Exxon Mobil’s Global Outlook To 2050 Insists On Fossil Fuel Opportunities

Summary:

• Exxon Mobil’s Global Outlook to 2050 is overly optimistic and lacks credibility, ignoring the urgent need for a transition to renewable energy.
• Financing for new fossil fuel projects is increasingly uncertain, with significant delays and setbacks in major LNG projects.
• Renewables investment is outpacing fossil fuels, with solar PV alone attracting more investment than all other electricity generation technologies combined in 2024.
• Exxon Mobil’s reliance on oil and gas for future growth is risky, as electrification of transport and power sectors will reduce demand for fossil fuels.

A very optimistic picture for investment in Exxon Mobil (NYSE:XOM) is being presented by some Seeking Alpha authors and Wall Street Analysts in recent months. I’ve summarised my sceptical views in an article in April 2024. Here I update my views based on Exxon Mobil’s recently released “Global Outlook to 2050”. My current analysis of what is happening in the energy and transport sector leads me to a different conclusion about investment in oil and gas companies in general and Exxon Mobil in particular. Exxon Mobil tells a good story in its Q2 earnings, but the Exxon Global Outlook to 2050 lacks credibility. Here I present why I think the picture is different to how Exxon Mobil positions the situation. The short term is very profitable, but longer term the clouds are looming.

Exxon starts with today’s position and projects forward

A key comment in the Exxon Global Outlook to 2050 report is the following:

“…scenarios such as the “IPCC Likely Below 2C” start with a hypothetical outcome and work backward to identify the factors that need to occur to achieve that outcome”.

Exxon sees the IPCC approach to 2050 outcome as flawed, yet it is exactly what was done in the case of the need to reduce a personal equivalent to the climate crisis (cigarette smoking). The WHO’s (World Health Organisation) response to the global problem of cigarette smoking starts with identification of the problem and then follows with a breakdown of the issues and actions to address the problem. Exxon starts with today’s position on fossil fuel consumption and assumes that it isn’t going to change dramatically. You don’t get change if you won’t entertain the need to change.

The point is that emissions from burning fossil fuels are an urgent problem for all of humanity and it doesn’t work to ignore the danger and say that it is inevitable. So far Exxon Mobil has been able to act as if there is no problem by saying that the world is hooked on fossil fuels and it will keep supplying them. This is like passively accepting cigarette smoking despite its well known serious negative health impact. Strenuous efforts to reduce cigarette smoking in the US have meant that smoking has been reduced by almost 70% since 1965.

The core problem today is not the lack of ability to transition to a decarbonized economy that stops burning fossil fuels. The urgent priority today is to prevent the fossil fuel industry and companies like Exxon Mobil from expanding their oil & gas production. The IEA is clear that there is no room for new oil & gas developments if unacceptable climate emergencies are to be addressed. The US is late to the party as it has gone on a detour in transitioning from fossil fuels to renewables; instead it has claimed that switching from burning coal to burning gas means lower emissions (it doesn’t). The countries key to addressing climate change (China, India) are actually in better shape to achieve the goals of limiting global temperature rise to 1.5C by aggressive expansion of renewables. The Inflation Reduction Act in the US is helping to get the US back on track.

Here I explore the assumptions underlying Exxon Mobil’s suggestion that oil & gas consumption will remain at similar or higher levels than today’s production in 2050. I also explore key issues that make exit from burning fossil fuels not only possible but also a cheaper and more efficient option. This leads me to suggest that now is not the time to invest in XOM because its share price is close to all time highs. In fact now is a good time to take profits and consider investment in the emerging low carbon power and transport sector.

Exxon’s assumptions about oil & gas industry

As a long term investor I like to test assumptions made by companies I consider investing in. I find many of the assumptions made by Exxon management in building their Global Outlook to 2050 to be questionable, even though they make their claims as if they are beyond question.

Key issues that I think are in question

i) Financing of big fossil fuel projects is an issue

One gets a sense of some anxiety experienced by Exxon management concerning investment in new oil & gas projects. If investment in oil & gas stopped, Exxon management claims that oil supply would fall by 15% annually and natural gas supply would decline by 11% annually. The end of fossil fuels would happen quickly if investment continues to grow in renewables and energy storage (batteries), rather than in oil & gas.

There is now a lot of activity in seeking to stop fossil fuel investment. Asia has been seen by big oil & gas companies as a huge emerging market for LNG. However the massive price spikes for LNG in Asia when Russia invaded Ukraine are having an impact on Asian Government considerations. Renewable energy provides reliable and confident pricing for local energy supply. It is an uncertain time for the oil & gas industry.

There are very recent signs of problems with financing and completion of major LNG projects both in the US and Asia/Pacific. For example two huge LNG projects that Exxon has a major stake in have both faced delay and uncertainty in financing. These are the $15 billion Papua New Guinea LNG project, managed by TotalEnergies (TTE) but majority owned by Total (37.55%) and Exxon (37.04%), and the $10 billion Golden Pass LNG project in Texas which is a JV between Exxon (30%) and QatarEnergy (70%).

