U.S. oil majors like Exxon and Chevron are failing to grapple with the energy sector’s transition away from polluting fossil fuels and refusing to disclose potential risks to their portfolios from assets that may become “stranded,” or uneconomical to develop, in a low-carbon world, new research from the London-based think tank Carbon Tracker shows.
Exxon, for example, stands to lose at least 80 percent of its business-as-usual petroleum investments if the world takes action to limit global temperature rise to 1.6 degrees C (2.9 degrees F), a limit that is within the “well below 2 degrees C” goal prescribed in the Paris Climate Agreement.
According to a Carbon Tracker report released October 9, the energy transition — which climate scientists say is necessary to avoid the most catastrophic consequences of an overheating planet — is an existential threat to the oil and gas sector. The report, titled “Fault Lines: How Diverging Oil and Gas Company Strategies Link to Stranded Asset Risk,” is the latest in a series of analyses from the research organization examining how fossil fuel firms are responding to this energy transition and the inherent risks it poses to their core business.
The industry’s strategy in the face of this risk is not uniform, the new report finds, with major U.S. companies generally lagging far behind their European counterparts in starting to adapt their business model.
Our new report ‘Fault Lines’: warns that the #EnergyTransition to a #NetZero carbon world is an existential challenge for #oil & #gas majors, but U.S companies are lagging way behind their European rivals (Equinor being the exception) https://t.co/SdF1dDek1T pic.twitter.com/tlqyCphvrJ
— Carbon Tracker (@CarbonBubble) October 9, 2020
“Very few parts of fossil fuel producers’ business models will be left unshaken by the energy transition. European leaders like Eni and BP are responding with an increasingly joined-up approach but for Exxon and others the only consistency is how completely they shy away from decarbonization,” Andrew Grant, Carbon Tracker Head of Climate, Energy & Industry Research and report co-author, said in a press release.
According to the report, Eni and BP are among the European companies that seem better prepared for the changing energy landscape, though these two companies still face up to 50 to 60 percent of their portfolios’ assets becoming stranded.
Chevron, ConocoPhillips, and Exxon, meanwhile, have not committed to substantially scaling back emissions, do not disclose price assumptions accounting for potentially uneconomical assets, and have even higher percentages of their portfolios at risk of becoming stranded in a world where warming is limited to 1.6 degrees C.
Exxon is perhaps the most resistant of the U.S. oil majors to shifting course. Recent reporting by Bloomberg Green based on leaked documents showed that Exxon’s internal strategy to expand petroleum production would cause carbon emissions to spike by 17 percent annually in just the next five years. And according to the new Carbon Tracker report, up to 90 percent of Exxon’s business-as-usual investments could be exposed to stranded asset risk. Exxon’s $10 billion Golden Pass liquefied natural gas (LNG) project in southeast Texas, for example, is one of 15 newly approved oil and gas projects identified by Carbon Tracker that are at risk of becoming stranded assets as the world pursues efforts to decarbonize.
But future developments in climate policy aside, current economic conditions mean that many proposed LNG projects in the U.S. face a steep path to being operational, much less profitable.
Failing to reckon with this energy transition and continuing to invest in petroleum projects that may become uneconomical also poses “a severe threat to the world’s financial system,” a report released in July by the National Whistleblower Center warned.
Our latest report ‘Fault Lines’ finds #ExxonMobil is the worst positioned of the #oil majors on climate targets, future oil price assumptions, and project portfolio resilience https://t.co/SdF1dDek1T #EnergyTransition #OOTT pic.twitter.com/nBXk8BHHBU
— Carbon Tracker (@CarbonBubble) October 9, 2020
Exxon’s intransigence in the face of clear climate-related economic risks has sparked backlash with some institutions divesting their stock in the company and two dozen communities across the country taking the company to court over its alleged deception and engineering of climate denial. Records from Greenpeace investigations show Exxon has poured more than $33 million from 1997 to 2015 into campaigns and groups disseminating disinformation on climate science. This funding of climate denial talking points and misleading messaging continues even to this day, according to Climate Investigations Center.
Exxon responded to a request for comment on how its business as usual strategy may leave it particularly disadvantaged as society shifts from fossil fuels to cleaner energy by pointing to its Energy and Carbon Summary report published in January. In that report the company acknowledged that some of its assets may not be developed but otherwise dismissed concerns over stranded assets, claiming, “trillions of dollars of investment in oil and natural gas will be needed” in the coming decades.
“ExxonMobil is positioned to continue to play a prominent role in meeting these future needs,” Exxon spokesperson Casey Norton said in an emailed response.
This assumption that oil and gas demand will require such a high level of investment, however, is a risky bet that may not pan out the way Exxon expects. The whole industry took a big hit as demand cratered this year due to the COVID-19 pandemic, but other factors such as competition from cheaper renewable energy and increasing calls for governments to step up climate action are also contributing to the fossil fuel sector’s decline.
While some oil companies are starting to acknowledge this decline and are making some adjustments to their business, the oil and gas industry overall remains woefully unprepared for the task of rapidly slashing production and associated carbon emissions to align with the Paris Agreement goals to limit dangerous warming.
“A growing number of oil and gas producers have recognized the fundamental impact the energy transition will have on their core business models and are setting climate targets, lowering price forecasts and writing down assets,” said Mike Coffin, Carbon Tracker senior analyst and report co-author. “However, there is a long way to go before they can be viewed as aligned with the Paris Agreement and the risk of stranded assets is still very real.”