US Majors Face Climate Strategy Gauntlet

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Chevron and Exxon Mobil are quickly getting pushed outside their comfort zone. Investor demands for comprehensive strategies to address all emissions -- including Scope 3 from the end-use of products -- have arrived and will require far greater ambition in low-carbon investment than the pair currently offer. US producers are not being asked to replicate the renewable power-heavy diversification plans of the European majors or adopt net-zero Scope 3 targets at this stage (related). But investors want credible, concrete goals to convince they'll have staying power in a Paris-compliant world. The industry has come to recognize that a viable “Big Oil” model requires far more than low-cost production and top-tier efficiency. Decarbonization is imperative, too (PIW Mar.5'21). Still, uncertainties surrounding the pace of future oil and gas demand destruction, types of policies that will impact energy use, and need for technological advancements to make many low-carbon solutions viable at scale have left Chevron and Exxon to favor medium-term emissions targets -- and limit those to their operations. The US majors’ desired conservatism has its logic. Both have promised to top up targets and expand ambitions as clarity comes to the pace and path of the energy transition. But investors no longer accept that timeline. They want immediately a defined view of how each company envisions more robust decarbonization and how they will start making that a reality. Neither have interest in renewable power as a business line, citing a lack of competitive returns and synergies with existing competencies. That leaves the rest of the toolbox -- carbon capture and storage (CCS), hydrogen, synthetic fuels, biogas, biofuels and, as a bridge, offset credits (PIW May21'21). The companies have begun defining which tools they prefer -- CCS for Exxon and a range of biofuels, biogas and CCS for Chevron, with hydrogen a longer-dated interest for both. But what’s missing is a tangible ramp to make these material businesses sooner than later. Management teams will face intense pressure to deliver such blueprints in the next several months, but recent moves offer some clues around potential paths. Chevron might see promise in becoming a partner of choice with the agricultural industry to build out a material bioenergy business, leveraging its experiences in California to elsewhere in the US and eventually globally. The company has already made inroads into negative emissions fuels via manure-fed renewable natural gas and a bioenergy CCS project using almond tree waste. Such solutions have finite market potential, but could be material for a company even Chevron’s size. Plus, the agricultural sector is facing its own fast-rising demands to address emissions, making it a potentially motivated ally. Chevron has also stepped up sales of renewable diesel. Becoming a leading logistics partner for smaller or less integrated players and/or entering the market as a producer would help reduce Chevron's Scope 3 emissions while sticking with “drop-in” fuels that work in conventional vehicles. Exxon arguably has the harder task given CCS' reliance on strong policy, fiscal and regulatory frameworks that are often still lacking and need time to advance. Its newly restocked board will have to sort out how to convince that going all-in on CCS is viable given needs to demonstrate near-term progress. Otherwise, some diversification could be required to at least bridge to a CCS-heavy strategy (PIW May28'21). Exxon has also boosted renewable diesel sales but would likely need to treat any material step-up here as complementary to other endeavors. Exxon’s other notable low-carbon venture -- “drop-in” algae-based biofuels -- has been quiet for years and received no mention when it created its Low Carbon Solutions unit this year. The biggest challenge for Exxon and Chevron is time. The US oil sector is navigating a compressed timeline to deliver on the same demands for disclosure, targets and execution on emissions strategies that Europe’s producers have faced for the past couple years. Failing to deliver a viable plan in the next year -- or less -- risks more aggressive shareholder action, removing the window of opportunity for US producers to chart a different strategic course. The successful board coup at Exxon, while rooted in myriad issues, sets a significant precedent (related). Major institutional shareholders are themselves under immense pressure to proactively align with aggressive decarbonization strategies and push their investments toward that path. Demands once thought fringe are now mainstream, and the bar continues to move higher.

Equity and Debt Markets, Corporate Strategy
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