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ExxonMobil Greening Up via Carbon Capture and Hydrogen, while Eschewing North American Natural Gas
ExxonMobil is looking to tame carbon emissions and make it as big a priority in future operations as its oil and gas businesses, CEO Darren Woods said Wednesday.
During the annual investor day, Woods set a major new direction for the company, which took it on the chin last year with its first annual loss in modern history.
Faced with mounting shareholder criticism, Woods promised that ExxonMobil would become a leader in low-emission technologies. The company is counting on carbon capture sequestration and utilization (CCUS) as the initial way to reduce greenhouse gas (GHG) emissions. Hydrogen energy also is on the table longer term.
New political winds are blowing, with the Biden administration a proponent of reducing carbon emissions and advancing green energy. Meanwhile, technologies to reduce GHG emissions are advancing, Woods said.
ExxonMobil is stepping up its game to develop “solutions” to reduce carbon dioxide (CO2) emissions,” he said. The strategy is centered around “carbon capture and low-carbon hydrogen…to decarbonize the highest emitting sectors of the economy, a critical requirement for society to achieve its net-zero ambition.”
The supermajor, dogged in recent months by activist shareholders to improve the value of the company and embrace the energy transition, remains “fully committed” to meet global energy demands, Woods said.
“Our investment portfolio is the best we’ve had in over 20 years, and will grow earnings and cash flow in the near term while remaining flexible to market conditions and benefiting from ongoing cost-reduction efforts.”
When he took over in 2016 from Rex Tillerson, Woods pushed to expand spending and production plans. Enthusiasm for the Permian Basin, the No. 1 Lower 48 play, has not wavered, but oil and gas prices have proved fickle. Then came Covid-19, which upended the entire energy complex, as consumption faltered and the energy transition accelerated.
Woods now is looking to change the minds of investors in terms of the financial promises and its role in the accelerating energy transition.
Once a reliable cash cow, ExxonMobil’s stock slumped 40%-plus in 2020.
To assuage dissatisfied investors, emissions targets since have been updated and climate change disclosures have been improved. The workforce is being cut by 15% through the end of 2022, with around 14,000 people losing their jobs.
In addition, three directors recently were added to the board, including hedge fund manager Jeff Ubben of ValueAct Capital, a proponent of environmental, social and governance initiatives.
Last month, ExxonMobil announced it would invest $3 billion over the next five years to reduce GHG. The newly launched ExxonMobil Low Carbon Solutions unit plans to evaluate, among other things, 20 CCUS projects globally, from Texas to Qatar.
Management put a price tag on the value of carbon capture during the investor presentation, estiimating it could be a $2 trillion market by 2040. It also may be the least expensive way to curb CO2. For example, Woods cited the 45Q U.S. tax credit, which can provide up to $50/metric ton for captured carbon, which may be less expensive than the incentives for electric vehicles.
The overarching goal through 2025 is to increase profits and cash flow by funding “advantaged” global projects and commercializing “lower emissions” technologies, Woods told investors.
To grow shareholder value through the energy transition, ExxonMobil is training its research and development portfolio on technologies to address “hard to decarbonize sectors of the economy,” which are responsible for around 80% of energy emissions. Those include commercial transportation, power generation and heavy industry.
ExxonMobil noted that it has an equity share in about 20% of global CO2 capture capacity and has to date captured 40% “of all the captured anthropogenic CO2 in the world.” Most of the carbon captured has been at its Shute natural gas processing plant in Lincoln County, WY. The CO2 captured is used or sold for enhanced oil recovery operations.
Management noted that it also produces about 1.3 million metric tons/year of hydrogen. Technology underway in that field “could significantly lower” the cost of both CCUS and low-carbon hydrogen.
“Our development of next-generation technologies and existing businesses positions us well to capitalize on the growing demand for decarbonization and market opportunities that are increasingly coming together to support lower-carbon energy solutions,” said Woods.
ExxonMobil said it met its 2020 emission reduction goals, which included a 15% reduction in methane emissions versus 2016 levels, and a 25% reduction in gas flaring versus 2016 levels. The 2025 emission reduction plans include a 15-20% reduction in upstream GHG intensity versus 2016 levels, supported by a 40-50% reduction in methane intensity and 35-45% reduction in flaring intensity.
ExxonMobil expects to reduce absolute GHG emissions by an estimated 30% for the Upstream business unit, while absolute flaring and methane emissions should decline 40-50%.
Stepping Off Gas
Meanwhile, management held fast to already announced plans to reduce North American capital expenditures (capex) for dry gas projects by half. Following an annual strategic review, the company in late November reduced the book value of some assets, including the U.S. dry natural gas portfolio, by up to $20 billion.
The once-prized dry gas assets had been included in future development plans, but under the revised strategy there are no plans to develop “a significant portion” of dry gas assets in Appalachia, Arkansas, Louisiana, Oklahoma, Texas and the Rocky Mountains, nor in some gas resources in Western Canada and Argentina.
Total capex for 2021 set at $16-19 billion, with the budget for 2022-2025 tentatively at $20-25 billion/year. Capex could be modified “to reflect market conditions,” as they were in 2020, Woods noted.
ExxonMobil last year slashed capex by 30% to deal with the pandemic. On the positive side, cash operating costs fell by 15% year/year, and those cuts look to be sustaining. The company looks to achieve “permanent structural savings” of $6 billion/year by the end of 2023 versus 2019 expenses. Operating cash flow in 2025 is forecast to climb by 20% from 2021.
Still, future spending plans are going to take into account “potential market volatility” as the world economy recovers from Covid-19.
“Our investments are expected to generate returns of greater than 30%,” Woods said. “And 90% of our upstream investments in resource additions, including in Guyana, Brazil and the U.S. Permian Basin, generate a 10% return at $35/bbl or less. Downstream investments improve net cash margin by 30% and our Chemical investments grow high-value performance products by 60%.”
There also are plans to increase the value of its liquefied natural gas (LNG) portfolio. ExxonMobil and Qatar Petroleum are partnering to build Golden Pass LNG near Freeport, on the upper Texas coast. ExxonMobil and QP also indicated Tuesday they may partner on LNG expansion via expanding the North Field in Qatar.
Once ExxonMobil’s short-term strategy was unveiled, the Coalition United for a Responsible Exxon on Wednesday took issue with the proposals. The 145-member shareholder coalition said the supermajor had “demonstrably failed over the last decade to deliver long-term shareholder value against the wider market and among its peers.”
The coalition said it would “remain vigilant and focused on the specific changes” required to put ExxonMobil “on a stronger path.”
Engine No. 1, which has called for an upheaval to the board, also responded on Wednesday to the strategy detailed by Woods.
“ExxonMobil has now adopted the language of long-term net zero emissions and dramatically shifted its emphasis from production growth to investor returns, both of which are remarkable shifts since the start of our campaign last year,” Engine No. 1 stated. “However, we believe that reacting to the threat of a shareholder vote is not the same as a coherent and value-enhancing long-term strategy, and that without real change these gains could be short-lived.
“More importantly, we believe that turning these newfound ambitions into action will require leadership, and that without a diverse mix of successful and transformative energy experience on the board, ExxonMobil will risk continued long-term shareholder value destruction.”
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