Exx-on, Exx-off: How Global Climate Change Could Wipe Away Big Oil’s Profits
The connection of ExxonMobil to climate change is more than just causal. Changing weather and landscapes will have a profound impact on Exxon's ability to profitably produce oil.
ExxonMobil being connected to global climate change will surprise no one. Though generally, the connection is seen as one of cause (Exxon) and effect (global climate change) with society being the victim. While it is unclear to me if more guilt should be attached to the producers, or to those who pay the producers, it is evident that both society and corporations will be negatively affected by climate change’s impacts. Ironically, the impacts of global climate change will have an extremely negative impact on ExxonMobil’s ability to profitably produce oil. The corporate impacts of climate change have been categorized as Physical (e.g. damage to infrastructure), Prices (e.g. cost of infrastructure), Product (e.g. loss of demand), Ratings (e.g. cost of capital), Reputation (direct or indirect), and Regulation (governmental)1. In addition to Reputational risk, ExxonMobil and its supply chain will be greatly affect by a large Physical risk.
The physical risks are incredibly diverse as a result of lengthy oil and gas supply chain. A significant portion of ExxonMobil’s oil production is offshore. These production facilities will be under increased threat of changes to Hurricane activity that result from climate change2. In addition, even pipelines are feeling the strain. Pipelines in Alaska have needed numerous modifications to avoid sinking into the melting permafrost3. Most crude oil inputs are shipped from international locations with lengthy loading, transit, and discharge times will be heavily influenced by changing weather patterns and sea levels. Refineries are generally close to the water and operations will be greatly influenced by weather patterns2, freshwater availability4, and sea level rise5.
Fighting Climate Change: Courage and Contradiction
Attempts to limit the impact of climate change can be broadly clumped into two categories: those that seek to prevent climate change from occurring and those that attempt to mitigate the impacts of climate change. ExxonMobil has made some limited strides to preventing global climate change from occurring. In the past few decades the company has moved from discrediting the science of climate change6 to admitting that climate change exists and pushing for a more rigorous carbon tax7. As well, Exxon has created a dedicated Environmental Engineering team that is working to decrease methane emissions from pipelines8. This being said, far more of Exxon’s actions are reactive instead of proactive.
The effort to decrease methane came years after awareness of the damage of methane in the atmosphere. Instead of waiting till problems manifest and then trying to solve the emergent issues, ExxonMobil should work to institutionalize environmental findings and best practices. Unfortunately, the actions of the ExxonMobil Political Action Committee (PAC) seem to contradict the evolving environmental focus of the corporation. Last year the PAC contributed to efforts to decrease the ability of counties to implement legislation affecting fracking9.
Supply Change Impacts: Sailing Ships and Sinking Pipes
In addition to attempting to limit the severity of global climate change, ExxonMobil needs to make increased efforts to mitigate the impacts of climate change. Exxon has made some limited short-term efforts to decrease its supply chain exposure. In the U.S. they have decreased their dependence on foreign oil which greatly simplifies the supply chain. Domestic crudes are generally transferred via pipeline which avoid many of the potential delays associated with shipping (with the exception of the Alaskan pipelines2).
ExxonMobil’s limited preparation will not be enough to mitigate the impact global climate change still poses. Focusing on the U.S. Gulf Coast (where ExxonMobil refining is primarily focused), the company has done little to improve outdated infrastructure. This has, and will, result in refinery disruptions10, particularly in extreme weather events. In an effort to decrease capital expenditures, Exxon has also limited its crude oil and product storage capabilities. Even in the absence of flooding or weather events this has led to a decreased refinery throughput in certain events. This refinery underutilization will only become more pronounced as climate change progresses, particularly as climate change puts strain on pipelines and shipping. Just as with the Alaskan pipeline, Exxon’s efforts have been more reactive than proactive in nature.
Will The Climate Change Exxon?
While ExxonMobil has evolved over the years to become increasingly involved in the climate change discussion, it still has work to do. The company characteristically underestimates the impact that climate change will have on its own operations. Ironically, the corporation’s risk averse culture (in no small part a result of the Valdez) limits its ability to spend capital to prevent future disruptions. Many questions remain. How much do you impact current profitability to prevent possible future disruptions? And is it the responsibility of governments or markets to remove negative externalities?
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- https://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/how-companies-can-adapt-to-climate-change
- Risky Business Project, Risky Business: The Economic Risks of Climate Change in the United States (2014)
- http://articles.latimes.com/1987-06-14/news/mn-7184_1_trans-alaska-pipeline
- United Nations Environmental Programme, GEO-5 for Business: Impacts of a Changing Environment on the Corporate Sector (2013)
- Gledhill, R., D. Hamza-Goodacre, and L. Ping Low, “Business-not-as-usual: Tackling the impact of climate change on supply chain risk,” PWC – Resilience: A Journal of Strategy and Risk (2013)
- https://www.nytimes.com/2017/08/22/opinion/exxon-climate-change-.html
- http://fortune.com/2016/07/10/exxonmobil-carbon-tax/
- https://www.nytimes.com/2017/09/25/business/energy-environment/exxon-methane-leaks.html
- http://cdn.exxonmobil.com/~/media/global/files/politcal-contributions/1q16-ld-2-disclosure-form.pdf
- http://www.latimes.com/business/la-fi-exxon-mobil-refinery-20170502-story.html
I think that big oil companies like Exxon have an opportunity to be more proactive in their climate change efforts and, in the process, build a better brand reputation as well as better standing with governments in order to avoid costly legislation. In Exxon’s 2016 Corporate Citizenship Report, they advertise investments of $4B in Upstream facilities for emission reductions since 2000, yet reductions in greenhouse gases in the last decade have been largely stagnant. For example, from 2015 to 2016, greenhouse emission grew by approximately 3 million CO2-equivalent metric tons mostly due to new facilities [1]. In order to make a difference, Exxon needs to find a way to deliver breakthrough technologies that can make up for any growth in output and deliver meaningful environmental gains. The trouble I imagine they are having with new technology is finding economically feasible solutions. For example, one of the technologies they promote for reducing climate change effects is carbon capture, but the cost to capture CO2 at coal-fired plants is twice as large as the cost to do so at natural gas plants. Hopefully for all of us, the $1B in annual R&D expenses on new technology will begin to pay off in the near future.
