The present authorized assault is unlikely to considerably limit world oil manufacturing – okay?
From The MANHATTAN CONTRARIAN
May 30, 2021 / Francis Menton
As you may know, a large part of the recent strategy by environmental activists to allegedly address “climate change” has been a legal attack on multiple fronts against the major oil explorers. The onslaught included hundreds of lawsuits in as many jurisdictions, restrictive new laws, regulatory initiatives, proxy competitions, and more.
The past few days have seen news of what appeared to be some major activist victories. In the United States, insurgent shareholders won a voting contest involving ExxonMobil on May 26 and successfully elected two directors (out of twelve) to the company’s board of directors. On the same day, in a lawsuit by Friends of the Earth in the Netherlands, a court in The Hague ordered Royal Dutch Shell to reduce its CO2 emissions by around 45% by 2030.
Various media sources, including the Wall Street Journal at the two links above, report these developments as significant defeats for the oil and gas industry and even as harbingers of its imminent rapid decline in the face of mounting legal obstacles. But is such a decline really likely? The latest developments are sure to matter to Exxon and Shell shareholders, respectively, but I have confidence that the large-scale oil and gas manufacturing industry is not going anywhere anytime soon. In fact, this industry is very likely to grow for many decades to come as fracking releases more and cheaper resources, and developing countries get a taste for things like automobiles, air travel, home heating and electricity.
If you look at the various branches of legal attacks on the oil and gas business, you quickly find that almost everything is concentrated in a relatively small sector of the industry, namely the large oil companies based in the western industrialized world. Exxon in particular is a great bogeyman for anti-fossil fuel activists and finds himself on the defense in almost all legal attacks. Others regularly on the defensive include Chevron, BP, Shell and ConocoPhillips – with headquarters in the US, UK or the Netherlands. For example, in the many cases by local governments in the US seeking to blame oil companies for damage caused by global warming, the culprits are generally the five or a subset of them.
But if you look at the statistics on oil production, it becomes clear that the large oil companies of the western industrialized countries simply do not have that large a share of world production. Here is a diagram on Wikipedia with data from the US Energy Information Administration. In 2020, the world was producing an average of about 76 million barrels of petroleum fluids per day. (That number represented a significant pandemic-induced drop of over 90 million barrels a day in 2019. A major recovery is already underway.) Then here are the 2018 oil production figures for the largest companies. The largest major of the western industrialized countries, Exxon, produced sixth place with around 2.3 million barrels per day and a market share of well below 3%. Before Exxon were Saudi Aramco (11.0 million barrels / day), Rosneft (4.2 million barrels / day), Kuwait Petroleum (3.4 million barrels / day), National Iranian Oil Company (3.3 million barrels / day) ) and China National (3.0 million bbl / day). The only other western major in the top ten was Chevron with 1.8 million bbl / day in ninth place with a market share of well below 2%. The top ten were rounded off by the national oil companies of Brazil, Abu Dhabi and Mexico. The top ten companies overall had less than 35% market share, while the remainder of the market is made up of hundreds of companies, many of whom are small US “frackers”.
Of course, the litigants aren’t interested in attacking the 90 +% production companies that are either small or located in unfriendly jurisdictions like Russia, China, Iran, and Saudi Arabia that haven’t drank the climate kool aid. The plaintiffs are looking for money and / or advertising. But if your real goal is to save the world, driving producers out of business with about 10% of production is a completely pointless strategy. The remaining players will simply gobble up the market share and carry on as if nothing had ever happened.
So what exactly were activist investors trying to achieve with the Exxon proxy competition? You can find some of the proxy materials issued by the insurgents here, here, and here. While some of the reports suggest that the insurgents want Exxon to exit the oil business, you won’t really find that. Rather, it is a question of vague general validities such as “Successive but targeted positioning of the company in order to be successful in a decarbonising world”.
Who knows what that even means? I have news for you in case you don’t already know. Exxon has no way of moving from the oil and gas business to any other business with a real chance of success. In particular, the decarbonization business (wind, solar, CO2 capture, etc.) is fundamentally different from the oil business. The oil business is a for-profit business where expertise in oil and gas production and marketing is everything. The decarbonization business is all about cutting government subsidies and handouts, where expertise means nothing and political connections are key.
After the oil shocks of the 1970s, Exxon went through a previous round of thinking that it was necessary to get out of the oil business. It formed a subsidiary called Exxon Enterprises to channel investment into something related companies that Exxon thought could leverage its existing expertise. (I was involved in a lawsuit against this company in the early 1980s.) I remember that Exxon wanted to get into two businesses, namely the nuclear power business and the “word processing business.” No sooner had they founded the Atom subsidiary than in 1979 the accident occurred on Three Mile Island, which ended the entire construction of nuclear power plants in the USA for decades. Exxon’s nuclear business struggled for years as a substitute fuel supplier before it was sold to Siemens at a great loss. The word processing business was also a total bankruptcy and was badly beaten in the market by others like Wang and Digital Equipment in the 80s before they lost to new competitors. In the meantime, Exxon turned back to oil.
Indeed, there is one way Exxon could completely “decarbonize” its operations in no time: selling its oil business. Same for Shell. Global carbon emissions won’t drop a single ton, but they could move the assets to a location less of a target for the process industry.
While the legal assault has absolutely no prospect of wiping out, or even seriously undermining, the oil business, it could have big ramifications for Americans. The oil companies are a big part of what makes our energy cheap and widely available. Predatory government regulation restricting drilling and the transportation of fuel could drive up our energy prices and impoverish Americans significantly.
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