energy Management system in Upstream, ExxonMobil is using technology to identify and eliminate excess energy.  According to ExxonMobil, their energy efficiency has grown two to three times faster than the industry average. [8]

Looking Forward

ExxonMobil should continue to make strategic strides to reduce its carbon output, but additional pragmatic measures are required to mitigate climate change impacts and to ensure that Exxon drives the conversation on carbon. ExxonMobil should take immediate action to assess the exposure of its assets to more frequent severe weather, most notably its refineries along the Gulf of Mexico and its offshore assets. Future assets should be designed and tested based on these studies. ExxonMobil should also take a cue from other partners such as Shell and Statoil who more openly recognize the impacts of climate change. These partners are more actively uniting with renewable energy partners. ExxonMobil could benefit from lessons learned along the way. If not, they risk being left behind.

Additional Questions:

  1. Geopolitical uncertainty aside, what is ExxonMobil’s responsibility to its consumers and the environment, and
  2. What (if anything) can ExxonMobil sacrifice in its climate change response in the name of profit?

(777 Words)

[1] Newstex Finance & Accounting Blogs, Chatham: Newstex. Aug 24, 2017.

[2] US Energy Sector Vulnerabilities to Climate Change https://energy.gov/sites/prod/files/2013/07/f2/20130710-Energy-Sector-Vulnerabilities-Report.pdf.

[3] Henderson, R. M., et al, Climate Change in 2017: Implications for Business (HBS No. 317-032).

[4] Arvedlund, Erin. TCA Regional News; Chicago [Chicago] 01 June 2017.

[5] Crooks, Ed. FT.com; London (Jan 26, 2017).

[6]Combined Heat and Power Basics” https://www.energy.gov/eere/amo/combined-heat-and-power-basics.

[7] http://corporate.exxonmobil.com/en/technology/energy-efficiency/cogeneration/overview.

[8] Skjærseth, Jon Birger. International Environmental Agreements : Politics, Law and Economics; Dordrecht Vol. 13, Iss. 1,  (2013): 31-48.

 

Previous:

Toothpaste courtesy of robots?! Colgate-Palmolive’s digital supply chain

Next:

Enough Rubber to Meet the Road? Managing the Natural Rubber Supply Chain

12 thoughts on “ExxonMobil(ize) on Climate Change?

  1. When it comes to climate change, I think that energy companies do have a fiduciary responsibility to protect the environment. Yet, why is it that energy companies rarely take initiative to combat climate change or develop sustainable business models? I think that one reason is because energy companies are fairly well-insulated from consumers who have limited purchasing power/options when it comes to buying the products of energy companies. Contrast this scenario to that of a consumer in a grocery store (or a consumer shopping for furniture…hi IKEA!). Consumers can quite easily choose not to support these companies/retailers/manufacturers if they do not take a strong stance on mitigating climate change or any other social justice issue since there are plenty of other options. Not so with energy companies.

  2. Great post! I found it concerning that such a visible company would deny the risks inherent in fossil fuel use, especially as these topics are widely publicized and studied today. In addition to being a good steward of society and complying with regulations, I believe there is a huge benefit in preempting any concern the public may have about environmental effects purely from a public relations standpoint. I think about BP and how much was spent in the aftermath of the Deepwater Horizon oil spill just to win back public opinion. I would also argue that consumers do have a choice of whom to buy gas from in high density areas, though this likely does not represent the majority of revenue for the company. Perhaps an ad campaign to promote awareness of climate change that touches on the basic concept of cogeneration would help public perception of Exxon’s operations.

  3. In my mind, Exxon embodies capitalism and maximizing shareholder value since its inception in the mid-1800’s as Standard Oil. However, as the world begins to shift to stakeholder value and climate change effects I believe companies like Exxon will be forced to change. Unfortunately, besides some regulations on emissions from federal and state agencies, such as the EPA, O&G companies do not have a legal responsibility to the environment. The irony is the same system (capitalism) which has propelled Exxon to be the world’s largest public O&G company are now working against it. The price of PV’s has fallen over 70% in the last five years and efficiencies in other renewable energies will keep on competing with Exxon for the foreseeable future. The largest threat will be electric vehicles, yet even with double-digit growth rates EV’s do not pose a material threat in the near term.

    What Exxon should do is exactly what you mentioned – take a cue from its peers (BP, Shell, Statoil) and begin to invest in alternative energies and transform into an Energy company.

  4. I think Exxon’s responsibility to consumers and the environment is actually quite aligned with its own fiduciary duty to shareholders: sustainability and efficiency. As oil prices have fluctuated around or even below the level that would allow for breakeven drilling economics, Exxon owes it to itself to continue to invest heavily to improve its upstream technology and downstream efficiency. As Danny noted, the demand for oil has weakened as Chinese and Indian growth has tempered and electric vehicles and renewables have grown, and shale development has led to a glut of supply in the US.

