ExxonMobil’s top executives went into the company’s yearly shareholder’s meeting in May 2021 confident it was set to win a proxy fight with activist investors over its approach to climate change.
Then the votes started rolling in and it soon became clear that Exxon had a full-blown revolt on its hands.
Engine No 1’s campaign tapped into a deep well of discontent among larger investors at Exxon — the corporate embodiment of the age of oil, that long denied and cast doubt on man-made climate change, and strode the global stage with more wealth and power than many nations.
The company was stuck in the past, the campaign argued, failing to position itself for a coming shift to clean energy and addicted to big spending on oil and gas projects that no longer made financial sense.
“This was a complete failure in running the business,” says Chris James, founder of Engine No 1.
But two years on from the landmark shareholder uprising, James says he sees signs that the proxy fight set Exxon on a new trajectory, pointing to a number of changes he says were pushed by the campaign.
Exxon has promised to inject billions of dollars into a new business line focused on what it calls low-carbon technologies such as carbon capture and hydrogen. The company has also brought outsiders into key senior roles, including leading the energy transition effort, which many see as a big cultural change at a company that historically promoted those steeped in the Exxon worldview into its upper ranks.
“Setting up a low-carbon solutions business, I would chalk that up as a definitive win for what we were talking about,” says James, whose campaign won three seats on Exxon’s board. “This was a company that was kicking and screaming going into the energy transition and then started talking about it after the campaign.”
But has Exxon changed? The company says it is pouring cash into lower-emission technologies to aid the climate fight. But critics note it is only about 10 per cent of overall spending over five years, and that the company remains fundamentally wedded to a future of ever more demand for fossil fuels — a future all serious climate models say would unleash huge environmental damage.
Some say this shift is less about a newfound belief in the need to transition to cleaner energy and more about taking advantage of the Biden administration’s flagship climate law, the Inflation Reduction Act, which includes generous subsidies for a range of green technologies.
The question of Exxon’s commitment to change has taken on new dimensions in the energy crisis that followed Vladimir Putin’s invasion of Ukraine. This crystallised competing visions of how the world will power itself in the future: the oil industry’s view of continued reliance on its core products; or an alternative one that breaks free of the fossil fuels that have given corporate titans such as Exxon — and autocrats like Putin — incredible riches and power.
“This is not the Exxon of even five years ago, they’ve read the tea leaves and they understand they need to project a different image,” says Andrew Logan, a senior director at Ceres, which co-ordinates investor action on climate change and backed the Engine No 1 campaign.
“What is still unclear is whether this is just an exercise in messaging and PR or whether there’s real commitment to a new strategy.”
A new narrative
Last month, Exxon’s chief executive, Darren Woods, fleshed out the company’s new energy transition strategy in the most detail yet, telling investors that efforts to cut emissions were creating markets worth trillions of dollars that the firm wanted to tap into.
“The world’s climate challenge is immense and the opportunity it creates is equally immense,” says Woods.
Dan Ammann, whom Exxon hired from General Motors’ self-driving car unit to run its low carbon efforts, says that the business could one day grow to be “larger than ExxonMobil’s base business is today as the world approaches net zero”.
The sudden bullishness on technologies that could profit from the energy transition marks a profound shift in messaging from Exxon. For decades, the company downplayed the threat of clean energy to its business, lobbied against government efforts to reduce emissions and actively set out to cast doubt on the science of climate change, even as it own scientists were coming to similar conclusions as the broader scientific community, internal documents released in recent years show.
Woods has denied that Exxon spread disinformation about the climate and said in 2021 that the company has “long acknowledged the reality and risks of climate change.”
Unlike European oil major rivals such as BP, Shell and TotalEnergies, Exxon is not ploughing cash into big wind and solar projects or trying to crack into the battery business. Woods in 2020 dismissed those companies’ climate targets as a “beauty competition”.
In Exxon’s view the energy transition will involve a lot of electrification for things such as power generation and automobiles. But it argues there will be large swaths of the economy like heavy industry and long-range transportation that will be difficult and costly to electrify and will need to be decarbonised by trapping emissions or deploying hydrogen made from gas or swapping today’s fossil fuels for biofuels.
Exxon is betting on those technologies — biofuels, carbon capture and storage, and low-emission hydrogen — which it says are more closely aligned with its expertise and deep experience in the oil and gas business.
“The world needs to establish a new industry, a carbon-reduction industry with new value chains and products, and we need it sooner rather than later. These needs play to our strengths,” says Woods.
Yet the strategy has many critics. Although the International Energy Agency and the UN say these technologies will play a key role in helping the world get to net zero, carbon capture and storage has never been successfully built at a significant scale and the projects that have been set up have often trapped far fewer emissions than advertised. While hydrogen is a common input for heavy industry, hardly any of it is produced cleanly today, and biofuels remains a largely niche product.
Climate activists and analysts say Exxon is focused on hydrogen and carbon capture and storage because it sees them as a way to extend the fossil fuel era and fend off electrification efforts in markets key to future oil and gas demand.
Prior, extravagantly publicised investments in energy innovations have not lived up to Exxon’s hype. Logan of Ceres points to the company’s decade-plus long push to make biofuels from algae, which the company for years publicly touted as its flagship climate initiative, including in multiple high-profile Super Bowl advertisements that tried to paint Exxon as low-carbon leader.
But the technology ultimately never went anywhere and Exxon quietly dropped its algae programme this year. “The onus is on Exxon to prove that it can actually innovate in an economically sustainable way in those areas, and that this isn’t just marketing, which seems like [it] has been the case in the past,” says Logan. “It’s a huge cloud that hangs over the plans around hydrogen and carbon capture and for biofuels.”