[1] “Mitigating emissions in our operations | ExxonMobil,” http://corporate.exxonmobil.com/en/community/corporate-citizenship-report/managing-climate-change-risks/mitigating-greehouse-gas-emissions-in-our-operations, accessed November 2017.
Interesting angle on the risk to Exxon’s physical assets due to climate change. I’d be curious to know how Exxon could capture synergies in its (hopefully future) attempts to locate its physical infrastructure out of “harm’s way”. The low price environment we’ve seen in the last 3 years is leading to a shift in drilling and production infrastructure back onshore, as offshore mega-projects are proving to be uneconomical. Perhaps Exxon can combine this business-driven shift in focus with hedging efforts to pull back its infrastructure from at-risk environments over the coming decades. I also think that regulation will play a much larger role, much sooner, as public opinion appears to be driving global climate policy to a greater and greater extent.
One of the most interesting discussions touched on above is discussing who should regulate Exxon, themselves or the consumers. The answer is most likely somewhere in the middle however consumers hold a lot of power they often don’t utilize. If consumers began to change their habits and therefore drive down demand, Exxon would be forced to change their habits. However, even without consumer pressure Exxon has a responsibility to protect the environment but also to protect its future as a company. As the energy landscape changes, I believe for Exxon to stay relevant instead of focusing on upgrading or replacing existing infrastructure, Exxon should, and to a certain extent has, focus its resources on alternative energy. Below is an article on some of the ways Exxon is diversifying into alternative energy.
https://lubes.exxonmobil.com/Lubes/sustainability_productsandprocesses_diversification.aspx
Unique take on the climate change discussion Dan – it does make you wonder how Exxon handles this sensitive issue internally (ie balancing the reality that you are a contributor to a problem while also trying to fortify yourself against that same problem). While I do agree with Berit’s comment that consumers have some power in forcing Exxon’s hand, I believe that government incentives to reward large oil and gas companies to develop new alternatives will be a critical driver in the progression of technological advancements. In fact, Exxon mentions in their 10-K that, due to governments providing tax advantages and other subsidies to promote research into new technologies to reduce the cost and increase the scalability of alternative energy sources, they are able to conduct their own research both in-house and by working with more than 80 leading universities around the world, including MIT, Princeton University, the University of Texas, and Stanford University. Their research projects “focus on developing algae-based biofuels, carbon capture and storage, breakthrough energy efficiency processes, advanced energy-saving materials and other technologies. For example, ExxonMobil is working with Fuel Cell Energy Inc. to explore using carbonate fuel cells to economically capture CO2 emissions from gas-fired power plants.” [1] Given this federal support, they can hopefully play more of a role in providing the energy products of the future in a cost-competitive manner.
[1] https://www.sec.gov/Archives/edgar/data/34088/000003408817000017/xom10k2016.htm
This is a very fascinating and thought-provoking post, thank you. When we consider how much oil is utilized in our everyday lives from transportation to food production, it’s important to realize the long-term implications of a disrupted supply chain.
Although the long-term changes that are required to aid in the fight against climate change, I am quite curious about what options Exxon Mobil has to protect its current physical infrastructure. Can they build rigs upwards? Can they build walls? Do they need to move their PP&E closer to the mainland to mitigate these risks?
Overall, I think all of the associated risks need to be addressed in order to protect our integral oil supply chain.
Thanks for the article, Dan. I think that you have made a compelling argument for ExxonMobil to change some of its emission-related operations. You have stated that many of the company’s operations are in areas with violent and risky weather patterns which could destroy many of the company’s facilities. In my experience, the company has been able to build and maintain PP&E in the coldest, warmest, or harshest climates on earth. As an example, hurricane Harvey caused a massive surge in gasoline price in the lower 48 as up to 1/5 of the supply was disrupted by the storm. However, the interruptions were because refineries had to evacuate their people. As flooding subsided and people returned, there was little damage significant enough to write off assets of to have to re-build.
I also think that while it is easy to make ExxonMobil the face of climate change, action needs to be taken much more broadly. Though it stands to suffer (as you alluded to), many stakeholders and countries are in much graver danger. The company may decide to move facilities around more strategically but in many cases (Sakhlin, Equatorial Guinea, Northern Canada), they have been successful in some of the harshest climates.
Lastly, I would be curious to understand the opportunities that ExxonMobil could be afforded as climate change accelerates. One which comes to mind is arctic drilling. As ice melts, it will become easier to explore and drill. Would this make them more reluctant to venture into more volatile climates?