Exxon Mobil dismisses a low carbon future and puts faith in oil markets
Andrew Logan
When an international group of 77 institutional investors with more than $3tn in assets asked the world’s 45 largest fossil fuel companies to assess the risks that climate change poses to their business, they were aware they were asking a tough, complex question.
Knowing this, investors launched the Carbon Asset Risk Initiative to spur fossil fuel companies to assess the risks climate change poses to their business based on two scenarios: a business-as-usual scenario under which the world’s fossil fuel use continues to grow, warming the earth to levels society may not be able to adapt to; and a low-carbon scenario where governments achieve their stated goal of limiting the average temperature rise to below 2C.
Many of the 45 companies that received this request are responding – among those, Exxon Mobil, the world’s largest publicly traded energy company, which agreed to publish a report after investors agreed to withdraw a pair of related shareholder resolutions.
This agreement was considered by many to be groundbreaking. And if the company had in fact provided the information requested by investors, the report itself would have been. While the report is a positive step, providing investors with useful information about the company’s views on managing climate risk, it mostly sidesteps investors’ concerns by dismissing a low carbon scenario as “highly unlikely” and glossing over the climate change implications of the company’s own Outlook for Energy.
According to the report, Exxon Mobil does expect increasing government action to curb emissions, but not to the level required to limit global warming to below 2C, which the company claims would be unaffordable. In fact, the report says the emissions projections in the company’s Outlook for Energy are comparable to the Intergovernmental Panel on Climate Change scenario that projects a temperature rise well above the international two degree goal. The company focuses on the costs of action and largely ignores the costs of inaction, suggesting that policymakers should balance mitigation, adaptation, and other social priorities.
This key issue – that inaction on climate change will carry significant economic costs – was underscored by a report the Intergovernmental Panel on Climate Change (IPCC) released the same day as Exxon Mobil’s report. According to the IPCC, “Throughout the 21st century, climate-change impacts are projected to slow down economic growth, make poverty reduction more difficult, further erode food security, and prolong existing and create new poverty traps.”
And interestingly, to make the case that a low carbon scenario would be unaffordable, Exxon Mobil cites a 2008 International Energy Agency (IEA) report that concluded: “To halve today’s emission levels would require additional investments of the order of USD 45 trillion.” What the company does not point out is the second half of IEA’s conclusion, which said: “Although this is a large number in absolute terms, it is small relative to the expected growth in global economic activity over the next forty years – and small relative to the cost of inaction.” More recently, the IEA said in 2012 that achieving a low carbon scenario would be affordable, requiring an investment of $36tn that would generate fuel savings of more than $100tn.
Considering that Exxon Mobil not long ago denied the science of climate change outright, this report shows the company has come a long way and this is an important step forward.
While the report discusses a number of actions the company is taking to manage climate risk, it is disappointing that it declined to assess the risk that investors asked it to simply because it does not see the risk as likely. Risk is not just the probability of an event occurring, but also the impact of the event if it were to occur.
No one can predict the future. The oil and gas industry is accustomed to boom and bust cycles and also has a history of overestimating demand. Exxon Mobil itself paid tens of billions for its shale gas specialist subsidiary XTO just before the natural gas price dropped precipitously. Profits from the investment have yet to materialize, demonstrating that even Exxon Mobil can be wrong about the future.
Referring mainly to its own Outlook for Energy, Exxon Mobil’s report concludes with surprising certainty that none of its reserves, either on its balance sheet or that it plans to bring onto its balance sheet in the future, will ever be stranded. The company says this is supported by “all credible scenarios”, apparently dismissing Citi’s projection that global oil demand could peak as soon as 2020 and IEA’s 2C scenario, not to mention the fact that, under the United Nations Framework Convention on Climate Change, governments worldwide have committed to a formal goal of limiting global warming to below 2C. From Exxon Mobil’s report, we might reasonably assume the company is betting against this.
The bottom line is that oil demand might not grow the way Exxon Mobil expects it to. Even if the company is right that a low carbon scenario is “highly unlikely”, that does not mean it should be dismissed. Meanwhile, producing oil is getting more expensive, so Exxon Mobil and its peers have to spend more shareholder capital to produce less oil and are seeing their profitability decline as a result. They actually need demand to keep growing so that prices stay high – around $120 per barrel, according to Goldman Sachs. Yet, if prices get too high, consumers will use less as alternatives become more economic. This means that the oil industry could be facing a shrinking window of opportunity, making companies like Exxon Mobil vulnerable to any scenario other than the one in its Outlook for Energy. Considering this, is it really prudent for Exxon Mobil to be so certain it is right?
Andrew Logan is oil and gas program director at Ceres, a US-based nonprofit organization mobilizing business and investor leadership on climate change. Ryan Salmon is senior manager in the oil and gas program at Ceres.