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Is Big Oil At A Crossroads?

Is Big Oil At A Crossroads?

Three of the world's largest oil companies faced a climate change reckoning on Wednesday, as shareholder revolts and a landmark court ruling increased pressure on them to reduce emissions.

The first blow came when a Dutch civil court ordered Royal Dutch Shell to reduce its carbon dioxide emissions by 45% below 2019 levels by the end of the decade.

Then, at Exxon Mobil Corp.'s annual shareholder meeting in Dallas, a comparatively small activist hedge fund seeking to shift the oil giant away from fossil fuels and toward renewables was elected to two seats on the company's board of directors.

That afternoon, at Chevron Corporation's annual shareholder meeting, climate-concerned shareholders voted to compel the company to develop a plan to reduce emissions generated by the use of its products, making the Texas company liable for the pollution its customers create when burning oil and gas.

“This truly is the beginning of a new era for Big Oil,” said Clark Williams-Derry, an oil analyst at the Institute for Energy Economics and Financial Analysis, an energy research organization. “You can’t dismiss it as a bad day; this is all three largest supermajors taking it on the chin from shareholders or the courts.”

It's been a tumultuous year for the industry, which saw record-breaking financial losses last year as government lockdowns to prevent the spread of COVID-19 grounded planes, halted factories, and kept automobiles idle, briefly sending the price of oil below zero for the first time in history.

Shell said it would appeal the decision, which Dutch Judge Larisa Alwin said would have "far-reaching consequences" and could "curb potential growth of the Shell group." However, industry analysts warned that the outcome would likely prompt more legal and investor challenges to fossil fuel producers.

“This case epitomizes the expanding fronts where fossil-fuel companies are facing pressure: on top of investors and regulators demanding carbon cuts, now heavy emitters are facing censure through the courts,” Will Nichols, head of environment and climate change at risk-analysis firm Verisk Maplecroft, told The Wall Street Journal.

In regulatory filings, Exxon Mobil stated that it spent $35 million to counter hedge fund Engine No. 1’s $30 million campaign to put climate advocates on the oil giant’s board.

As the two new members of Exxon Mobil's board of directors will be independent of the company, the vote amounted to a signal of disapproval of the company's management; however, their influence over company policy may be limited if the other members of Exxon Mobil's board rally behind Woods.

The Chevron investor revolt was a more direct rebuke of the company's strategy, with the company being required to reduce emissions from its products, according to Williams-Derry.

“That is the kind of directive that you can't just shuck and jive and say you've met,” he said, adding that “if the carbon content of the fuel you're selling is increasing and you've been told it needs to decrease, you're in trouble.”

You can't dismiss this as a bad day; it's the three largest supermajorities taking a beating from shareholders or the courts.

Clark Williams-Derry, a petroleum analyst at the Institute for Energy Economics and Financial Analysis

However, enforcing that measure in a way that significantly reduces emissions, according to Fernando Valle, an oil analyst at the energy consultancy BloombergNEF, could prove difficult.

“It’s such a fine line because it’s difficult to determine what your emissions are in comparison to everyone else’s,” he explained.

The most immediate impact could be the clear exclusion of Chevron from investment funds that market themselves as adhering to environmental and social governance principles, or ESG, especially as regulators tighten rules on which stocks qualify under that label.

Overall, Valle believes it demonstrates that “the regulatory environment is just getting tougher and tougher, not just in Europe but now also in North America.”

According to him, the best indicator of what is to come is a fourth oil company, Suncor Energy, which recently announced its latest five-year plan, which included “almost no growth and no new projects due to high regulatory costs.”

That doesn't mean the end of oil. New projects will likely continue in countries with laxer regulations or weaker enforcement, and publicly traded companies in North America and Europe may face a stock-market trajectory similar to another industry, one whose public relations strategies fossil fuel executives borrowed for much of the past three decades in an attempt to avoid regulations.

“It will be similar to what happened to Big Tobacco in the mid-1990s, where it is still one of the better performing sectors, but not investing in growth, only reaping cash flow,” Valle predicted.

People continued to smoke, albeit in smaller numbers and in far fewer places, and Valle stated that “you still have to change societal needs” in order to eliminate oil consumption.

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