    Against these secular headwinds on both sides of its market, Exxon must aggressively try to disrupt itself, and it can perhaps do so by setting ambitious targets to meet emissions standards. While “clean fossil fuels” are something of a fantasy, companies like Exxon are the only ones who can either make them a reality or devise a credible alternative. As one of the largest incumbents in both upstream and downstream operations, Exxon will also have the ability to influence the development of new infrastructure that is better suited towards cleaner energy production.

  5. After reading another post about Nike and their sustainability practices, there seemed to be a consensus that Nike was simply incorporating these practices because their consumers wanted to align with a brand known to be green. In this respect I definitely agree with HBSTOM17 in that companies like Exxon are far away from consumers so they likely won’t feel any direct pressure from their downstream counterparts to change. My initial thought is that change will need to come from the regulatory side because there’s no way a company like Exxon would take sustainability initiatives such as carbon reduction when it would directly impede on their core business. However, after reading Danny’s post, capitalism may prove to be a valuable ally for the environment after all because renewable technologies that don’t rely on fossil fuels will eventually begin to compete economically. When Exxon’s shareholders vote to reduce global warming I can’t help but think it’s only because they believe incorporating sustainability into Exxon’s business is to their economic advantage.

  6. From a practical perspective, Exxon faces significant geopolitical risk as energy prices remain low and broad trends move in favor of clean/renewable energy. As access to information reduces the distance between oil companies (and those directly affected by their practices) and consumers, I believe consumers will continue to demand more stringent standards. As CC wrote, this will very likely result in large quantities of stranded oil, greatly reducing the value of companies like Exxon. Therefore, Exxon should move aggressively into clean energy, where it can take advantage of rapidly expiring tax credits to fund long term projects. Regardless of the social good, Exxon should have the foresight to build a sustainable financial future through sustainable energy.

  7. One thing for Exxon to consider is to double down in its participation with the Climate Disclosure Project similar to Chevron. The Carbon Disclosure Project provides a platform for companies to report data on their practices and their supposed proposed changes they’d like to make as it pertains to climate change. The Carbon Disclosure Project is a fixture in the supply chain of Chevron, helping them realize leakage that they initially did not notice.
    https://www.chevron.com/corporate-responsibility/climate-change/greenhouse-gas-management

  8. I strongly believe that ExxonMobil has a responsibility to its consumers and the environment. Based on your post it’s apparent that the company isn’t doing much to address the serious issue of climate change in the energy sector. But why is that.. isn’t it in ExxonMobil’s best long-term interest to address its social responsibility to the environment? My guess is that one major issue is the impact on profitability for the company. A shift to cleaner energy is an easy solution to propose, however, it requires a significant investment from companies like ExxonMobil. Moreover, I believe that the government holds some of the responsibility to the impact of energy on environment and thus a possible suggestion would be to provide energy companies with tax credits for meeting certain environmental standards.

    One last question I have is, what are other companies (e.g. BP, Chevron, Citgo) doing in response to increasing climate control concerns?

  9. It is interesting to read about an oil and gas company’s perspectives on climate change. On one hand, climate change is a fundamental threat to their business (ie rising water levels and decreasing water availability) but on the other hand, acknowledging that burning of fossil fuels is leading to climate change is also a fundamental threat to their business model. The very idea of investing in alternative energies like wind and solar will lead the world to be less dependance on oil and gas. Can Exxon-Mobil protect its assets along waterlines while at the same time acknowledge they the products they are producing from those assets are a part of the core problem? It will be interesting to see as government regulations get involved in the climate change debate if regulations will negatively affect Exxon-Mobil and other gas company’s business operations. Will they have something else to say about climate change if solar and wind became as ubiquitous as gas in the energy sector?

  10. This is a great article that demonstrates how climate change could impact ExxonMobil daily operations and, more importantly, its ability to do business in the fossil fuel industry.

    The company is heavily invested and exposed to a market that may be connected to the acceleration of climate change. I believe this is the biggest threat to the company and that, in addition to the issues raised in your essay, there are more angles to explore this topic. Management needs to develop a more robust plan to be less exposed to this risk. What if new regulations decrease the ability of ExxonMobil to transform its oil reserves in oil barrels? What if the price of oil is reduced to a level that makes the production of oil unsustainable? What is the impact of technology trends like electric cars?

  11. I think O&G companies across the world have to reinvent themselves in the face of increasingly stricter environmental regulations and growing awareness amongst consumers. I believe that it is high time that companies such as Exxon start comprehensively assessing not just their financial performance, but also environmental performance. Not just will such measurements help Exxon improve the public perception, but also guide its managers in making decisions which might look financially inviable right now, which might be strategically crucial going forward. Energy companies such as BP have already embarked on that path and might soon start lobbying governments to impose stricter controls on its peers to get a competitive advantage. I believe that Paris Agreement is just a start of a much stricter environmental regime across the world and Exxon needs to take note!

  12. Very interesting read. The moral question at hand of duties to the environment and consumer are complicated but also simple in some ways. On the environment specifically, I like to believe organizations should strive to leave the planet in a better place than when they left it. In the energy sector, this is particularly important as not prioritizing the environment can lead to especially serious consequences.

Leave a comment