Judgment day for Big Oil

EMERGENCY EDITION: Shell in Dutch court drama, as shareholder rebellions rock Exxon and Chevron

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Yesterday a transatlantic earthquake struck Big Oil.

First, a Dutch court ordered Shell to cut its emissions by 45% this decade, in a landmark ruling that also found the Anglo-Dutch oil major liable for Scope 3 emissions from customers and suppliers. This has big implications for other big emitters.

Then, shareholders defied both ExxonMobil and Chevron to pass resolutions filed by climate-conscious activist investors. What does this mean? ExxonMobil will get at least two new board members and will have to come clean on its climate lobbying; while Chevron must now set and meet Scope 3 emissions reductions targets.


Any one of these events would be significant in its own right, but three on the same day is historic. They prove that investor sentiment is turning much more quickly than board members realise, and that C-suite oil executives arguing for a cautious approach to change are losing the argument with their fiduciaries.

The Shell ruling marks “the first time a judge has ordered a large polluting company to comply with the Paris Climate Agreement,” according to Roger Cox, lawyer for Friends of the Earth Netherlands, a co-plaintiff in the case. This could have “major consequences for other big polluters”.

Shell says it will appeal, and it may well find favour in a higher court. Even if the appeal fails, meeting the emissions target should not be overly onerous. The company could simply sell its dirtiest assets, says Rystad Energy, which calculates that 45% of Shell's Scope 1 emissions come from only 14% of its total portfolio production.

Does this mean oil companies will never be made responsible for their Scope 3 emissions? It is hard to say now. Rystad deputy CEO Lars Eirik Nicolaisen said:

“The mere fact that such a ruling now exists … is evidence in itself that a court of law can make these kinds of judgements… There is some analogy to the tobacco industry, where producers became more liable for the choices of their customers.”

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Institutional rebellion

US oil supermajor ExxonMobil will have to welcome two new members to its board: Gregory Goff and Kaisa Hietala. (A third could yet take a board seat, as the vote was too close to call on Wednesday evening.)

Both were nominated by activist investor Engine No.1, which mounted a stinging proxy attack on the company over its lack of climate risk disclosures and unpreparedness for a lower carbon future (as covered by Energy Flux here).

This rebellion is unusual since it was instigated by a hedge fund – the kind of investor that typically seeks to maximise short-term returns over long-term reforms.

The irony is that the hedge fund is calling for Exxon to take a longer view of the business risks, while executives have been more focussed on the immediate opportunity to capitalise on resurgent oil demand.

If a company of ExxonMobil’s might and stature can’t defend a conservative oil-focussed business strategy against a small rabble-rousing boutique investment house, what does this mean for others?

Any listed oil company with institutional shareholders is surely now at risk of revolt. If the world’s biggest investment manager BlackRock ($7.4 trillion in assets under management) is finally putting its money where its mouth is, others will follow suit.

Meanwhile, Chevron shareholders voted 61% in favour of committing the company to “substantially reduce the greenhouse gas (GHG) emissions of their energy products (Scope 3) in the medium- and long-term future”. Chevron executives may set the target, with board oversight.

The motion was filed by activist investor Follow This, marking its third consecutive win of the 2021 AGM season. Earlier this month, 58% of shareholders voted for a similar Follow This resolution at ConocoPhillips and 80% at Phillips66.

Forced into action

Rebellions are also brewing at European oil majors. Support for Follow This climate resolutions more than doubled at three companies this month, garnering 21% of votes at BP, 39% at Equinor and 30% at Shell, despite their 2050 net zero promises. Follow This founder Mark van Baal said:

“These votes reflect a rising awareness that shareholders’ votes are crucial to rapidly scale the transition from fossil fuels to renewable energy. Institutional investors understand that no investment is safe in a global economy wracked by devastating climate change.

It now seems to be only a question of when, not if, every Big Oil company is bound to concrete emission reductions this decade – not flexible ‘emissions intensity’ targets for the post-2030 period.

To comply with these obligations, publicly traded international oil companies will have nowhere to turn: they will in all likelihood have to offload the most emissions-intensive assets from their portfolios. Merely producing more from cleaner assets to reduce the overall CO2 intensity won’t cut it.

This means privately held rivals and national oil companies stand to pick up bargain-priced fossil fuel assets that are too carbon-heavy to satisfy the IOCs’ newly climate-savvy shareholders.

Many of these assets will have plenty of economic life left in them and won’t stop producing, they will simply change ownership – and fall into the hands of potentially less environmentally responsible operators.

In a broad sense, the energy transition means a transfer in near-term economic value and longer-term sustainability risks from Wall Street to private equity and nation states.

Yesterday’s developments are undoubtedly positive for climate action and corporate reform — although the net impact on emissions is hard to gauge. Celebrate progress, but beware unintended consequences.

Seb Kennedy | Energy Flux | 27th May 2021

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