Exxon Mobil: Obsolete Business Model Means Challenges Ahead

Summary:

• Exxon talks about molecules (fossil fuel, carbon) versus electrons (electrification); Exxon thinks that electrons are not a solution for decarbonization.
• Exxon is using electrification to achieve net zero Scope 1&2 emissions by 2030 in its Permian operations.
• Exxon posits that carbon capture will resolve carbon emissions from oil & gas use; there is no evidence that this is feasible.
• Insistence on a long term future for oil & gas and Governments funding carbon capture leave Exxon’s business model exposed.
• Long term investors need evidence for a business model consistent with a future. Exxon is not providing this.

We are at the beginning of a “once-in-a-century” switch in two key areas of human endeavour, which both involve the fossil fuel industry. These are energy/power and transport, both of which are experiencing an amazing switch from carbon-based molecules to electrons. Everything is becoming electrified and this means the end of fossil fuels. From left field comes an urgency that is accelerating the shift. Normally transitions occur because a better and cheaper solution arises and this is the case for electrification in both power and transport, but the accelerant is that the status quo (fossil fuel based power and transport) is now clearly changing the climate of our planet in a disastrous way. There is a lot of change happening, but as often happens at times of great change, some of the major status quo players are resisting the changes because they require the end of their core business. I’ve written a lot about Toyota (TM) which is spearheading the attempts to stop transport being electrified. Here I take another look at Exxon Mobil (NYSE:XOM) as a key player in oil & gas exploitation. It appears to me that Exxon Mobil is behaving as if it refuses to accept the end of the fossil fuel era at a time when I believe it is clearly both necessary and also happening. Investors might reflect on how resistance to change will play out when considering investment in, or divestment from, holding XOM stock. The story has the hallmarks of Kodak, which invented the digital camera and chose not to develop it, with unhappy outcomes for Kodak. Note that my comments relate to long term investment. Traders and those using technical analysis have a different basis for investment, which is relevant for a shorter term view that is not focussing on the company’s longer term prospects.

Exxon’s role as a key influencer

According to company documents published by the Wall Street Journal, around 50 years ago Exxon scientists recognised the dangers caused by burning fossil fuels. The company ignored and sought to suppress this know-how because it required Exxon to reconsider its role as a key company involved with fossil fuel exploitation. Today Exxon faces many law suits concerning its role in seeking to prevent action on climate. The latest development in this story sees Exxon attacking in the courts those seeking it to address its emissions. I’m not convinced that this is a good idea, because it elevates the issues about failing to address the climate emergency. It isn’t clear to me that Exxon can win this battle.

For a long time Exxon management has trivialised renewable energy investment as fiddling at the edges with technology that cannot possibly do the heavy lifting in energy and transport. Exxon management has recently changed strategy from stating that there is no alternative to its fossil fuel products, to just ignoring the massive changes happening as the world begins to come to grips with the climate emergency. It also seeks to have a discussion about molecules (carbon- and hydrogen-based) versus electrons in addressing energy and transport. Investors may believe that the goal here is to avoid the end of the fossil fuel (carbon molecule-based) era, but instead to maintain the need for fossil fuels and seek to find ways to be able to keep expanding its fossil fuel production.

Last week Climate 100+ released a report on transition action plans for 10 major oil & gas companies. Exxon fared near the bottom as one of the least prepared for addressing the needs to decarbonize. The report noted than Exxon has no plans for transitioning to low carbon (renewable) energy production and instead focused on alternative fuels and carbon capture. Alternative fuels (biofuels) seek to continue a role for the internal combustion engine in transport, when clearly the shift is towards BEV (Battery Electric Vehicles). Apart from Toyota, wheeled transport manufacturers are acknowledging the coming end of the internal combustion engine, even if they have poorly developed plans as to how they will cope.

At the end of 2023 Exxon Mobil reviewed how its plans developed in 2018 for the following decade have progressed, and where the company is headed by the end of that decade in 2027. In a nutshell it is about not mentioning the energy transition, just expanding fossil fuel production and making hay. There are diversions in terms of biofuels, carbon capture and lithium mining, but none of these projects are significant compared with Exxon’s massive oil & gas expansion plans.