The PNG LNG project has suffered a series of construction and finance delays with a final investment decision delayed until 2025. It isn’t clear that projected construction costs make financial sense, eight key global bankers (including one of TotalEnergies major banks, Credit Agricole which has been the project’s financial advisor) are not supporting the project, and there are concerns about the Scope 3 emissions from the project.

The Golden Pass LNG project has experienced a variety of setbacks, with the bankruptcy of the major contractor Zachry Holding being the latest issue. What seemed a temporary setback has now snowballed to a request for a 3-year delay with the US Regulator, asking for an approval extension until November 2029. An ironic partial cause for further delays is climate-related events (severe weather/hurricanes).

One can’t help but wonder whether the massive renewables developments and pushback against natural gas (which isn’t a bridging solution for exit from burning fossil fuels) puts these projects at risk.

ii) Exxon assumes that renewables will remain marginal

One needs to look no further than where capital is going to understand that renewables are no longer a marginal add-on. The fact is that investment in renewables is now substantially greater than that for fossil fuels. The IEA claims that global investment in clean energy technologies in 2024 will be double that for fossil fuels, at $2 trillion renewables and $1 trillion fossil fuels. It is important to realise that renewables investment is dominated by capital investment in capture technology and energy management technology that then delivers power essentially for free, while a significant part of the investment in fossil fuels reflects ongoing cost of harvesting and transporting the fuel. So a $1 investment in renewables delivers a longer term reward than an equivalent investment in fossil fuels. This explains why in 2024 more money ($500 billion) will be invested in solar PV than all other electricity generation technologies combined. Investors reading the Exxon Global Outlook to 2050 will not find this kind of information. Renewables are mentioned but they are still positioned as marginal issues. Comparative figures for global upstream oil & gas investment (which will increase by 7% in 2024) indicate that it will reach $570 billion in 2024… not much more than the investment just in solar PV in 2024.

Investment in electrification of transport directly impacts the major destination (70%+) for oil (gasoline and diesel). The IEA report acknowledges that currently renewables spending is biased against emerging economies (just 15% of the total clean energy spend led by India and Brazil). China is the huge outlier in renewables investment currently.

iii) Exxon assumes that oil & gas supplies won’t be curtailed

While currently Exxon has two assets (Permian and Guyana) that are relatively low cost, the cost of fossil fuel permitting and development cannot be assumed to be cheap and unlimited. There is no sense that the climate emergencies everywhere and the COP structures (involving just about every country) are going to impact Exxon’s ability to keep expanding oil & gas production. The list of financial institutions banning investment in fossil fuel projects is getting to be long (see above re LNG).

iv) Energy use will increase substantially

With the rise of AI and increased affluence of developing countries Exxon assumes that the amount of energy required will increase. While this is true, the unspoken Exxon position is to conflate “energy” with “oil & gas”. There are two key issues here :

Exxon assumes that fossil fuels will continue to dominate energy supply : The thing is fossil fuels are a highly inefficient way to deliver energy. The amount of energy required to discover, develop and deliver fossil fuels is large, and the efficiency of burning fossil fuels is low. The cost structure with renewables developments, especially solar PV and energy management (batteries), has massively declined in recent years. Electricity can be moved rapidly across large distances with very small losses. The result is that while energy use will increase, it is by no means certain that the energy will be fossil fuel-based.

Electrification of power and transport is a big threat to fossil fuel use : Electric motors are robust and extremely efficient. The fact is that in China penetration of electric cars in new car sales is ~50% in 2024.

Strategies used by Exxon management

Highlight small emerging opportunities for its oil

In the Q2 reporting, CEO Darren Woods makes a big deal of future needs for oil which Exxon plans to exploit. The point made is that Exxon started out making kerosene lamps, long before it serviced the Internal Combustion Engine with gasoline and diesel. It is argued that in the future it will pivot to new business areas. The Exxon view of the future does not change from it being an oil & gas company; this view of the future requires continuation of Exxon’s core skills in oil & gas exploration and exploitation. Darren Woods gives two examples of new uses for oil & gas that don’t involve combustion and greenhouse gas emissions. These are interesting and valuable, but they require a small amount of oil or gas compared with Exxon’s oil & gas products that get burned and release emissions.

Proxxima resin formulations

Exxon is innovating in new polymer technologies with interesting properties. The addressable market for Proxxima by 2030 is given to be 5 million tons annually. To give a view as to how much of Exxon’s oil production would be needed to service this market, Exxon produces currently ~2.5 million barrels/DAY (ie ~400 million liters/day). Producing 5 million tons of Proxxima annually is unlikely to require more than a few weeks of its current oil production. In other words even if Exxon won the entire market for Proxxima-type products it will only require a small percentage of its current oil production.

Exxon thinks the world is still going to use ~100 million barrels of oil daily in 2050. Since ~70% of each barrel of oil is used to produce fuel for the internal combustion engine, I don’t see how Exxon’s view of oil needs by 2050 is anything other than a dream unless they don’t accept that we are entering maturity for the electrification of transport.

