Renewables not profitable XOM/Shell Explode Energy Transition Myths

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ExxonMobil takes on the myth that the world is currently on course to meet the much-publicized “net zero by 2050” target, and as a result, Exxon and other oil companies are at significant risk of incurring major “asset retirement obligations (SROs),” or what is commonly referred to as "stranded assets.”

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I have written several times in the past that this stranded assets narrative is an overblown concern that few executives in the industry itself take seriously, for good reason. The simple fact is that the global community is not remotely on a pace to achieve the net-zero by 2050 goal, and even if it were, a robust level of global demand for the products supplied by oil and natural gas companies would continue to exist, perhaps at even higher levels than today.

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This is essentially the theme of ExxonMobil’s response to the Glass Lewis Report, with the company pointing out that even the energy transition boosters at the International Energy Agency (IEA) admit the world is not on a pace to meet the 2050 target. Here is the key part of the company’s response:

“In their analysis, Glass Lewis states that AROs could represent a material financial risk to the company. We are unable to understand how they have arrived at this conclusion. In accordance with GAAP, we do not incorporate into our financial statements those types of risks that are as remote as the IEA NZE path. Glass Lewis apparently believes the likelihood of the IEA NZE scenario is well beyond what the IEA itself contends: that the world is not on the NZE path and that this is a very aggressive scenario.” The company goes onto state its belief that “it is highly unlikely that society would accept the degradation in global standard of living required to permanently achieve a scenario like the IEA NZE.”

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The ExxonMobil reply here reflects precisely the answers I get back from the variety of industry executives I converse with during the course of my daily activities. The narrative surrounding stranded assets is not a driver of investment or strategic decision-making inside the industry, though it has been used as a tactical talking point by activists seeking to discourage investment in oil and gas-related industries and projects.

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[img]Shell Pushes Back At Renewables [/img]At Any Cost Advocates Bloomberg reported May 18 on remarks made by Steve Hill, executive vice president of Shell Energy, during a May 17 internal town hall meeting. In the meeting, Mr. Hill is quoted as making it clear to employees in Shell’s renewable power business that their projects must become more profitable or face defunding and/or divestment. “Delivery will be the mandate of the organization going forward,” Bloomberg quotes Hill as telling the gathering. “The things we’ve been less successful with, we need to scale back or stop.” The story goes on to cite examples of unprofitable renewables projects the company has divested in recent months, and indicates the new direction is part of a strategy designed to create higher shareholder returns and make Shell more competitive with peer companies like ExxonMobil.

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When asked by one questioner on the conference call about why capital for renewables projects would be reduced considering Shell’s $40 billion in reported profits for 2022, Bloomberg reports that “Ingrid Button, the finance chief for Shell’s renewables business, responded by saying that the company needs to use that money for other purposes, including shareholder dividends and buyback.” Briton added that the company’s renewables unit “needs to improve compared to competitors and demonstrate discipline with financial choices.”

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Bottom Line Shell’s strategic shift is similar to the announcement in February by BP CEO Bernard Looney that his company would dedicate increased capital investment away from less-profitable renewables investments back to its core oil and gas business in order to make the company more competitive. Taken together, the actions by these three oil majors reflect growing willingness in the industry to defend itself against critics and speak positively about the undeniable benefits its investments and products provide to the public. After years of comparative timidity in the industry’s willingness to tell its own story, these stories represent a welcome change in direction.

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