Key Exxon positions not aligned with reality

Exxon claims that renewables are a partial solution, but they aren’t enough : “yes they are”

Exxon CEO Darren Woods makes clear that his view is renewables aren’t enough and that oil & gas are here forever.

Here’s the reality of what is happening with renewables (data from OurWorldInData Energy ) :

There might be some basis for Darren Woods’ view if you consider just the US, because new energy capacity in the US in 2022 was led by gas (454 TWh) and oil (178 TWh), with wind (145 TWh) and solar (103 TWh) coming third and fourth. Notably, in 2022 gas substituted for coal (down 196 TWh) and nuclear declined slightly (down 29 TWh). Note that solar and wind did contribute substantially to new power generation in the US.

The real action is in China and India and these countries show a very different emerging picture both in terms of the scale of new power generation and the mix of power generation.

Comparable figures for 2022 for China showed that wind (up 272 TWh) and solar (up 259 TWh) were the dominant new power sources in 2022, with coal a close third (up 244 TWh). Nuclear was up 22 TWh, gas was down 46 TWh and oil down 379 TWh.

India is behind China in the transition and new primary energy consumption in India in 2022 reflects its current fossil fuel dependence, with oil up 223 TWh, coal up 221 TWh; solar was up 69 TWh, with nuclear (up 5 TWh) and wind (up 4 TWh) bit players, while gas was down 39 TWh.

The real picture comes when figures for growth in China and India are reviewed.

Figures for India comparing 2022 and 2032 are interesting. Installed electricity generation capacity shows that while coal remains a major source of electric power (210.6 GW, 2022/ 248.7 GW, 2032), the figures for solar and wind are dramatically different with huge expansion in the coming decade : solar : 61.6 GW, 2022/ 333.4 GW, 2032; wind : 41.8 GW, 2022/ 133.9 GW, 2032. Gas barely changes : 24.8 GW 2022/ 25.3 GW 2032. Hydro increases significantly: 2022, 46.9 GW/ 82.6 GW, 2032. Nuclear increases from 6.8 GW 2022 to 22.4 GW 2032.

China’s plans for solar and wind are astonishing. China planned to have 1,200 GW of solar and wind by 2030, but this will be achieved in 2024, six years early. By 2030 China is likely to have 2,800-3,000 GW of solar PV and wind installed.

The picture that I’ve drawn for India and China in coming years reflects a global goal of 11,000 GW of solar PV and wind by 2030 as a result of global commitments to decarbonize as a matter of urgency, because the goal of limiting warming to 1.5C is rapidly disappearing. Tens of thousands of GW of new renewable power must have a massive impact on need for fossil fuels. There is no hint in Exxon Mobil planning of consideration for massive renewables expansion.

The scale of the above actions indicates global seriousness about addressing the climate emergency. The US is the exception and 2024 is a year of uncertainty. Should Donald Trump become President, in my opinion he will likely try to force abandonment of renewable energy developments. This would be a disaster for global climate action. If President Biden gets re-elected, the focus on decarbonization will once more take precedent.

Exxon Mobil’s intention to increase emissions dramatically (through expanded oil & gas production) stands in stark contrast to its tiny goals to capture emissions through carbon capture (see below). In short the Exxon plan seeks to derail attempts to limit global temperature rise and CEO Darren Woods acknowledges this when he agrees that we are not on track to limit global emissions.

Addressing emissions starts with acknowledging them; Exxon refuses to address the main (Stage 3) emissions

There is a lot of pressure on the oil and gas industry to be clear about the emissions caused by harvesting, transporting and delivering oil & gas to customers. And of course to be clear about the extent to which its products cause emissions. Exxon Mobil is the only oil & gas major to point blank refuse to get into a discussion about reducing Scope 3 emissions caused by burning its oil and gas by customers. Exxon has been reluctant to even reveal its Scope 3 emissions, with lack of clarity about what the data that they present means. The latest from Exxon Mobil concerning Scope 3 emissions is to blame consumers, arguing that Exxon is just responding to customer needs. An interesting angle concerning focus on customers is a recent suggestion that if death caused by carbon emissions was properly priced, this might accelerate the path to net zero for all emissions.

