Is This A Turning Point For Big Oil?

Three of the world’s largest oil companies faced a reckoning over climate change Wednesday as shareholder revolts and a landmark court ruling added new pressure to slash emissions.

Royal Dutch Shell suffered the first blow, as a civil court in the Netherlands ordered the company to cut its carbon dioxide emissions 45% below 2019 levels by the end of the decade.

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

That afternoon, climate-concerned shareholders at Chevron Corporation’s annual investor confab voted to force the company to make a plan to cut emissions generated from the use of its product making the Texas firm responsible for the pollution its customers create when burning oil and gas.

“This really is the start 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 outfit. “You can’t shrug this off as having had a bad day. This is all three largest supermajors taking it on the chin from shareholders or the courts.”

It’s been a turbulent time 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. Governments across the world have taken bigger roles in the economy since the start of the pandemic, and they face mounting pressure to restrict fossil fuels, invest in zero-emissions alternatives and slash energy use. Still, it’s difficult to parse what the final impact of Monday’s decisions will be on the industry.

Shell said it would appeal the ruling, which Dutch Judge Larisa Alwin said would have “far-reaching consequences” and may “curb potential growth of the Shell group.” But 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 coming under 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 the risk-analysis company Verisk Maplecroft, told The Wall Street Journal . “We can expect this case to embolden activists and pressure groups.”

The shareholder victories in particular may spur more activist investors to launch internal campaigns for reform. In regulatory filings, Exxon Mobil said 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. Despite an eight-figure war chest and command of a corporate Goliath worth nearly $250 billion, Exxon Mobil CEO Darren Woods lost resoundingly to a financial David worth just $50 million.

The vote amounted to a signal of disapproval of the company’s management, as the two new members of the board of directors will be independent of the firm. Yet their influence over company policy could still be limited if the other members of Exxon Mobil’s board rally behind Woods.

The investor revolt at Chevron offered a more direct repudiation of the company’s strategy. Requiring the firm to slash emissions from its products marks “a clear directive,” Williams-Derry said.

“That is the sort of directive that you can’t just shuck and jive and say you’ve met that,” he said. “If the carbon content of the fuel you’re selling is going up and you’ve been told it needs to go down, you’re in trouble.”

But enforcing that measure in a way that seriously lowers emissions could prove challenging, said Fernando Valle, an oil analyst at the energy consultancy BloombergNEF.

“It’s such a tenuous line, because it’s difficult to decide what are your emissions versus everybody else’s,” he said. 

The most immediate effect could be the clear exclusion of Chevron from investment funds that brand themselves as complying with environmental and social governance principles, or ESG, particularly as regulators tighten rules on what stocks qualify under that label. 

Overall, though, Valle said it shows “the regulatory environment is just getting tougher and tougher, not just in Europe but in North America now as well.” 

The best evidence of what’s to come, he said, actually rests in a fourth oil company. Canadian giant Suncor Energy recently announced its latest five-year plan and included “almost no growth and no new projects because of high regulatory costs.” 

That doesn’t mean the end of oil. New projects will likely continue in other countries with looser regulations or weaker enforcement. And the publicly traded companies in North America and Europe may face a similar stock-market trajectory to another industry, one whose public relations strategies fossil fuel executives borrowed over much of the past three decades in a bid to stave off regulations. Once denying the link between cigarette smoking and cancer no longer worked, tobacco firms largely stopped growing, but kept making money.

“It’s going to be similar to what happened to Big Tobacco in the mid-1990s, [where it’s] still one of the better performing sectors, but not investing in growth, just reaping cash flow,” Valle said.

People kept smoking, albeit fewer of them and in far fewer environments. To make oil consumption a thing of the past, Valle said, “you still have to change societal needs.”