Exxon Mobil and the Future of Climate Change
As the largest oil company in the United States, ExxonMobil will be looked to as a model for how to adapt in the oil and gas sector to sustain profitability in the face of climate change. The company must confront huge challenges in adapting its far-reaching, dispersed and capital-intensive set of assets to the new legislative and environmental situations that climate change is shifting the world towards.
First, the physical manifestations of climate change put Exxon’s business practices at risk. Rising and warming oceans will be the most dangerous symptom of climate change that Exxon will have to deal with directly. Rising oceans will affect the global network of ports which are the means by which a huge portion of the international oil trade is carried out. The degradation of this network of deep draft ports presents a significant challenge for Exxon’s long-term product distribution plan. In addition to the risks associated with rising sea levels, warming oceans make the oil refining process costlier. As sea water is often used to cool the refining process, warmer sea water makes cooling more difficult. Exxon splits its business lines into Upstream, Downstream and Chemicals. The percentage of revenues those business line generate are 9.3%, 79.9% and 10.8%, respectively (source: http://revenuesandprofits.com/how-exxonmobil-makes-money/). The Downstream segment is comprised mainly of transportation, refining and marketing of petrochemical products. It is particularly worrisome for Exxon that its largest business line is the one that is most threatened by the long-term effects of climate change.
Secondly, the regulatory environments that Exxon operates in across the world are likely to make it harder for Exxon and the oil industry at large to remain competitive. Specifically, carbon taxes and cap-and-trade regimes are likely to reduce dependence on fossil fuels and shift public consumption to renewable sources through price mechanisms. Furthermore, government-imposed emissions limits on vehicles and financial incentives for consumers to buy electric vehicles will threaten Exxon’s gasoline businesses over the coming century.
Exxon has only formally acknowledged the effects of climate change for two years so its approach to dealing with the issue is relatively new. It has undertaken three notable initiatives, including working with industry partners to create a voluntary framework for companies to report the risks associated with climate change. According to their 2015 Corporate Citizenship Report, the “resulting framework, which International Petroleum Industry Environmental Conservation Association (IPIECA) will pilot during 2016, covers a wide range of climate-related issues and provides a consistent reporting methodology for the oil and gas industry. This framework should enable interested stakeholders to understand an individual company’s views on the issues central to addressing climate change risks.” Another avenue that Exxon is pursuing is the development of more sustainable biofuels. The long-term implications and profitability of this type of technology are hard to predict and Exxon’s corporate communications don’t indicate to what extent they believe the biofuels business can replace lost oil, gas & petrochemical revenue. The last notable initiative Exxon is working on is the reduction of greenhouse gases either through improving their own process efficiency or by providing products and solutions to enable customers to reduce the amount of greenhouse gases emitted into the atmosphere. While cutting emissions is the main short-term goal, the 2015 Corporate Citizenship Report cites that for “the medium term, we are deploying proven technologies such as cogeneration and carbon capture and sequestration where technically and economically feasible.” The least detail from Exxon came from their plan for the long-term, for which the same report states that in the “longer term, we are conducting and supporting research to develop breakthrough, game-changing technologies.”
I think Exxon’s current strategy does not adequately address the threats its business lines face, particularly in the medium- and long-term. It is difficult to know exactly what Exxon means by “breakthrough, game-changing technologies,” though I think they owe it to their shareholders, and arguably the industry & general public, to better articulate the nature of those technologies and how they plan to address them. A main concern of mine is that they will face the phenomenon that Professor Christensen laid out in The Innovator’s Dilemma, where large established firms fail to properly embrace disruptive technologies and end up losing out to new entrants who are better equipped to succeed with the new technology and do not have to pivot the way an established firm would. As an industry leader, I’d like to see Exxon spell out a more detailed plan for what types of technologies they plan on using to drive growth and the process they plan to use to embrace such new technologies. (761 words)
Sam, I could not agree with you more when you say “I think Exxon’s current strategy does not adequately address the threats its business lines face, particularly in the medium- and long-term”. It is ironic that the company that benefits from contributing to climate change is struggling to deal with its consequences. The disclosure the company gives around the “medium term” and the “long term” is incredibly vague and almost seems like the company is including it to appease those who want them to include something about climate change. Your inclusion of The Innovator’s Dilemma phenomenon is also very interesting – there have been several industry leaders, for example, Kodak and Nokia to name a couple, who did not embrace new technologies – it would be a shame if one of the world’s largest companies by market capitalization lost its way because of its lack of desire to embrace environmental shifts.
I agree with Gregor in that Exxon’s lack of clarity in its pursuit of new technologies to take over the current business model reminds me of Kodak and other failed used-to-be industry leaders. I came across an opinion article on Forbes about this (http://www.forbes.com/sites/timworstall/2016/03/28/the-very-odd-idea-that-exxon-should-become-a-renewable-energy-company/#b6cb30c39a1c) where the author argues that “if the task for which a company is constructed no longer needs doing then we don’t retask the company. We deconstruct it and repurpose the constituent parts.” He believes that Exxon has no expertise and skilled employees needed to go on renewable energy space. In other words, once fossil fuels become obsolete or undesirable, Exxon should shut down its business he claims. Yet, I wonder if there’s a way for Exxon to pivot its business, drawing few lessons from General Electric. GE is known for its portfolio management–opening up and selling off business units according to market needs and its strategic focus. Of course Exxon Mobile cannot sell off its core business, but maybe it can focus on upstream or downstream and use the money from divestiture to acquire a renewable company to start building its presence in the field.
Interesting article and thanks for sharing. Sam, Gregor, and KS, I agree that ExxonMobil should diversify more in order to position itself better for the future. Like GE, DuPont, and numerous other companies, it is important that it is able to reinvent itself multiple times in order to stay relevant. Since there is still much money to be made in oil and gas while renewable are still relatively less profitable, I do not see them exiting oil and gas for quite some time though. Also, while downstream is such an important part of their revenues, it is also very capital intensive. Profits paint a slightly different picture for the importance of their chemicals division – especially in light of recent oil prices. It has grown to be a significant part of their profits. Interestingly, this chemicals division also produces key plastics and parts for electric car batteries. Maybe a step in the right direction of diversification?
Sam, I too wrote about Exxon and their need to adapt. They are taking a wait-and-see approach and their current CEO, Rex Tillerson, has gone so far as to say that humanity will adapt to the threat of climate change. In some ways we are at a major crossroads as a society. How will we manage our energy needs while navigating the rough waters ahead with respect to global warming? It is unclear to me and I wonder if Exxon will simply let others do the navigating for them. Great article and I hope to discuss with you during class later.