Multinational oil company ExxonMobil faced many challenges related to climate change. Climate change is taking place because of the greenhouse effect. When solar radiation passes through the atmosphere, some of it is absorbed and warms the earth, while some is reflected outward and trapped in the atmosphere. The trapping of solar radiation has made the Earth’s climate tolerable in comparison with that of other planets. However, the greater the concentration of greenhouse gases, the more that solar radiation is trapped in the atmosphere, and the warmer the atmosphere becomes. The consumption of fossil fuels including coal and oil is one of the chief sources of human-produced greenhouse gases. 

Scientific evidence shows that climate change is indeed taking place. The years 2014 to 2018 were the five hottest years since the time the U.S. government started to track global temperature in 1880. Climate change brought devastation to the Philippines, Vietnam, the Korean peninsula, and Tonga. Hurricanes Florence and Michael created significant damage in the United States. Wildfires erupted in Greece, Canada, California, and other areas, while floods overwhelmed Kerala, India, and forced the evacuation of more than 1.4 million people. Japan and East Africa too have had serious flooding, the likes of which they have not previously experienced. As the climate has changed, sea levels have risen and the oceans have become hotter, changing the patterns of global rainfall, evaporation, snow, stream flow, and other factors affecting water supply and quality. With record-high heat waves, record-low Arctic sea ice level, above- average tropical cyclones, and deadly wildfires, the world is now in the midst of a climate crisis. 

The concentration of greenhouse gases in the atmosphere is likely to continue to increase to a point where the climate will heat up in very dangerous ways, resulting in the following: 

More extreme weather such as droughts and hurricanes 

The melting of glaciers and ice sheets 

Small island states disappearing entirely 

Wildfires growing in both number and severity 

Severe changes in plant life cycles, with negative impacts on agriculture and food production 

Unpredictable and heavy levels of rain and snow 

The destruction of coral reefs 

The disruption of animal migration 

These changes are having very real impacts on people’s lives. Heat waves, wildfires, extreme weather events, and rising sea levels take their toll in the form of reduced crop yields, deaths, health problems, and destruction of vital infrastructure.  Throughout the world, climate change has become an imminent and tangible threat to people’s lives, property, and their ways of earning a living.

Steps to Curb Emissions and Promote Renewable Energy

The world has taken a number of steps to curb greenhouse gas emissions.  The 1992 Rio Treaty, signed by the then U.S. President George H. W. Bush and ratified by the U.S. Congress, established a goal of “stabilization” of greenhouse gases at a level to “prevent dangerous interference with the climate system.” Each nation in the world, under this treaty, has a “common” but “differentiated” responsibility to addressing the problem, meaning that industrialized nations, who have been most responsible for the problem, had to act first, since they owed a substantial amount of their affluence to the greenhouse gases they had emitted in the past. For developing countries, the highest priority was sustainable development, in effect meaning that they should address their greenhouse gas emissions but not at the expense of economic growth.

After Rio, the next step that the world took was the Kyoto Protocol, which most nations signed in 1997 and ratified in 2005. According to the protocol, industrialized countries were to reduce their average annual emissions by 5% in the years 2008 to 2012 in comparison with 1990. To achieve these goals, they could reduce their emissions, buy emissions reduction allowances from developing countries, or buy them from one another. The United States did not ratify the Kyoto Protocol due to senators’ concerns about job loss in the coal industry and the belief that developing countries were not being called on to contribute to the solution. Although the United States did not sign the protocol, the country took some steps to reduce emissions. After the election of President Barack Obama in 2009, the U.S. EPA assumed the obligation to regulate greenhouse gas emissions. Some states followed. For example, California’s Air Resources Board and a consortium of states in the Northeast started cap-and-trade programs to obtain greenhouse gas reductions.

ExxonMobil and Climate Change

In 2015, the New York Attorney General sought documents to determine whether ExxonMobil had lied to investors and consumers and kept secret information about the effects of climate change on its financial health. The pressure intensified when the Center for International Environmental Law released decades-old documents that revealed that the firm had investigated and understood the link between burning fossil fuels and climate change many years ago but tried to keep this information from the public. Attorneys general from other states demanded that the company release information about its research and its funding of climate change denial. 

