Big Oil Looks To Cut Production Following Activist Backlash

Two weeks ago, Big Oil suffered a series of boardroom and courtroom defeats in the hands of hardline climate activists.

Exxon Mobil (-2.56%)lost three board seats to Engine No. 1, an activist hedge, in a stunning proxy campaign. Engine No. 1 told the Financial Times that Exxon will need to cut fossil fuel production for the company to position itself for long-term success. "What we're saying is, plan for a world where maybe the world doesn't need your barrels," Engine No.1 leader Charlie Penner told FT. No less than 61% of Chevron (-3.77%)shareholders voted to further cut emissions at the company's annual investor meeting a week ago, rebuffing the company's board which had urged shareholders to reject it.

Meanwhile, a Dutch court ordered Royal Dutch Shell (-5.26%) to cut its greenhouse gas emissions harder and faster than it had previously planned. Never mind the fact that Shell already had pledged to cut GHG emissions by 20% by 2030 and to net-zero by 2050. The court in The Hague determined that wasn't good enough and has demanded a 45% cut by 2030 compared to 2019 levels.

And now Big Oil is beginning to respond.

CNBC has reported that Shell is considering selling its holdings in the largest U.S. oil field, worth as much as $10B.

The Anglo-Dutch supermajor is said to be evaluating selling all its 260,000 acres (105,200 hectares) holdings in the Permian Basin, located mostly in Texas, according to media reports.

A week ago, Shell CEO Ben van Beurden vowed to "rise to the challenge" in its transition to cleaner energy and pledged to speed up plans to cut greenhouse gas emissions following last month's court order.

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However, a subsequent social media post gives us better insights into how van Beurden actually views the situation:

"Imagine Shell decided to stop selling petrol and diesel today. This would certainly cut Shell's carbon emissions. But it would not help the world one bit. Demand for fuel would not change. People will fill up their cars and delivery trucks at other service stations," van Beurden wrote on LinkedIn last week.

He goes on to say:

"Society needs to take urgent action on climate change. But a court ordering one energy company to reduce its emissions – and the emissions of its customers – is not the answer. I believe Shell should work with our customers and their sectors to help them find their own pathways to achieve net-zero emissions. This will help grow demand for new low-carbon products. For companies to invest successfully, they also need bold, clear, and consistent government policies and regulations. Greater collaboration between governments, companies and customers will allow us and others to build up our low-carbon energy businesses in the fastest way."

Shell's Big Oil peers might agree with van Beurden's take.

Lowering emissions, not nixing fossil fuels

Shell's plans to sell prime real estate and expand its lower-carbon investments including providing its customers with electric vehicle charging, hydrogen, power from wind and solar energy, and biofuels will not only lower its oil production but also support demand for renewable energy.

However, Shell's peers have proposed a very different strategy: Lowering emissions without necessarily cutting oil and gas production.

Speaking at this year's CERAWeek by IHS Markit energy conference, the overriding theme that emerged at the conference was that Big Oil wants to focus not so much on curtailing oil and gas production but rather on mitigating the impact of its carbon and greenhouse gas emissions.

According to Exxon Mobil CEO Darren Woods and Occidental Petroleum's Vicky Hollub, reducing carbon emissions from fossil fuels and not the actual use of fossil fuels offers the best way to combat climate change.

Interestingly, both CEOs have stressed that the world still needs oil and gas, and governments need to focus on mitigating global warming using technologies such as carbon capture and storage (CCS) instead of attacking fossil fuels.

Nevertheless, even the biggest hardliner of them all, Exxon Mobil, has markedly changed its tune from just a few years back.

During the company's 2021 Investor Day, CEO Darren Woods outlined the company's energy transition strategy including plans to trim production growth and boost cash flows in a bid to support a growing dividend. Exxon revealed that it plans to hold production flat from 2020 levels through 2025 at 3.7M boe/day, good for a 26% cut from the 5M boe/day estimate for 2025 it released just a year ago.

Still, Exxon plans to continue ramping up production at the Permian Basin and Guyana, with Permian production averaging 400K boe/day this year before rising to 700K boe/day by 2025. Exxon also sees Guyana quickly becoming a key cash cow but has indefinitely suspended other major projects such as the $30B Mozambique LNG export project.

Woods announced plans to increase investments in carbon capture and storage to ~3% of new spending, an improvement from the 1% it had previously earmarked for CCS but still a far cry from the double-digit levels from European majors Total SE (-0.60%) and Royal Dutch Shell, Woods urged governments to stop picking winners and losers but instead establish carbon markets so as to "make sure we're using market forces to try to most cost-effectively reduce CO2 emissions."

Deep-pocketed investors are, however, not buying it.

The 145-member Coalition for a Responsible Exxon that oversees $2.5T in assets said that Exxon Mobil must change direction and not merely appoint new board candidates. Then of course Engine No.1 drove the point home even more forcefully.

Occidental Petroleum's Vicky Hollub pretty much echoed Darren Woods' views:

"What I think that people don't understand is we should not be talking about eliminating fossil fuels. What we really need to be talking about is eliminating emissions and if we can provide and we will. Net carbon zero oil, that is what the world needs and the world cannot achieve the goals ... of the Paris accord without the oil industry helping with that. We can be leaders in that."

Hollub said OXY's goal was to not only become a net-zero oil producer but also help other companies lower their carbon footprint:

"We're going to be building what will be the largest direct air capture facility in the Permian and partnering with us to do that is United Airlines because they also have a commitment and focus on getting to net-zero by 2050."

Hollub revealed that Occidental has signed up to take carbon from two ethanol plants and a steel plant in Colorado and sequester it in the Permian Basin.

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Last week, Occidental Petroleum announced that its Oxy Low Carbon Ventures subsidiary plans to build and operate a bio-ethylene pilot plant that will apply technology using human-made carbon dioxide instead of hydrocarbon-sourced feedstocks.

Bio-ethylene is currently produced from bioethanol mainly derived from sugarcane. The pilot plant is expected to begin operations in 2022.

OXY is also against a carbon tax:

"A carbon tax would be bad for a lot of the industry, a carbon tax would be bad for the consumers and especially for those consumers who are more disadvantaged from an economic standpoint," OXY's CEO told a virtual summit of the Texas Independent Producers and Royalty Owners Association.

OXY has become the quintessential poster-child of an M&A deal gone bad after its $55B acquisition of Anadarko left it saddled with a massive debt pile.

OPEC, Russia the biggest winners

Not all parties in the fossil fuel industry are, however, alarmed by the growing wave of climate activism or Shell's decision to lower oil production.

Indeed, OPEC and leading national oil companies (NOCs) are reveling in schadenfreude following Big Oil's latest woes, viewing it as a prime opportunity to grab more business and market share.

The boardroom and courtroom defeats of Exxon, Chevron, and Shell is sweet music in the ears of Saudi Arabia's national oil company Saudi Aramco (2222.SE), Russia's Gazprom (GAZP.MM) and Rosneft (ROSN.MM) as well as Abu Dhabi National Oil Co. who are looking to capitalize by filling the gap that will be left if these companies start cutting oil production in a bid to pacify investors.

"Oil and gas demand is far from peaking and supplies will be needed, but international oil companies will not be allowed to invest in this environment, meaning national oil companies have to step in," Amrita Sen from consultancy Energy Aspects has told Reuters.

By Alex Kimani for