America’s biggest oil company is in big trouble, and its struggle reflects a widening gap in the U.S. oil patch over how quickly the country will shift from fossil fuels to renewables.
It’s been a rough year for Exxon Mobil, which reported back-to-back quarterly losses and which in August was ousted from the Dow Jones Industrial Average, America’s preeminent stock market index, after being a member for almost a century.
Now, analysts predict the company will lose more than $1 billion this year, a far cry from the $46 billion profit it booked in 2008—at the time a record for any U.S. company.
The company’s financial situation has worried investors, and it’s compounded by the seeming reluctance of Exxon management’s to change direction. Chief executive Darren Woods launched a ambitious $230 billion spending plan two years ago aimed at boosting production by 1 million barrels a day by 2025. Yet production has inched up only slightly since 2018.
It has cut $10 billion, or about 30%, of its capital spending for the year and slowed down projects around the globe. It has also been borrowing to avoid cutting its dividend to shareholders, which has long been seen inside and outside the company as sacrosanct.
So far, Exxon has not announced layoffs, even as other U.S. majors have shed about 35,000 jobs. But the company has said it will stop matching contributions to employees’ 401k retirement plans in October, and it will undergo a sweeping review of its workforce, which could lead to job cuts in the future.
Of course, Exxon could benefit from its steadfast commitment to fossil fuels if oil demand surges in the as the COVID-19 pandemic subsidies, or if the current increase in renewables investments fail to produce results.
But the company is increasingly becoming an outsider among the majors, many of whom, like Shell and BP, have announced large investments in renewables projects this year. Woods has been dismissive of those moves, which remain a small percentage of those companies’ overall capital investment.
This summer has intensified the pressure on oil companies as a string of natural disasters has ravaged the U.S. Wildfires burned hundreds of thousands of acres up and down the West Coast, fueled by record heat and dry winds. Meanwhile, one of the most active hurricane seasons on record played out in the Atlantic. By late September, Tropical Storm Beta was approaching the Texas coast, named for the second letter of the Greek alphabet because the National Weather Serviced had already used all the names on its list for the year. Earlier, Hurricane Sally dumped record amounts of rain on Florida and Alabama just weeks after Hurricane Laura slammed into Louisiana with catastrophic winds.
Scientists say we are entering a new era of large-scale—and more frequent—climate disasters, and they’re advancing more quickly. Pressure from voters and stakeholders is likely to intensify in the form of stricter regulation and candidates that will be less sympathetic to the industry.
Companies such as Google have pledged to use only carbon-free energy sources by 2030, and Amazon has made similar pledge for 2040. Such policies, as they spread, could have a profound effect on demand. BP, which itself has pledged to eliminate or offset all emissions by 2050, has predicted global oil demand could fall by as much as 80% in the next 30 years. Bank of America has forecast peak demand in a decade.
Against this backdrop, Exxon’s continued allegiance to fossil fuel development seems out of step. But it’s a more immediate threat— the current prices for those fuels—that’s behind most of the company’s financial struggles. Abundant domestic production from shale plays has driven down prices for the entire industry, but those declines came after Exxon, under former CEO Rex Tillerson, paid $30 billion in 2010 for XTO Energy, a major shale producer. At the time, natural gas prices were near a 10-year high. Exxon’s plans to expand production in fields such as the Permian Basin of West Texas have been curtailed by the pandemic.
It also has made big bets in areas such as the Arctic, where the Trump administration recently signed an executive order allowing drilling in the Arctic National Wildlife Refuge’s 1.56 million-acre coastal plain. The area is home to polar bears, caribou herds, Arctic foxes and some 200 species of birds, and environmental groups in mid-September wrote to Exxon and other oil companies warning against leasing the land. Some 250 environmental and indigenous groups, representing about 27 million members, warned Woods and the CEOs of other key Arctic drillers, including Chevron, ConocoPhillips and Hilcorp Energy, of a “major public backlash” and long-lasting reputational damage for any company that drills in the region.
The letters follow a major lobbying campaign that convinced five of the six largest U.S. banks to eschew financing for any fossil fuel development in the Arctic.
As the Arctic dispute rages, the cost for renewables development continues to decline. The price tag for a new utility-scale solar farm in the U.S. fell by 50% from 2013 to 2018, while the cost of new wind installations dropped by 27%, according to the U.S. Department of Energy.
Prices for combined-cycle natural gas generating plants dropped 13% during the same period. The declines represent lower costs for solar panels, generating equipment and construction expenses. Wind, solar and natural gas-powered plants accounted for more than 98% of the new generating capacity added to the U.S. electricity grid in 2018.
The trends, in other words, are moving against U.S. producers, many of whom have been slow to address climate change. As smoke from West Coast wildfires blanketed much of the country in September, as Beta bore down on Texas with two months left in hurricane season and as climate issues took on a bigger role in heading towards November’s presidential election, they may be running out of time. Exxon’s financial struggles, while prominent, may be just the beginning.
Read the latest issue of the OGV Energy magazine HERE.
Subsea Innovation and the Energy Transition - By Moray Melhuish
Bilfinger’s Core Crew knowledge is key to Decommissioning success
J+S with their Legacy Locker: a circular Economy approach to the decommissioning model
Proteus: How to use technology to stay agile in the changing business environment