ExxonMobil vigorously fought these actions, calling the accusations against it inaccurate and misleading. Yet the news disturbed family members of the company’s founder, John D. Rockefeller. They controlled the Rockefeller Family Fund (RFF), which was a major shareholder in the company. They were concerned that the company had concealed its prior knowledge of climate change and failed to act on it. They accused the company of not disclosing the research it had done on the impacts and distorting the evidence. 

ExxonMobil forcefully denied these charges. However, family members turned against the firm and chose to divest their holdings in the company in a public gesture that received substantial media exposure. In a public statement, members of the Rockefeller family wrote, 

Earlier this year our organization, [RFF] announced that it would divest its holdings in fossil fuel companies . In a public statement we singled out ExxonMobil for immediate divestment because of its “morally reprehensible conduct.” For over a quarter-century the company tried to deceive policymakers and the public about the realities of climate change, protecting its profits at the cost of immense damage to life on this planet.  Often working indirectly through front groups, it sponsored many of the scientists and think tanks that have sought to obfuscate the scientific consensus about the changing climate, and it participated in those efforts through its paid advertisements and the statements of its executives.

The Company’s 2016 Annual Meeting

At the company’s 2016 annual meeting, shareholders had many reasons to be concerned. From 2014 to 2016, ExxonMobil’s finances were in a free fall (Figure 9.4). The company lost about a third of its revenue and profits as oil prices fellsteeply (Figure 9.5) and natural gas prices did not rebound significantly from their 2012 lows. The stock market value of all the major oil and natural gas prices, ExxonMobil included, had not kept up with the growth in the value of the other stocks listed in the S&P 500. Figure 9.4 Decline in ExxonMobil Annual Revenue and Earnings: 2014 to 2016 

A bar graph plots values in billion dollars, ranging from 0 to 450 with increments of 50 (y-axis) for revenue and earnings across years, ranging from 2014 to 2016. In 2014, revenue was 400 billion and earnings were less than 50 billion. In 2015, revenue was slightly above 250 billion and earnings were 20 billion. In 2016, revenue was above 200 billion and earnings were less than that of the previous year. 

Figure 9.5 Oil Prices From 2012 to 2017 

The graph plots dollars on the vertical axis ranging from 10 to 120 with an increment of 10 across years on the horizontal axis, ranging from 2013 to 2017 with a 6-month increment marked as July. Oil prices fluctuated between 90 dollars and slightly above 100 dollars from July 2012 to July 2014. There is a sharp fall to 60 dollars in July 2014, followed by another sharp fall to less than 30 dollars between July and 2016. A steady rise to above 60 dollars is seen after that till 2017. 

Though the company faced many challenges, the 2016 shareholder meeting was dominated by the issue of climate change. It was a raucous event in which the company was inundated with climate- related demands. The conveners had to remind those present of proper rules of conduct. Participants were prohibited from making provocative statements and distributing unauthorized literature. The security guards who patrolled the hallways had the responsibility to prevent protesters from disrupting the meeting. Knowing that civility would not be easy to maintain, the conveners wanted to be prepared. The anger against the company was palpable. 

Shareholders brought forward eight proposals dealing with climate change. Only one passed, obtaining the support of 62% of the shareholders. Backing for this proposal came from some of the most prominent investment firms and organizations in the world, including BlackRock, Vanguard, State Street, and the California Public Employees’ Retirement System. Without their backing, the proposal would not have passed, as they represented a majority of the company’s share owners. This victory, though important, seemed hollow in the activists’ eyes, who wanted much more. The proposal gave shareholders—actually only those with 3% or more of the company’s shares for more than three years—the right to nominate a quarter of the firm’s board of directors. The hope of activists was that this proposal would lead to the appointment of a climate advocate to the board. In a nonbinding resolution, more than 62% of shareholders also voted that the company should conduct a detailed assessment of the impacts of climate change on the firm. As climate change became more of a problem, the company’s fossil fuel assets would be worth less. 

Stranded Assets 

A major concern of the activists was the problem of stranded assets. In a study conducted by the research group Carbon Tracker, it concluded that oil companies were wasting trillions of dollars in investments in additional oil development. The investments would generate 380 billion tons of additional carbon dioxide by 2035, but within a decade, world governments were likely to introduce legislation limiting the amount of climate-changing gases emitted into the atmosphere and reducing the demand for oil. Oil companies like ExxonMobil would be left with petroleum assets that had decreased in value. Indeed, the study found that ExxonMobil, which had more oil reserves than any other major oil company, also would have more stranded assets than any other company.