The recent attempt by two activist groups to get Exxon Mobil to reveal details about addressing Scope 3 emissions failed when Exxon Mobil took the groups to court. Exxon CEO Darren Woods’ response to the activist action is as follows “Their scope 3 target, their proposal asks us to reduce Scope 3 which is essentially the emissions of our customers. And the way that we would have to do that is to reduce the sales of oil & gas, so that is getting right into the heart of what we’re doing. Their objective is to get us to stop selling oil & gas. That’s basically what we do as a business.”

Note that the activist proposal does not seek to prevent Exxon from selling oil & gas. The activist proposal said : “shareholders support the Company, by an advisory vote, to go beyond current plans, further accelerating the pace of emission reductions in the medium-term for its greenhouse gas (GHG) emissions across scope 1, 2, and 3, and to summarize new plans, targets, and timetables.”

Some numbers about emissions are relevant to this debate. It isn’t easy to make sense of Exxon’s Scope 1, 2 and 3 emissions and the scale of its decarbonization efforts, but broadly for end of 2022 figures the following statistics are provided by Exxon Mobil :

Scope 1 & 2 emissions : 110 million metric tons (largely Scope 1 emissions)

Scope 3 emissions from petroleum product sales : 720 million metric tons

CO2 captured and stored : 7 million metric tons

The point is that carbon captured (CCS) represents 1% of Exxon’s Stage 3 emissions, and Stage 1 & 2 emissions amount to ~15% of Exxon’s Stage 3 emissions. So Exxon is fiddling at the edges of its contribution to addressing the emissions problem, while attacking those seeking to shed some light on the damage Exxon’s activities cause to society.

The fact is that Exxon Mobil’s Scope 3 emissions dwarf initiatives like CCS (Carbon Capture and Storage) which provide tiny amounts of emissions reductions. The end of this argument will have to involve Governments because Exxon is clear that it has no intention to abandon its business model. I suspect that Exxon’s actions will probably accelerate Government actions to reduce emissions because the obscenity of expanding fossil fuel exploitation in terms of climate impacts is clear.

Exxon Mobil claims that decarbonization involving renewables is costly and won’t work

Perhaps it is not surprising that a company that has been engaged with fossil fuel exploitation for a very long time should see the world through a fossil fuel lens. Exxon CEO Darren Woods is very clear that molecules (code for fossil fuels) are central to civilised society. Thus there is a clear assumption that decarbonization through substituting electricity (via renewables) for fossil fuels is not a practical solution.

However, there is an example close to home at Exxon Mobil where it is clear that decarbonization is both possible and relatively quick to implement.

This concerns Scope 1 & 2 emissions, which is where Exxon Mobil seeks to focus the discussion on its emissions reductions. The point is that discovering, harvesting, refining and transporting its oil & gas products itself is an emissions intensive process. While this is a relatively small part of overall emissions from Exxon’s business (emissions are mostly about burning oil & gas), the thing is that a lot of fossil fuel is consumed in Exxon’s operations. The curious thing is that these emissions seem to be able to be addressed relatively quickly. Exxon boasts that it is on target to become net zero in terms of its Scope 1 and Scope 2 emissions produced in its unconventional operations in the Permian basin by 2030! This means a lot of fossil fuel will no longer be consumed in its operations. How is it doing this? Exxon is using clean electricity instead of fossil fuels! It has electrified its Permian drilling fleet and is implementing electrification in its fracturing units. It has also eliminated routine flaring in the Permian. So what is different about fossil fuel consumption in Exxon’s operations and fossil fuel consumption out there in the community? The answer is there is no difference.

My take on Exxon’s rapid actions on Scope 1 & 2 emissions in the Permian shows clearly that not only is decarbonization possible, but it can and is being achieved quickly in a cost-effective way.

Carbon Capture, hydrogen, let’s not exit fossil fuels

Exxon CEO Darren Woods insists that he is ready to bring his company into solutions for the climate crisis. This is not about exiting fossil fuels in Darren Woods’ world. He wants Governments to fund costly plans concerning capturing emissions. One has to acknowledge the clout that Exxon has, to see that these adventures (e.g. $100 billion Houston hydrogen hub!) have gained some traction.

