One thing to start:
Welcome back to Energy Source.
Last month I went to West Texas to gauge the temperature of the engine room of the US oil industry. I visited Midland and Odessa, spoke to dozens of people across the two towns and visited production sites scattered across the region. (Thanks to the local ES readers who got in touch).
In my Big Read, out today, I take a detailed look into how people most affected by the ups and downs of the oil industry — the people often overlooked in coverage of the big macro issues — feel about the future of their sector: from the boom and bust cycle and the threat of Opec to the transition and the global shift away from fossil fuels.
I spoke to operators big and small, service providers, elected officials, industry leaders, economists and educators. And with oil back on the march — Brent and WTI rallied again yesterday to trade in the high $80s a barrel — there was a buzz of optimism about the outlook for the region.
Their fundamental message was plain: despite the chaos triggered by the brutal crash of 2020 and all the ambitions elsewhere about decarbonisation and getting off fossil fuels, West Texas is oil country and it will remain oil country, for better or worse.
Please give it a read — and feel free to send on any and all thoughts to [email protected]
On to today’s newsletter, which looks at ExxonMobil’s new net zero emissions targets, announced this week, and its proposed “road map” to decarbonise its operations.
Data Drill lays bare the scarcity of key metals — from lithium to copper — needed to drive forward the energy transition.
Thanks for reading.
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What is Exxon’s energy transition strategy?
When the tiny hedge fund Engine No 1 took on ExxonMobil, one of its most effective lines of attack was that the American supermajor essentially did not have a strategy for the energy transition. It would live or die with fossil fuel demand — a stance that the fund argued left Exxon at “existential” risk from a rapid global shift towards clean energy.
Nearly nine months on from its stunning shareholder defeat, ExxonMobil has offered some answers.
One thrust is the “ambition” it put out this week to make greenhouse gas emissions from most of its oil and gas operations net zero by 2050.
Exxon was undoubtedly late to the party on this — it’s the last of the majors to announce a net zero goal — but the plan is still significant.
The company says it is building out “road maps” for how to bring emissions at 33 of its major assets — large refineries, plants and oilfields and gasfields — around the world down to net zero. It says it can get the Permian to net zero by 2030. Ending flaring, staunching methane leaks and electrifying operations will be key.
But “net zero” from each operated asset does not mean emissions are reduced to zero. For operations that continue to pollute, Exxon may buy so-called carbon offsets (credits for planting trees, for example, that might capture an amount of carbon equivalent to that emitted from one of the company’s assets). Some climate activists believe these offsets effectively act as permits to pollute.
Even so, Exxon’s ground-up approach is novel and worth watching. If the company pulls it off, it could prove a blueprint for other producers.
This effort will address the company’s so-called scope 1 and 2 greenhouse gas emissions — those directly tied to its operations. To put some numbers behind this: those emissions were around 111m tonnes of CO2 equivalent in 2020 (probably a bit more in 2021). This is more than some advanced countries’ emissions, but tiny compared with the global total of around 50bn tonnes (any single company’s action is), but putting a serious dent in the carbon pollution from one of the world’s largest fossil fuel producers’ operations would undoubtedly be a climate win.
But here’s the rub. Exxon’s target does not cover the company’s much larger scope 3 emissions, those from the Exxon-made fuels that you and I burn in our everyday lives. They make up more than 80 per cent of the company’s overall emissions, which we know because the company (reluctantly) started reporting them last year.
Exxon’s European rivals have committed to slashing their scope 3 emissions and Shell and BP have said they will start winding down oil and gas output to meet those targets. Exxon’s chief executive Darren Woods told us the company can continue to expand production and still meet its ambition to cut pollution from operations to net zero.
In essence, Exxon’s argument is: we’ll tend to our garden and you tend to yours. The modern economy runs on fossil fuels and Exxon says that is an issue for society at large, not Exxon, to deal with. Critics will respond that Exxon’s pro-fossil fuel lobbying has done plenty to entrench oil and gas over the years.