Carbon capture

The challenge I have with a carbon capture & storage (CCS) business is that it is a business where substantial additional costs are added to a product that is already failing to compete with new “electron” technologies (solar/wind/storage). CCS only has a future if Governments continue to provide additional subsidies to a technology that is fundamentally changing the climate. Because of the power of the fossil fuel industry with government, at this stage governments are playing ball, but as far as CCS goes, I still don’t see successful projects that provide long term carbon storage at scale. I exclude EOR (Enhanced Oil Recovery) because the carbon doesn’t get stored with that technology; it comes back out with the recovered oil. The numbers produced are always tiny and of little relevance to the need to reduce emissions.

The Exxon Global Outlook to 2050 report continues the myth of CCS with no evidence to indicate that this is even feasible if unlimited funds were made available to develop it.

What the markets think

In the past 30 days 15 Seeking Alpha authors have rated XOM, with five “strong buy”, eight “buy”, one “hold” and one “sell” recommendation. Indeed six Seeking Alpha authors in August have provided three “strong buy” and three “buy” recommendations. Of 27 Wall Street Analysts in the past 90 days there were nine “strong buy”, six “buy” and 12 “hold” recommendations. Seeking Alpha’s Quant rating is a more measured “hold”, with negative “D+” ratings for both valuation and growth. Profitability received an “A+” rating.

Exxon’s stock price breached $120 in early April of this year. Since the end of April XOM has traded below $120 with a low of $108 and no clear trend. Year on year XOM stock is up 7.6%. Given that XOM’s stock price of $118.13 is close to an all time high and there is no clear strategy for when burning fossil fuels comes under closer scrutiny, it seems like a time to take profits and not a good time to buy the stock.

Politics

While politics are not part of general commentary, there is a very unusual situation leading up to the 2024 Presidential election. Donald Trump’s modus operandi is to be transactional. When he summons a group of leading oil & gas executives and asks them for $1 billion to aid his election, his promise to change the investment scene for the oil & gas industry needs to be taken seriously. It isn’t clear what the oil & gas industry has done about this move by Donald Trump, but it suggest that if he is elected he will try to mess up the renewables industry (and maybe electric cars?) and stimulate the oil & gas industry. The Democrats have made their position clear with the Inflation Reduction Act. It is rare that such dramatically different positions are held in a Presidential election.

Investors who are punters might make their choice about this, while others might be cautious until it becomes clear what the outcome of the November Presidential election brings.

Conclusion

When addressing a revolution it is always a good idea to carefully examine the assumptions that limit how one addresses the changes coming. Exxon Mobil has developed a marketing message that it is a “molecules” company as the rest of the industry pivots towards “electrons”. The core assumption by Exxon is that there will always be a need for molecules (specifically carbon), even as the electrification (electrons) of everything takes shape. My take is that molecules are being supplanted by electrons in the key areas of industry that Exxon plays in. These are power and wheeled transport, which are the core areas where rapid greenhouse gas reductions are possible. The technologies are available, they have been scaled and they are cost-competitive. 70% of every barrel of oil gets burned in an internal combustion engine and the internal combustion engine will become largely extinct well before 2050 as electric motors have proven their efficiency, reliability and longevity and big reliable batteries have arrived.

In Q2 we see more efforts by Exxon Mobil to position their business according to two principles that I think are no longer valid. Firstly, Exxon management sees oil consumption being largely unchanged through 2050 and gas production increased. There is a climate crisis and these assumptions have been questioned by 124 countries in the recent COP28 meeting. Secondly, Exxon management spends a lot of time exploring alternative uses for oil that don’t involve its combustion. This is a smart move for the company, but back of the envelope calculations make clear that the amount of oil that will be consumed by these new technologies (eg Proxxima) are a small percentage of Exxon’s oil production. The big majority of oil produced by Exxon (~70%) gets burned in Internal Combustion Engines and these will be progressively banned from 2030. The numbers don’t add up and lots of “look-over-here” signals are distractions to the problem facing Exxon Mobil as substantial reductions in oil & gas use will follow electrification of everything.

I suggest that we are approaching a time when Exxon Mobil will no longer be able to continue to claim its future will be dominated by its oil & gas history, including major expansion of oil & gas production. Exxon does a superb job of making the discovery and extraction of oil and gas more efficient, with no thought that the major market for its products will disappear sooner rather than later. This will either happen through inability for it to continue to fund its exploration and development activities or through regulation. There are already signs of capital issues concerning proposed gas expansion. Net zero commitments by 151 Governments are not consistent with planned expansion of fossil fuels. The worsening climate crisis provides a reason why things are going to change soon. When the cost of climate disasters far outweighs the cost of addressing fossil fuel consumption, things will change. We are close to that tipping point now. The challenge for investors is that Exxon management has no plans to exit oil & gas for combustion as its dominant business activity. I maintain that this is a high risk strategy for the long term investor.

I am not a financial advisor but I closely follow the revolution involving electrification of power and wheeled transport to make oil & gas redundant in these processes. I hope that my perspective is useful for you and your financial advisor as you consider investment in Exxon Mobil.

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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