The Fuse

In Wake of Losses to Oil Majors, Path Forward Remains Unclear

by Nick Cunningham | June 28, 2021

The reshuffling of the board at ExxonMobil in May sent shockwaves through the oil industry, ushering in a new era of scrutiny on the corporate strategies of the world’s top oil producers.

The effects will continue to ripple through the market, and there is still no single path forward for the oil majors. Some are continuing to dabble in renewables, with varying degrees of seriousness, while others are sticking with oil and gas production for the foreseeable future.

More renewables, stay-the-course for oil and gas

The triple whammy blows to Big Oil on May 26 – ExxonMobil lost seats on its board to activists calling for change, Chevron’s shareholders voted for tighter Scope 3 emissions, and Royal Dutch Shell lost a major case on climate change – ratcheted up the pressure on the oil titans.

In the wake of those developments, Norwegian state-owned oil company Equinor announced in mid-June its new strategy, which consisted of shifting capex to 50 percent renewables by 2030 and cutting emissions intensity along the way. That would be a significant ramp up compared to the 4 percent of the company’s spending on renewables in 2020.

The company plans to have 12 to 16 GW of renewables installed by 2030, moving up its target by five years.

Notably, however, Equinor did not explicitly detail how it would reduce oil and gas production even as it increases spending on renewables. It also detailed emissions intensity targets, not reductions in absolute emissions. That leaves quite a bit of wiggle room to increase oil and gas production.

“We will continue to cut emissions, and in the longer term, Equinor expects to produce less oil and gas than today recognising reducing demand,” the company said. Pitched as a bold strategy to transition with the times, the real work transforming the business model, it seems, will be left for some future day.

But Equinor is not out of the woods. Norwegian activists are turning to the European Court of Human Rights, asking it to rule against Norway’s plans to drill in the Arctic. The move comes after Royal Dutch Shell lost a landmark case in Dutch court, which ruled that the Anglo-Dutch oil major was required to cut emissions by 45 percent by 2030. The legal logic was based on the notion that Shell was violating human rights.

“The environmentalists argue that, by allowing new oil drilling in the midst of a climate crisis, Norway is in breach of fundamental human rights,” the climate campaigners said in a statement when announcing that they were taking their case to European court.

The case may have seemed like a long shot up until only recently. But as the Shell decision notes, courts are increasingly receptive to this new legal frontier, at least in Europe. The Shell case could have implications for Equinor. And as the climate crisis continues to grow worse, the legal risks for oil majors are certainly set to proliferate.

Meanwhile, other risks for Equinor could emerge. Some investors were unimpressed with the new strategy. “It is not the same as absolute targets for greenhouse gas emissions and not immediately in line with our expectations,” Jan Erik Saugestad, the chief executive of Storebrand Asset Management, which owns 0.5 percent of Equinor, told Reuters.

Equinor said it would increase its dividend, which may assuage the concerns of asset managers, but as the board shakeup at ExxonMobil shows, oil companies are vulnerable to activist investors actions if they do not do enough to cut emissions and embrace a clean energy transition.

Another notable event is coming in the next few months. Norway is holding an election in September, which in theory could result in the Green Party or some other anti-drilling party joining a coalition government. “Regardless of which side wins the election, the large oil-friendly parties will have to negotiate with smaller parties that want to stop new oil activities,” Bard Lahn, a researcher at the Cicero Center for International Climate Research in Oslo, told Bloomberg in early June.

Sticking with oil and gas

“We have to agree that we have to stop the extraction of additional fossil fuels round the planet,” Francesco Starace of Enel, Europe’s largest utility, said at the Reuters conference. But the western oil majors are not ready to head that advice.

When it comes to oil companies resisting more ambitious action, Equinor is hardly alone. In fact, the American oil majors, which are somewhat more insulated from the societal and legal pressures that their European competitors face, are steadfastly sticking with oil and gas even as they pay lip service to clean transition.

Chevron, for example, will only invest $3 billion on lowering emissions between now and 2028. At a recent conference hosted by Reuters, Chevron’s chief financial officer Pierre Breber said that the company has no plans to shrink its oil and gas business.

At ExxonMobil, the path forward is unclear, although it’s safe to say that the oil major cannot pursue oil and gas production growth in the same way as before. Investors are aiming to negotiate with the company later this year on formulating a net-zero plan. But, again, there is little chance the company will announce a decision to cut production or even emissions on an absolute basis.

Even BP’s CEO said that the company would be producing oil and gas for “decades to come.” The British oil giant is pursuing a strategy that involves unwinding some of its production, although those assets are more often than not going to be sold to other operators rather than shutdown.

The oil majors find themselves at an awkward crossroads. They are facing rising legal, societal, and investor pressures to clean up their acts. But they don’t want to, and they haven’t charted a viable path forward to navigate the transition. However, the risks are nevertheless not going away.