ESG Oil wins just shift value to National Oil unless carbon consumption is taxed

  • Bigger emissions cut drives ExxonMobil's Board nominations, Chevron's shareholder vote, Shell's court ruling
  • Follows recent IEA recommendation that 2050 net zero emissions means no new oil & gas capex from now
  • All of this benefits mature national oil companies (eg in Saudi, Russia et al) unless taxes raised on carbon consumption
ESG Oil wins just shift value to National Oil unless carbon consumption is taxed

Old-fashioned "Big Oil" proponents, who always argue for pushing out the date for "peak oil", suffered three setbacks on 26 May from the climate activist and ESG investor camp.

  1. Exxon Mobil saw nominations of two new Board members (out of twelve) to represent the climate focus of small activist group Engine No. 1 with, evidently, the backing of large institutional shareholders.

  2. Chevron shareholders voted 61% in favour of a resolution for an unspecified cut to "Scope 3" CO2 emissions (indirect emissions that occur across the company's value chain).

  3. Royal Dutch Shell was ordered by a Hague District Court ruling in The Netherlands to cut its CO2 emissions by 45% by 2030, instead of by 20%.

This follows the 18 May publication of the International Energy Agency's roadmap to net zero CO2 emissions by 2050, which proposed zero new capex to cultivate new oil, gas, and coal reserves, with immediate effect.

I have previously discussed that the global coordination required to implement the IEA roadmap is missing and this may sustain high Oil prices in the short to medium term. These three events from last week reinforce that view.

Activist social and shareholder pressure may simply drive a transfer of value from Big Oil to National Oil Companies and smaller independent oil companies off the radar of activists – one the points made by my colleague, Paul Domjan, when he looked at how independent oil companies, like BP, and the emerging markets in which they operate, may change as a result of the energy transition away from carbon.

Independent and National Oil company dividend yields

This is likely to remain the case until taxes are levied on the consumption of carbon-related products in order to reflect something closer to their full environment cost. Until that happens the activists may win these battles on the supply-side of the oil & gas industry, but they will lose the war on the demand side.

And along the way, there is likely to be push back from consumers when they bear some of the upfront cost of the energy transition and even deeper scrutiny of the true environmental cost involved in the shift to renewables in terms of Copper mining and rare-earth mineral processing.

It may be some time before the returns available to investors from economies dependent on oil & gas production are exhausted: too long for most institutional fund managers unless their embrace of oil & gas exposure undermines their appeal to asset allocators.

Below we illustrate the valuations of Oil exporter equity markets and how they compare with the Copper exporter markets. Copper should benefit from the energy transition away from carbon but, because of overdone domestic political concerns, the Copper exporter equity markets are more attractively valued on price/book versus 5 year median.

Copper and Oil equity market valuation versus history

Related reading

International Energy Agency calls time on Oil, May 2021

BP is leaving Emerging Market oil but could return in new ways (Domjan), October 2020

Russia revisited as Biden-Putin summit confirmed, May 2021

Saudi's 'Vision 2030' five years in, April 2021

Colombia underperforming oil peers and cheap but struggles to reform, May 2021

Chile votes left, May 2021

Peru unlikely to nationalise Copper, the key metal for renewables and EVs, April 2021


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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...

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