US oil on the defensive over emissions

Pressure is likely to mount on US oil firms to take bolder steps to slash emissions following last month's stunning boardroom coup at ExxonMobil, when tiny activist investor Engine No 1 succeeded in unseating three directors.

US producers have set out differing strategies for reducing their carbon footprint, but attention is likely to focus on emissions caused by customers burning their fuel — so-called Scope 3 emissions — which comprise over 80pc of the total. Chevron shareholders defied their board to press for action to curb Scope 3 emissions. "They can talk about how they've reduced the intensity of operations and done some things around the margins, but it's really a Scope 3 story at the end of the day," ratings agency Moody's senior credit officer, John Thieroff, says. It warns that the industry faces increased credit risks over climate concerns.

Most US oil firms have been reluctant to follow their European peers and adopt more sweeping emissions targets, on the basis that they have little control over how their products are used. But that argument may hold less sway after Engine No 1's victory at ExxonMobil. The latter's chief executive, Darren Woods, last year shrugged off rivals' plans to address climate risks as a beauty contest, but under investor pressure has unveiled long-term carbon capture, utilisation and storage (CCUS) ambitions and pledged to cut upstream emissions intensity by as much as 20pc by 2025 compared with 2016. Chevron has pledged to cut its emissions intensity by 35pc by 2028 against the same baseline, among other goals. It plans to boost renewable energy and carbon offsets and to invest in hydrogen and CCUS.

But the lack of absolute reduction targets has prompted criticism that the US majors are giving themselves wiggle room to raise outright emissions if their output increases. Both have resisted any meaningful pivot away from their core business of oil and gas, arguing that demand is not going away any time soon. Chevron chief executive Mike Wirth says he is working with the board to respond to the shareholder call to tackle Scope 3 emissions, but cautions that simply cutting production to meet green goals may not have the desired effect. There is no benefit for society if "that demand is met by a producer who's less committed to reducing the carbon intensity of the current system", Wirth says.

Targets with teeth

Upstream independent Occidental last year became the first major US producer to commit to net zero emissions from its operations before 2040 and from the burning of its fuels by 2050. These goals rely heavily on carbon storage technology. Domestic rival ConocoPhillips, which has pledged net zero emissions from its operations by 2050, has come under shareholder pressure to target Scope 3 emissions as well.

"With Exxon, I think it will ultimately need to go the route of Occidental and set a Scope 3 target to show that its CCUS commitment has teeth," sustainable investment advocacy group Ceres' senior director for oil and gas, Andrew Logan, says. "Chevron is more complicated, but it will need to do something about Scope 3 and move beyond its current dabbling in hydrogen, biodiesel, etc."

Although a clampdown on Scope 3 emissions could force companies to divest assets or reduce output, short-cycle developments such as ExxonMobil's shale position in the Permian basin could work to its advantage. "If you're able to put money in the ground, get it back out within 18-24 months, that gives you a much more nimble operation [amid] the fits and starts that we're probably going to see in transition," Thieroff says.

In the meantime, Engine No 1's success could inspire similar campaigns against other oil producers. That the investor was able to successfully take on the biggest private-sector oil company suggests similar tactics could work elsewhere.

By Stephen Cunningham