Climate activists argue that the company needs to set a more expansive target that covers these scope 3 emissions — and the company’s shareholders are likely to have their say in a few months.
Mark van Baal, a founder of Follow This, an activist investor group, said it plans to put forward a shareholder resolution calling on the company to set scope 3 targets at this year’s annual general meeting in May. It won a similar vote at Chevron’s shareholder meeting last year.
“Net zero for operations by 2050 is mere tokenism and no serious attempt to address investors’ concerns about the climate crisis,” van Baal told ES. “At the AGM in May, responsible investors can show ExxonMobil that all emissions have to go down.”
Exxon’s announcement seemed to go down somewhat better on Wall Street, which is warming to Exxon again — the company’s share price is now back above its pre-pandemic level.
Matt Murphy, an analyst at Texas-based investment bank Tudor, Pickering, Holt & Co told his clients that Exxon was “striking the right mix in balancing the outlook for returns as well as addressing concerns on disclosures and emissions reduction”.
This takes us to the next leg of the transition strategy — it’s all well and good for the company to clean up its operations, but what if fossil fuel demand starts to evaporate, as outlined in that famous IEA net zero scenario from last year? Or what if oil and gas prove a whole lot stickier than many would hope?
Woods is positioning the company to tack as closely as it can to the pace of the energy transition, giving it the ability to toggle investment between fossil fuel production and low-carbon technologies in a way that mirrors, but does not get out in front of, the broader transition.
Key here are the low-carbon technologies where Exxon is placing its bets — carbon capture and storage, hydrogen and biofuels. It is very much unproven that these will become profitable large-scale businesses. Critics see these three technologies in a similar way to how they see carbon offsets: a way for fossil fuel producers to stick with business-as-usual, including emissions-as-usual, while pinning hopes on future tech to come to the rescue.
But Exxon is not wrong to point out that they are central to the IEA’s and most other net zero scenarios — and they are as well positioned as anyone in those nascent businesses.
Woods told us getting an early start on those businesses was “a little bit of a natural hedge” for the energy transition.
“If the transition happens faster, more policy comes in sooner, we can divert resources into those projects,” he said.
Deep in Exxon’s climate report released this week, the company modelled what it would look like under the IEA net zero scenario, which it characterises as “extreme”.
Woods told us even under that model the company could continue to grow, though primarily as a carbon capturing, hydrogen producing and biofuel refining business. Oil and gas investment would fall to a tiny fraction of total spending.
And if the energy transition does not pick up pace?
“To the extent that those policies are slower, the market evolves less rapidly. We’ve got options to continue to produce low emissions, low cost barrels,” said Woods.
That is not likely to win over activists who want Exxon to turn off the oil taps and start building wind and solar farms. But it could prove enough to win over Wall Street. (Justin Jacobs)
Net zero commitments are outpacing metal supply chains. A new report by McKinsey found that supplies for key metals must grow at unprecedented rates if countries want to keep global warming from exceeding 1.5C.
Supplies of lithium and tellurium must expand by over 700 per cent by 2030, according to the report. Copper and nickel must also achieve unprecedented growth.
Boosting metal supply requires long lead times and high capital investments. McKinsey expects rapid price increases and supply constraints to be “unavoidable” as the mining industry works to meet the demand surge.
These challenges can already be seen. Record demand for battery metals sent prices skyrocketing in 2021, according to BloombergNEF. The research firm predicts average prices for lithium-ion battery packs to increase for the first time ever this year, as metal demand continues to set new records. (Amanda Chu)
BHP, the world’s biggest miner, cut its coal guidance owing to Omicron-related workforce disruptions.
EU regulator renews calls to ban an energy-intensive method of crypto mining.
Industrial leaders are rethinking supply chains in the face of climate change.
Carmakers are frustrated with France’s plan to require public health warnings in advertisements.
Google’s new campus has a “dragon-scale” solar roof as part of its move to go carbon-free and attract a young, eco-conscious workforce. (The Guardian)
Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.
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