Oil Companies Under Pressure To Change Their Business By Shareholders and Governments

The June Oil and Gas Issue

The earliest memory I have of oil companies was probably from Saved By The Bell where an oil company wants to do some oil extraction near Bayside high. The episode essentially asks us why we need more oil and tells us there are externalized costs that we don’t think about to get one of the most important raw materials in the world. I believe this episode aired back in 1991 and about 30 years later the same issues are being discussed, but this time in boardrooms, chambers of government, and courts.

I’m bringing this clip from 1991 up because this is the earliest thing I can remember about the conflict between the environment and oil companies. These conflicts have been going for over 30 years and recently I think we are starting to see them get resolved despite events like the Valdez spill and Deepwater Horizon occuring and not much changing.

I’ll start the story back in the beginning of the year with a Dutch court ordering Royal Dutch Shell to pay compensation to Nigerian farmers for oil spills in the Niger Delta. From what I could tell this would not be Shell’s responsibility if the leaks were due to sabotage, but this time it is Shell’s responsibility and in addition to compensation they are being asked to outfit oil extraction rigs with leak detection systems. This has been a long running civil case involving a Shell subsidiary based in Nigeria, but the forcing of payment for damages laid the groundwork for what happened at the end of May. 

A court in the Hague has recently ordered Royal Dutch Shell to curb its emissions, also a landmark ruling, and that while it does not consider Shell’s emissions to be unlawful it is requiring them to reduce them. The Dutch court is telling Shell that emissions need to be reduced by 45% by 2030. Shell was already planning on doing this themselves, perhaps not on a timeline dictated by a government, but they were planning on being net zero emissions by 2050. Shell’s CEO Ben van Beurdan in their presentation on how to achieve this transformation said he wasn’t exactly sure how Shell would be able to do it, but they at least have a vision for their future.

Exxon Mobil’s vision for the future has been much the same as it always has been, which has been to make as much money as possible for shareholders by extracting, refining, and selling oil and oil derived products. While many of Exxon’s counterparts in Europe and even the US have signaled that they are looking at alternatives, Exxon appears to be the least enthusiastic of the oil companies. Recently, they proposed a gigantic carbon capture project, but they want everyone else to help derisk the project including tax payers and that they would welcome a carbon tax.

At the end of May Exxon’s board experienced a first—they lost a vote to an activist investor by the name of Engine No. 1 on two of the board of directors seats. Engine No. 1 is a relatively small investor that holds about 1% of Exxon’s shares, but they have the backing of big named institutional investors such as Blackrock, Fidelity, and Vanguard (if you have a 401k or pension you are probably a shareholder by proxy). Gregory Goff and Kaisa Hietala are the two board members that Engine No. 1 got elected to the board. 

Heitala is an interesting board member choice primarily because she is coming from the Finnish oil giant Neste. Heitala has been integral to Neste’s transformation and Neste has been a leader in transforming their business towards renewable energy and biofuels. Neste over the last five years with Heitala in a senior leadership role has seen their market capitalization quadruple while Exxon’s has gone down. While many may consider Engine No. 1 to be backing climate change (and I think they are) I view it more as capitalists being capitalists.

One of the worst things you can do as a CEO is post declines in stock price while your competition grows and returns more money to shareholders. Jinjoo Lee did some excellent reporting about how Engine No. 1’s boardroom battle was less about climate change and more about transforming the company to be a better investment for shareholders. Lee reported on Goff’s board appointment: 

Paul Sankey of Sankey Research wrote in a note last week: “Anyone who thinks that Greg Goff is going to storm into the Exxon Mobil boardroom and start yelling about wind farms, does not know Greg Goff.”

I tend to agree with both sentiments that it’s about making money for investors and that it is also kind of about climate change, not in a hand-wavy, “we need to save the planet” kind of way but in an “oil might not be a thing with alternatives taking market share we need to figure out a better business strategy.” One of the strategies that Exxon and Shell could do and/or probably have done is to sell off their most emissions heavy operations to smaller private companies to raise cash. A smaller private company has less scrutiny than a massive oil giant when it comes to emissions and the oil giants can use their cash to buy “greener” or more ESG focused companies to diversify their business. 

Engine No. 1 could possibly win another board seat once everything shakes out and this is a sign that change at these large companies happens because investors demand it. Executives ultimately answer to their shareholders and the largest group of shareholders are institutions made up of small individual retail investors. If you want to try and take on an oil giant give Fidelity a call.