Occidental ups the ante on ESG

US oil and gas producers are embracing the growing importance of environmental, social and governance (ESG) commitments for investors — at least on paper. But Occidental Petroleum has significantly upped the ante.

The independent this month committed to offset all carbon emissions, direct and indirect, throughout its entire value chain by 2050, becoming the first US oil producer to seek such a standard. Chief executive Vicki Hollub has been talking up the firm's developing carbon capture and storage (CCS) technologies, with plans to sell these and related expertise to industries such as marine and air transport, as well as to technology firms operating large, power-hungry data centres. "We are going to be able to expand beyond our own operations to give opportunities to those industries that cannot otherwise lower their carbon footprint," Hollub says.

Becoming the first US independent to commit to offsetting Scope 3 emissions — which include direct and indirect emissions related to the company's entire service chain — is a good way to show that Occidental is serious about those ambitions. But more importantly, Hollub has been pitching a new investment thesis to Wall Street that says the company will create shareholder value by using innovation to reach new markets beyond just pumping crude and natural gas.

For a company that paid $57bn just last year to acquire rival Anadarko Petroleum and expects to produce more than 1mn b/d of oil equivalent (boe/d) this quarter, Hollub's strategy might seem puzzling. But Occidental is responding to a seismic shift facing the industry. Institutional investors have traditionally valued oil and gas producers on the quality of their hard assets, such as land and energy reserves, which have historically generated strong returns. But asset managers over the years have been shifting dollars to technology firms whose value comes from intangible assets such as intellectual property. Valuations have soared for technology firms such as Google and Apple because of the network effect — the rapid rise of people or participants using their goods and services. Creating algorithms is also much cheaper than drilling for oil and gas.

With returns drying up for the energy industry — and arguably being non-existent for the past five years — investors have flocked to companies with higher growth potential thanks to those network effects. Facebook, Amazon, Google, Apple and Microsoft now account for a staggering 20pc of the S&P 500 US stock market index. Between the end of June and the end of September, the S&P 500 rose by 9pc while the S&P 500 Energy index declined by almost a fifth.

Investor exodus

Occidental has certainly seen an exodus of institutional investors. Franklin Resources and SunAmerica Asset Management this year sold off most of their stakes in the firm. But Occidental thinks its CCS technology can help it win back investors by providing the company with its own network effect. "This is something that the world needs," Hollub says. "And without others doing this, there is no way that the world could achieve a cap on global warming of 1.5-2°C [under the Paris climate agreement]."

Other large US oil firms are making commitments to address operational CO2emissions. ConocoPhillips last month became the largest US producer to commit to a Scope 1 operational net zero carbon ambition by 2050. And independent refiner Marathon Petroleum this month made the same commitment. "Higher returns and lower carbon are the challenge — and if we do one and not the other we are not really making progress," Chevron chief executive Mike Wirth said last month. And while Hollub acknowledges that it will take time to prove her firm's investment thesis, she says it has the technology and scale — and the will — to do it.

By Thomas Lee