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Can ExxonMobil Protect Climate & its Bottom Line?

Dave Hawkins

Posted March 21, 2014

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It’s big news that ExxonMobil (XOM) has agreed to report on the risks to its fossil fuel assets in a world that comes to terms with the reality of climate disruption.  Many investors and others will check out what XOM has to say.  But more important is what XOM will do with its business strategy to minimize both the risks to its current assets and to the climate.

For decades, the strategy XOM and other fossil majors have followed is to delay the development of serious climate protection policies as long as possible in an attempt to minimize near-term impacts on their business operations.  But it is now clear that this strategy is not only harmful to the climate but also to XOM’s interest in protecting its assets. The forthcoming XOM report will show whether its management understands the new imperative for its business strategy.

That imperative is driven by the fact that there is a finite future global budget for carbon pollution that is compatible with avoiding terrifyingly destructive changes to the climate.  The startling news for many XOM investors is that the current proven reserves held by XOM and other fossil-fuel majors are several times the total cumulative carbon budget that can avoid very damaging climate change.  When governments wake up to the true threat of climate disruption, they will act to put a halt to the unlimited release of carbon from the products sold by XOM and other fossil-fuel asset holders.

Until now, XOM and others have acted as if the current attitude of governments to climate change (mostly lip service and token steps) means that fossil-fuel companies can ignore the prospect of future limits on carbon.  But it is becoming obvious that this is an unwise, “bet the company” approach.  The reason is that every year we delay action to reduce the global carbon burn rate, the less of the finite budget will remain when the world’s governments start acting in earnest to protect the climate.  Continued delay in deployment of low- and zero-carbon energy systems assures that the shift when it comes, will pose a greater threat to fossil-company asset values.  The current approach is literally burning up the degrees of freedom that big firms like XOM will need to navigate the transition successfully.

So what should XOM do to manage these risks to its assets?  It needs an action plan to preserve the asset value of the reserves it has already invested in.  XOM’s strategic objective should to assure there is room left in the finite future global carbon budget so it can minimize the fraction of its current reserves that become stranded.

XOM can do two big things: change where it makes its investments and change its stance on public policies to cut carbon emissions.

On changing its investments, it can stop putting more money into additional reserves discovery and development.  Its capital budget should shift promptly to energy options that are sustainable in a carbon constrained world and that will help reduce global carbon burn rates.

But XOM cannot protect its reserves just by acting alone (any more than DuPont could protect its CFC-substitute business just by making new chemicals).  XOM needs policies that constrain the rate at which everybody else is burning up the finite carbon budget.

The way to do that is to actively promote private and public sector technology and policy initiatives to reduce the global carbon burn rate as fast as possible.  That will leave maximum room in the budget for XOM to turn its reserves into salable products.  It is in XOM's interest to get competing uses of the global carbon budget reduced ASAP because continuing today’s massive carbon burn rate means that less of the budget will be left for XOM's products.

Consumption of the budget by coal is probably the biggest threat to XOM's reserves value. Policies to deploy efficiency, renewables, and carbon capture and sequestration (CCS), all can cut the carbon burn rate from coal and leave more room for XOM''s reserves to be used.

XOM's reserves are almost entirely oil and gas and those two fuels have different ultimate carbon footprints: nearly all oil goes into vehicles and CCS is not feasible for vehicles.  But a great deal of gas goes into power and heavy industrial use, where CCS is feasible.  So zero-carbon alternatives and CCS will help there too.

Getting active in the policy arena to protect its interests is not such a novel idea.  XOM and others have long been active in promoting trade, investment, intellectual property policies to create a stable business platform. And XOM has been active in climate policy too; just operating contrary to its long term interests.  Soon it will be obvious that its stance on climate policies needs to change.  

The report it will issue will be the first indicator of whether XOM gets what it needs to do or whether it tries to rationalize continuing what it has been doing.  In either case, XOM's explanation will be subject to intense public scrutiny.  And that will lead to progress.

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Michael BerndtsonMar 21 2014 09:38 PM

Nicely said. And very interesting.

Warning: the rest of this comment is late night musings to help get oil and gas companies on board with addressing climate change.

Instead of putting a climate price on carbon dioxide (or GHGs) as an exhaust product, put a climate price on in situ (in place) crude reserves based on GHG potential. The point of this would be to give oil and gas companies an incentive to keep heavy oils like tar sands in the ground. This would be a weighted price on the reactant rather than the products of combustion.

Basically, potential GHG would be the physical/chemical properties of the hydrocarbon mixture as it sits. Plus assumed production and end use GHG generation. For instance, let's assume tar sands in Alberta has X GHG generating potential, from subsurface to emissions and all uses in between. While a light crude like Bakken shale oil has a 75 percent of X GHG generating potential. I don't know if that's the case, just guessing.

GHG potential would be determined based on the fossil fuel life cycle including: extraction, transmission, processing/refining and end use (combustion). Standard calculations that are already being done.

From my understanding, the carbon tax (or credit) puts the onus of GHG emissions control squarely on the end user. The emitter. There seems little disincentive for fossil fuel producers to limit extraction and ship crude to wherever there is a buyer. Usually the buyer in a country that doesn't care. Or has worked around GHG emissions issues.

Using Alberta tar sands as an example. Tar sands will be extracted mostly by in situ extraction methods going forward. It's already about 50/50 surface mining versus in situ extraction. The recovery of surface mining is very high. Basically all the tar is removed from the ground, since, well, all the ground was removed as well. The goal of in situ extraction is to liquify the solid tar below ground using steam via injection wells and recover as much as possible of the multi-phase goo via extraction wells.

Much of the cost for in situ extraction is in heating the tar below ground and turning it into something that resembles the semi-liquid goo recovered and processed from surface mining operations. This is a very heavy oil.

So why not incentivize oil and gas to keep the heavy ends of tar sands in the ground, while extracting mostly lighter ends (a lighter oil). The producers would use less energy to heat the tar in situ. Pipeliners would use less diluent to transport. Refiners would use less energy to refine. And would produce less petcoke. Less carbon dioxide would be emitted all around.

Of course this would mean proved reserve estimates would greatly decrease. Oil and gas's cash reserves in hydrocarbon form. How to incentives or disincentives based on GHG potential, I haven't a clue. But, hey, we're talking our planet here.

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