The SEC also was uneasy about the value of the company’s assets. Following an investigation, in a 2016 ruling, it compelled ExxonMobil to write down the value of its oil reserves by about one fifth. Other oil companies had taken similar actions voluntarily, but ExxonMobil refused and the SEC had to compel it to reduce its assets’ value. As a result of the investigation by securities regulators, the company had to write down the value of more than $2 billion of its assets in the United States. The reduced value of these assets was not good news for ExxonMobil’s shareholders. Shareholder activists were not done and planned to bring forward additional resolutions at future shareholder meetings. They wanted ExxonMobil to do a more honest reckoning of the implications of climate change for the firm’s future. 

The New CEO

 In 2017, Darren Woods replaced Rex Tillerson as CEO of the company. Woods was a graduate of Texas A&M University, where he earned an engineering degree. He also had an MBA from Northwestern’s Kellogg School of Management. The expectation was that he would break from ExxonMobil’s past climate change policies even more than his predecessor, Tillerson, who had made many changes, and, in comparison with his predecessor, Lee Raymond, was considered rather enlightened on the climate change issue. 

ExxonMobil had many initiatives in the area of climate change. Along with other companies, it was part of the Climate Leadership Council, which advocated for a gradually rising and revenueneutral carbon tax with carbon dividend payments to be made to American families. The company also continued to participate in the activities of the U.S. National Research Council and the Intergovernmental Panel on Climate Change (IPCC), the United Nations body that was responsible for the assessment of climate change. Moreover, it had a goal of reducing its environmental footprint and had taken a number of steps to reduce emissions and lower its carbon intensity. The company was not just seeking to reduce its own emissions but was also trying to help consumers reduce theirs. It was therefore pursuing innovations in the reduction of methane emissions, internal combustion engine (ICE) efficiency, power generation technologies, automotive light weighting, reduced packaging, and industrial process efficiency. It was carrying out research into alternative energy, carbon sequestration, and biofuels. Since 2009, it had invested $0.6 billion into an algae-based biofuels project. The company was a main sponsor of a global climate and energy project at Stanford University. In trying to create new supply options and efficiency savings, it had secured partnerships with universities and private sector companies including Georgia Tech, Purdue, Berkeley, TDA Research, ECN, Fuelcellenergy, Michigan State, the Colorado School of Mines, Synthetic Genomics, and REG. Nevertheless, company managers were concerned that international accords and regional and national greenhouse gas regulations would continue to evolve and reduce the value of the company’s fossil fuel assets. The uncertain timing and outcomes of greenhouse gas control policies made it difficult to assess their business impact. 

Continued Criticism

Activists continued to target the company even as investors staged their revolt at the annual meeting. The company persistently denied the charges that it had concealed its prior knowledge of climate change and regularly pointed to its support of a carbon tax and its endorsement of the 2015 Paris Climate Agreement that called for the countries of the world to keep global temperatures below 2 °C above historic levels, but activists considered its endorsements weak. They called on the company to show that it had a plan to manage a transition away from fossil fuels. They held that the company stood out among its competitors for its failure to invest in renewable energy. 

Indeed, some of the world’s other large oil companies were preparing for a decline in oil demand in coming decades. BP projected slower demand growth until about 2040, and a decline in demand after that. Shell forecast a demand peak as early as 2025 and changed its long-term investment plans to diversify away from oil and invest in alternatives. ExxonMobil, however, expected that oil would be the dominant fuelsource well beyond 2040, predicting that demand would pick up because of growing incomes in Asia and lack of progress in fuel economy, electric and self-driving vehicles, and battery technology. ExxonMobil concluded that substantial need for sizable investment in oil projects remained. 

The company continued to fight off the suit the New York and Massachusetts attorney generals had brought against it for seeking to neutralize and obfuscate climate change research. ExxonMobil pointed out that since 2007, it had included in its assessment of new projects a proxy cost of how much governments might charge it for carbon dioxide emissions. However, the attorney generals claimed that from 2010 to 2014 the company publicly held that it applied a $60 per ton cost, while internal documents showed that it used a $40 per ton cost—in other words, it had not built climate change into its plans to the extent it said it did. 