Exxon’s Ammann acknowledges that the talk around carbon capture and hydrogen has outpaced the reality.
“One of the things that’s been interesting to me coming into this space, is there have been lots of press releases and lots of talk, frankly, but there have been very few real definitive project agreements,” he says.
But he points to a string of deals Exxon has announced in recent months for new hydrogen and carbon capture projects as evidence the business is “moving off PowerPoint and into the real world”.
The company has committed to building a new hydrogen production facility in a major refining and petrochemical hub outside Houston, Texas. It will be a so-called “blue” hydrogen facility, a novel venture in which it uses carbon-intensive natural gas to produce the hydrogen but captures and stores the plant’s CO₂ emissions.
Last month, it signed a deal with UK-based chemicals company Linde, in which Exxon says it will transport 2.2mn tonnes a year of CO₂ from a new Linde hydrogen facility on the US Gulf Coast and permanently store it underground.
Those initial projects could start generating cash by 2025, Amman says.
It is an open question whether any of these investments would have been greenlit without the subsidies for carbon capture and storage and hydrogen in the Inflation Reduction Act. The projects position the company as potentially among the IRA’s biggest winners.
ExxonMobil and others in the industry lobbied Joe Manchin, a Democratic senator from West Virginia, who played a key role in shaping the IRA, to get the incentives for oil and gas companies’ favoured green technologies into the law alongside subsidies for wind, solar and battery projects.
The bill includes a subsidy of $85 a tonne of CO₂ for projects that capture and permanently store the emissions, and up to $3 a kilogramme of clean hydrogen produced, which analysts say makes a huge number of projects that previously lacked a viable business model suddenly potentially very profitable.
Jeff Ubben, the activist investor and member of Exxon’s board of directors, said at an event recently that the IRA could lead to the company’s low-carbon spending “number going up — up a lot”.
He said that most Exxon shareholders would not support spending on low-profit clean energy projects, but that the IRA’s tax incentives had potentially put returns “into double digits” where the company could “start to defend the spend”.
“It’s difficult if you’re the CEO — or want to be the CEO — to lead the decarbonisation of energy across the existing infrastructure and then do it at a subpar return. Your investors may fire you,” says Ubben.
While Exxon says it wants to expand into new low-carbon businesses, it is not retreating from oil and gas. Rather, it plans to bolt the low-carbon business on to a growing oil and gas business.
The company plans to expand its oil and gas production by 3 per cent a year through 2027, setting it apart from its European rivals that say they are holding output steady or letting it decline. Exxon is rapidly expanding output in the massive Permian Basin shale oilfields in west Texas and New Mexico, and analysts say the company, flush with cash, could be on the hunt for a big deal in the shale patch or elsewhere.
It is also ploughing billions of dollars into a massive deepwater oil project off the coast of Guyana in Latin America, among the largest discoveries the industry has seen in decades.
Exxon’s bet on oil and gas has paid off over the past 18 months as surging oil and natural gas prices after Putin’s full-scale invasion of Ukraine made the company more profitable than ever.
It racked up nearly $56bn in profits last year and its shares have soared to new record highs, far outpacing European oil major rivals Shell and BP that had been emphasising their transition out of fossil fuels. Both these companies now say they are slowing their shift away from oil and gas, a move that has been broadly welcomed among investors.
Exxon argues it can continue to expand its oil and gas business and remain aligned with global efforts to reduce emissions as laid out in the Paris Agreement by cleaning up and offsetting emissions from its own operations.
But Neil Quach, an analyst at Carbon Tracker, a climate-focused think-tank, says the company’s strategy is not Paris-aligned because it ignores the emissions that come from people burning the oil, gas and fuels that it produces, or so-called scope 3 emissions. These account for more than 80 per cent of total emissions related to Exxon — about 540mn tonnes of CO₂ a year, nearly as much as the total CO₂ emissions of Canada.
The company’s investments in fossil fuels might make financial sense in the short term, but Quach says these costly new oil and gas developments are “at risk of being stranded in a fast-transitioning world”. He says, however, that planned investments in the Permian are preferable to other developments because shale projects have a shorter lifecycle, meaning investment can be dialled up and down more quickly in response to demand signals.
Exxon has also been subject to shifting political winds on fossil fuels. Joe Biden, who campaigned on a green transition, has changed course after last year’s war-driven surge in fuel prices and pressed Exxon to lift output, at least in the near term.
The Biden administration has become more focused on energy security and affordability of supplies in addition to slashing emissions. That has clearly played to Exxon and other oil producers’ favour. It has opened political space for new fossil fuel development — Biden recently approved a major Alaska oil project and has resumed auctioning drilling right in the US Gulf of Mexico — and brought some investors back to the oil and gas sector.
Even so, many investors are looking to keep the company’s climate strategy in the spotlight. Legal & General Investment Management, the UK’s largest asset manager and a top 20 shareholder in Exxon, has put forward a new climate resolution for the upcoming May 31 annual shareholder meeting.
It would require the company to make new disclosures of the financial risk if a quick drop in fossil fuel demand forces closures to its downstream fuel production facilities.
The proxy fight “changed the narrative”, says Dror Elkayam, an analyst at LGIM, but Exxon’s green energy spending levels remained “quite low compared to its European peers”.
“Whether the company is really increasing the level of ambition on climate change, we’ll have to wait and see.”
Additional reporting by Myles McCormick