ExxonMobil Strategy For Climate Change

Dissident shareholders of ExxonMobil (XOM) have won two seats on the company’s board of directors. The election “will likely force it to alter its fossil-fuel focused strategy and more directly confront growing shareholder concerns about climate change,” according to The Wall Street Journal.

Oil Rig, Sea, Oil, Gas, Drill, Drilling

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Fossil fuels are probably on the decline long-term, as solar power becomes cheaper and battery storage more effective. Although I’m personally doubtful we’ll ever completely stop burning hydrocarbons, it’s worth imagining that world. What an oil company should do, though, is not obvious. Shifting the company into renewable energy, such as wind and waves in addition to solar, is not the clear best strategy.

A simplistic vision is that ExxonMobil should change from thinking of itself as an oil company to being an energy company. Then it would go whole-hog into renewables. A more realistic approach would ask, “What are the corporation’s strengths?” I’m not familiar with what minor projects the company may have, and it’s possible they have some expertise in renewables, but let’s view this as an instructional exercise. What should a hypothetical oil company with no experience with renewables do in a world that is reducing dependence on fossil fuels?

A baseline for operating a company in a dying industry is to produce cash. Stop making long-term investments, implement efficiency improvements that will pay off in a few years, and use cash to buy back shares or pay dividends. Spin off any subsidiaries that may have long-run potential.

The baseline is not necessarily the best choice, but it’s the standard against which all other strategies should be judged. Corporate loyalists hate to consider what was once a mighty company going into runoff mode. But reality is reality, and there’s no fighting it. At least, no chance of winning a fight against reality.

Chemical processing is undoubtedly an ongoing operation even if we don’t burn fossil fuels. ExxonMobil’s chemicals business contributed 13% of the companies revenues in 2020. The carbon in oil or natural gas can be locked into plastic products without contributing directly to climate change. Right now, though, natural gas is burned to create the high heat needed for the chemical production process, but other energy sources could be used in a world that had stopped burning hydrocarbons. A reasonable strategy for this division would be figure out how to use renewable energy sources here. This may sound implausible, but the world wants plastics. Someone will find a way make them.

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