Investing in Shale and in the Internal Combustion Engine

ExxonMobil also announced plans to spend $50 billion to expand its U.S. shale initiatives over five years. It invested $6.5 billion into doubling its acreage in the Permian Basin’s shale fields. Once a dominant player in the region, ExxonMobil had to rebuild its portfolio. Though the purchase doubled the amount of oil and gas the company held in the area to the equivalent of 6 billion barrels, its holdings were smaller than rivals Chevron and Occidental Petroleum. ExxonMobil planned to use the purchase to drill long horizontal wells that would reduce its costs by extending the drilling’s reach. It planned to spend about $5.5 billion in 2017 in Texas, New Mexico, and North Dakota in tapping wells that could turn a profit at prices as low as $40 a barrel. Though the hurdles were high and costs great, ExxonMobil also tried to replicate the U.S. fracking boom in a desolate part of Patagonia in western Argentina that potentially had as much oil and gas as the biggest fields in Texas or North Dakota.

As ExxonMobil increased its investment in shale, it sought to reduce oil production and concentrate on natural gas production. The natural gas ExxonMobil extracted from shale was a bet on a relatively low-emissions bridge from coal to renewable energy, since the greenhouse gas emissions that contribute to climate change are lower for natural gas combustion than they are for oil combustion. Nevertheless, methane, which is the main component in natural gas, was a potent greenhouse gas, and the issue of methane emissions leaks was drawing increasing attention. To reduce these leaks, ExxonMobil joined together with seven other large energy companies and created an agreement to abide by a set of principles to drive down their fugitive methane emissions.

ExxonMobil also teamed with other oil companies and automakers in an effort to help sustain the gasoline-powered auto, as tough regulation and EVs put the technology at risk. They were spending millions of dollars a year to create a new superslick oil that would make traditional engines more efficient, which would allow them to comply with stricter environmental rules and fight off the threat of zero-emission EVs.

Many countries signaled that they would ban traditional gasoline-powered vehicles in coming years and implement tough new emission standards. The European Union in 2017 came forward with a proposal to cut carbon dioxide emissions from cars and vans 30% by 2030. China called for 20% of its vehicle production and sales to be electric and hybrid by 2025. The Trump administration, on the other hand, was trying to relax U.S. efforts to tighten vehicle emissions standards. Auto companies promised to launch more EVs in the next decade, and GM pledged to sell a million annually by 2026. Oil companies other than ExxonMobil invested in gasolinepowered vehicle alternatives and in EV infrastructure. 

Once defined by massive spending and ambitious exploration, ExxonMobil had to practice greater frugality. The company got praise from President Trump for $20 billion in commitments to oil, gas, and chemical infrastructure projects on the Gulf Coast. However, investments of this kind were becoming increasingly less attractive. The company had to respond to investors who demanded greater financial discipline and a more judicious approach to investing. 

Financial Performance

Despite billions of dollars in spending cuts and a modest oil price rebound, in 2016 ExxonMobil spent nearly $7 billion more in developing new projects and paying dividends than it generated in cash. According to analysts’ estimates, the company needed the price of oil to be at more than $50 a barrel in order to balance the cash it generated against the capital expenditures it made and the dividends it generated. 

The company’s first quarter 2018 profits missed Wall Street expectations. Seventy percent of its $8.4 billion net income in that quarter arose out of one-time Trump administration tax change benefits. Earnings declined by 2.2% on an adjusted basis that excluded the new tax law bonus. Production fell by around 130,000 barrels a day. The company’s U.S. drilling operations lost money for the 12th consecutive quarter. 

How should ExxonMobil address the grand challenge of climate change? What facts are relevant to its decision? What options does it have, and what are their consequences for the company’s many different stakeholders? What principles should it apply? What can it do to build from a short-term fix to a more thorough long-term solution? In answering these questions, consider ExxonMobil’s legal and ethical responsibilities to its various stakeholders, and whether there is a difference between them. Can the company earn higher profits by investing more in sustainable energy options? Which stakeholders should be the company’s highest priority? Should it take an interactive approach to engaging stakeholders? Also consider the point made in Chapter 7 that companies do not just follow laws but also contribute to their making. What role if any should ExxonMobil take in national and international climate change policy processes? What positions should it take?

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$, in billions 450 400 350 300 250 200 150 100 50 0 2014 2015 Revenue Earnings 2016