The latest has to be overreach when Darren Woods tries to coax the Biden administration into supporting his blue hydrogen plans, involving hydrogen made from natural gas with CO2 emissions to be stored by carbon capture. Current funding for hydrogen development requires that the hydrogen be “green”, made by electrolysis using renewables energy.

I’ve covered elsewhere my take on CCS, which is still mostly about enhanced oil recovery, where the injected CO2, helps release oil but in doing so the CO2 comes back out. Exxon has purchased a substantial CO2 pipeline network, but there is yet to be clear evidence that significant amounts of CO2 have been stored at scale anywhere.

The other area that Exxon has chosen to address emissions involves biofuels. The thing about transport and fuels is that you can’t capture the emissions from burning the fuel, so there is CO2 released. My bigger issue with biofuels is that they rely on continued use of the internal combustion engine… which has a limited future.

Are there signs of change?

Exxon Mobil is “not for turning” but there are signs of change in a world where climate issues impact everyday lives (e.g. food production) and emotional things like the end of coral reefs are front and center. Exxon Mobil is an extreme outlier in insisting on the need for expanded oil & gas production.

Not necessarily related to the above, there is a new change happening in China as investment shifts from property to manufactured goods. Electric cars are an example of this switch as the change in China is dramatic, with BEV + PHEV (i.e., substantially electric vehicles) likely to exceed 50% of new car sales for the first time in 2024. Pushback from Europe and the US may mean that China might focus on Asian markets to rapidly increase in uptake of electric cars. I doubt that the US and Europe, being traditional car makers that are important for both economies, will allow electrification of these markets to lag notwithstanding current “noise” in the US about failing adoption of electric cars. My conclusion is that we may be seeing the beginning of unprecedentedly rapid electrification of transport. Remember that ~70-75% of every barrel of oil ends up being consumed as gasoline or diesel.

The above gives a context to Darren Woods views that the current expectations about speed of electrification are unrealistic because the uptake of electric vehicles is so small. Exxon Mobil might pay attention to what is happening in China and being pushed out globally.

What does the market think?

My analysis is qualitative and it includes big issues facing humankind, which includes near term climate emergencies. There isn’t a lot of analysis of Exxon which takes emissions seriously, because all of the serious climate analysis posits that there is no room for major new fossil fuel exploitation. Virtually no analysts seem concerned about Exxon’s plans to dramatically increase its oil & gas production, with no credible plan as to how the resulting increased emissions might be handled. Therefore it isn’t surprising that of 17 Seeking Alpha writers in the past 30 days, there are 4 strong buys, 9 buys, 2 hold and just 2 sell. Wall Street has a similar positive view from 25 Analysts in the past 90 days, showing 9 strong buy, 6 buy and 10 hold. Seeking Alpha’s Quant is the outlier with a “hold” rating.

Conclusion

Exxon Mobil has a business whose core products are causing harm on a global scale and this has been apparent for at least the past 50 years. Management of Exxon has the view that humanity cannot thrive and prosper in the absence of its oil & gas products, although the ability for management to maintain this position is increasingly untenable for areas where major emissions result. There are now cheaper and much less polluting solutions to address energy and transport needs. The latest corporate plan update of December 2023 resolves the problem of discussing Exxon Mobil’s fossil fuel business in a broader picture, that includes solar PV and wind as power substitutes and electrification of transport, by avoiding this discussion. In my opinion no convincing argument preferring oil & gas can now be made.

Exxon Mobil’s share price at $121.37 is now at an all-time peak, as a result of geopolitical uncertainties leading to oil price increase. My take is that climate issues are becoming so expensive and the threats to food security so significant that much delayed action is finally in view. Both oil and gas are now threatened by cheaper and low emissions alternatives. It is clear that Exxon management still thinks it can stay with its expertise in extraction, processing and delivery of fossil fuels, with perhaps a nod to what is happening in the world with a small play in ‘mining’ lithium brine. If you own Exxon stock, think about where things are headed and how quickly. There is still time for a favourable exit. For new investors in energy and transport, think about where things are headed. My personal take is to look for the companies that are making this change, rather than those trying to prevent the change.

I am not a financial advisor but I pay close attention to major transitions happening in energy and transport. I hope that my perspective is useful for you and your financial advisor as you consider your fossil fuel investments in general and Exxon Mobil in particular.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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