The world is moving toward an energy transition — but Big Oil is reluctant to give up fossil fuels

The world is moving toward an energy transition — but Big Oil is reluctant to give up fossil fuels

Countries may be moving toward green energy, but Big Oil is hardly all in.

On Friday, two impact-oriented funds dropped a climate proposal intended to go to a ExxonMobil (XOM) shareholder vote after the Houston-based oil giant filed a lawsuit to remove the measure from its proxy ballot.

In the complaint, the oil producer said the activist investors Arjuna Capital and Follow Thiswere driven by an “extreme agenda” with the goal of “diminishing the company’s existing business.”

“Given Exxon’s preference to fight a battle in court rather than allow shareholders the freedom of a vote at its annual meeting, we decided to withdraw the climate proposal,” Mark van Baal, founder of Follow This, said in a statement on Friday.

As ESG initiatives and investing styles fall out of favor, energy giants are doubling down on their core business of oil. Last year, ExxonMobil announced a near $60 billion deal to acquire Pioneer Natural Resources (PXD) that will make it the largest player in US shale.

More than a week later, Chevron (CVX) said it would buy oil explorer and producer Hess (HES) in an all-stock agreement valued at $53 billion.

The Chevron logo is seen with the Hess logo in the background in this photo illustration on 13 March, 2023 in Warsaw, Poland. (Photo by Jaap Arriens/NurPhoto via Getty Images)
The Chevron logo is seen with the Hess logo in the background in this photo illustration on March 13, 2023, in Warsaw, Poland. (Jaap Arriens/NurPhoto via Getty Images) (NurPhoto via Getty Images)

Big Oil companies have posted blockbuster quarters following the start of the Russia-Ukraine war in 2022 as crude prices surged.

Even as West Texas Intermediate (WTI) fell more than 10% in 2023,US energy giants saw their second-largest annual profit in a decade. The industry is under pressure from shareholders to keep momentum going.

Last week, an activist hedge fund sent a letter to BP (BP) demanding that the British oil and gas producer scale back its “irrational” green energy strategy, which has, “quite understandably, depressed the value of BP’s share price.”

A BP spokesman said in a statement the company continues “to receive support for our strategy” from other shareholders.

‘The problem is not oil and gas’

Oil and gas participants say a shift to green energy won’t happen from one day to the next, and fossil fuels are still needed for the transition to happen.

“We cannot replace overnight an energy system that took 150 years to build,” said ExxonMobil CEO Darren Woods at the Asia-Pacific Economic Cooperation conference in San Francisco in November.

“The problem is not oil and gas. It’s emissions,” he added. “The solutions to climate change have been too focused on reducing supply. That’s a recipe for human hardship and a poorer world.”

Exxon Mobil Corporation (XOM)

Last year the International Energy Agency, which advocates for green technologies, noted the oil and gas industry invested around $20 billion in clean energy in 2022, some 2.5% of its total capital spending.

The relative disproportionate spendingisn’t due to a lack of efforts from green advocates.

In 2021, environmentally friendly fund Engine No. 1 obtained three independent director seats on ExxonMobil’s board via a proxy battle.

Mark Kramer, a senior lecturer at Harvard Business who wrote a case study on Engine No. 1 and ExxonMobil, said even with the seat wins, he believes little progress was made.

“It’s quite clear — its not working,” he said of green advocates’ efforts. “The profitability of oil and gas right now is so strong that it’s extremely hard for a company to walk away from that, or even to talk [of] walking away from it.”

That’s not to say Big Oil hasn’t made pledges for net zero emissions and launched large initiatives in the energy transition.Following Engine No. 1’s proxy battle, ExxonMobil announced a Low Carbon Solutions unit.

The company has since committed more than $20 billion through 2027 for initiatives such as carbon capture, hydrogen production, and a massive lithium extraction operation announced last year. The critical metal is used to make EV batteries.

“We see an opportunity to supply approximately 1 million electric vehicles per year by 2030. With economically advantaged production, it has a much smaller environmental impact than today’s supply.” Woods said during the company’s earnings call on Friday.

SAN FRANCISCO, CALIFORNIA - NOVEMBER 15: ExxonMobil CEO Darren Woods speaks during the APEC CEO Summit at Moscone West on November 15, 2023 in San Francisco, California. The APEC summit is being held in San Francisco and runs through November 17. (Photo by Justin Sullivan/Getty Images)
ExxonMobil CEO Darren Woods speaks during the APEC CEO Summit at Moscone West on Nov. 15, 2023, in San Francisco. (Justin Sullivan/Getty Images) (Justin Sullivan via Getty Images)

‘No good answer’

HBS’s Kramer says ExxonMobil is receiving pressure from shareholders on either side of the green issue.

“There is no good answer if you’re an ExxonMobil. You have activist shareholders on both sides,” he said.

“You have ones saying, ‘I want as much profit now as soon as possible, and I don’t care about the future or believe in climate change.’ And you have [others] that say, ‘If there’s no planet, and it’s not habitable, there’s no point in having dividends,'” he added.

“I think the greater pressure comes from the shareholders who want profits now,” he added.

The problem for oil companies is renewable projects that exceed return on investment hurdles “have been hard to find,” says Stewart Glickman, energy equity analyst at CFRA Research. That could have implications for what consumers pay.

“I would argue that federal governments have both a role and a responsibility to change incentives, so that individual firms change their behavior. That, too, has its own tradeoffs,” said the analyst. “Being tougher on oil and gas firms to move away from hydrocarbons will make energy more expensive, and that makes voters unhappy.”

“It would be better if governments could have honest conversations with the public about this trade-off,” he added.

HBS’s Kramer agrees the answer must be government intervention.

“Unless government steps [in] and requires a phase-out of fossil fuel or imposes such a heavy carbon tax that it’s no longer economically desirable, I don’t think the change is going to happen,” he said.

Ines is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.