Climate Activism Is Great News For Saudi Arabia And Russia

Big Oil has lately come under a plethora of attacks from all directions, ranging from uncooperative financiers and investors amidst a global shift to renewable energy to hostile governments and hardline climate activists.  But not all oil and gas players will be on the losing end of those attacks. 

Some of the biggest names in the oil and business have recently suffered a trifecta of blows by climate activists and investors.

Exxon Mobil (NYSE:XOM) lost three board seats to Engine No. 1, an activist hedge, in a stunning proxy campaign. Engine No. 1 has told the Financial Times that Exxon will need to cut fossil fuel production in order for the company to position itself for long-term success. "What we're saying is, plan for a world where maybe the world doesn't need your barrels," Engine No.1 leader Charlie Penner has told FT.

No less than 61% of Chevron (NYSE:CVX) shareholders voted to further cut emissions at the company's annual investor meeting a week ago, rebuffing the company's board which had urged shareholders to reject it. 

Meanwhile, a   Royal Dutch Shell (NYSE:RDS.A) to cut its greenhouse gas emissions harder and faster than it had previously planned. Never mind the fact that Shell already had pledged to cut GHG emissions by 20% by 2030 and to net-zero by 2050. The court in The Hague determined that wasn't good enough and has demanded a 45% cut by 2030 compared to 2019 levels.

However, not everybody in the oil sector is alarmed by the turn of events.

Indeed, OPEC and leading national oil companies (NOCs) are reveling in schadenfreude following Big Oil's latest woes, viewing it as a prime opportunity to grab more business and market share.

The boardroom and courtroom defeats of Exxon, Chevron, and Shell is sweet music in the ears of Saudi Arabia's national oil company Saudi Aramco (2222.SE), Russia's Gazprom (GAZP.MM) and Rosneft (ROSN.MM) as well as Abu Dhabi National Oil Co. who are looking to capitalize by filling the gap that will be left if these companies start cutting oil production in a bid to pacify investors.

"Oil and gas demand is far from peaking and supplies will be needed, but international oil companies will not be allowed to invest in this environment, meaning national oil companies have to step in," Amrita Sen from consultancy Energy Aspects has told Reuters.

Lowering emissions, not nixing fossil fuels

An overriding theme that has emerged is that Big Oil wants to focus not so much on curtailing oil and gas production but rather on mitigating the impact of its carbon and greenhouse gas emissions.

Big Oil chief executives from Exxon Mobil, Chevron Corp., Occidental Petroleum, (NYSE:OXY) and ConocoPhillips (NYSE:COP) have all spoken about the industry's transition to a lower carbon world, with OXY even branding itself a 'carbon management' company that wants to set the industry standard for the production of net-zero carbon oil.

According to Exxon Mobil CEO Darren Woods and Occidental Petroleum CEO Vicky Hollub, reducing carbon emissions from fossil fuels and not the actual use of fossil fuels offers the best way to combat climate change. 

Interestingly, both CEOs stressed—on separate panels—that the world still needs oil and gas, and governments need to focus on mitigating global warming using technologies such as carbon capture and storage (CCS) instead of attacking fossil fuels.

Nevertheless, even the biggest hardliner of them all, Exxon Mobil, has markedly changed its tune from just a few years back.

During the company's 2021 Investor Day held on Wednesday, CEO Darren Woods outlined the company's energy transition strategy, including plans to trim production growth and boost cash flows in a bid to support a growing dividend. Exxon revealed that it plans to duction flat from 2020 levels through 2025 at 3.7M boe/day, good for a 26% cut from the 5M boe/day estimate for 2025 it released just a year ago.

Still, Exxon plans to continue ramping up production at the Permian Basin and Guyana, with Permian production averaging 400K boe/day this year before rising to 700K boe/day by 2025. Exxon also sees Guyana quickly becoming a key cash cow but has indefinitely suspended other major projects such as the $30B Mozambique LNG export project.

Woods announced plans to increase investments on carbon capture and storage to ~3% of new spending, an improvement from the 1% it had previously earmarked for CCS but still a far cry from the double-digit levels from European majors Total SE (NYSE:TOT) and Royal Duch Shell. Woods urged governments to stop picking winners and losers but instead to establish carbon markets so as to "make sure we're using market forces to try to most cost effectively reduce CO2 emissions."

Occidental Petroleum's Vicky Hollub pretty much echoed Darren Woods' views:

"What I think that people don't understand is we should not be talking about eliminating fossil fuels. What we really need to be talking about is eliminating emissions and if we can provide and we will. Net carbon zero oil, that is what the world needs and the world cannot achieve the goals ... of the Paris accord without the oil industry helping with that. We can be leaders in that."

Hollub said OXY's goal was to not only become a net-zero oil producer but also help other companies lower their carbon footprint:

"We're going to be building what will be the largest direct air capture facility in the Permian and partnering with us to do that is United Airlines because they also have a commitment and focus on getting to net zero by 2050."

Hollub revealed that Occidental has signed up to take carbon from two ethanol plants and a steel plant in Colorado and sequester it in the Permian Basin.

Massive Fiscal Players

On their part, national oil companies or NOCs are massively important to the governments that own them.

State-owned oil and gas companies control at least US$3 trillion in oil and gas assets and hold an estimated 90% of all known reserves—considerably more than publicly listed companies such as ExxonMobil, Chevron, and Shell. Meanwhile, Saudi Aramco leads the pack as the world's most profitable company. 

At least 25 NOCs account for 20% or more of government revenues, with Nigeria's national oil company, the Nigerian National Petroleum Corporation (NNPC), collecting about half the general government revenues through oil and gas sales. 

That said, not even NOCs will be completely immune to the global energy transition.

The International Energy Agency (IEA) has just warned that pursuing net-zero emissions target is likely to be catastrophic for many oil-exporting countries.

Pursuing a net-zero emissions target by 2050 would see OPEC become even more dominant and end up accounting for more than 50% of world production as supplies become concentrated among a smaller number of countries. Unfortunately, it would also mean there's a lot less pie to go around, with annual per capita income from these commodities predicted to fall by as much as 75% in little more than a decade.

However, countries that are the least resilient—where the revenues from the sale of fossil fuels have not been adequately managed by means such as using the cash to diversify into other domestic industries or create sovereign wealth funds that invest abroad to secure long-term revenues—will also bear the full brunt of the energy transition.

One such country is Iraq.

Despite harboring ~145bn barrels of proven crude reserves, Iraq's finance minister Ali Allawi recently warned that pursuing a net-zero target by 2050 could be catastrophic for the country. Allawi has been desperately trying to push sweeping state and economic reforms in a bid to avert this eventuality but has seen his efforts thwarted by a government more concerned with more prosaic matters.

The World Bank has named Iraq, Libya, Venezuela, Equatorial Guinea, Nigeria, Iran, Guyana, Algeria, Azerbaijan, and Kazakhstan as the most vulnerable oil-producing countries due to their high exposure to the oil and gas sector and relative lack of diversification.