Big oil: demand shocks and investors’ led change

The recent oil price shock has deeply affected corporations such as Chevron and Exxon Mobil, but also the long-term trend in oil demand seems to pose risks. As the sector is evolving, activist investors are becoming increasingly vocal with respect to environmental matters and are leading change in the areas of carbon emissions, climate risks, lower-carbon technologies and renewable energy.

In the past months, we have witnessed a severe oil price crash, to be explained as a consequence of both the Covid-19 pandemic and the Saudi-Russian price war. Among the companies that most suffered from this collapse in demand are the American-based Chevron and ExxonMobil, who respectively recorded second-quarter losses of $8.3bn and $1.1bn. However, despite the short-term consequences of this sudden shock, also the future shape of oil demand is not necessarily a bright one given public policies that disincentivize fossil fuel and evolving consumer behavior (e.g. adoption of electric cars).

How is this sector going to look like then? Public scrutiny has increasingly put companies under the pressure of having to act on climate change, with profound effects on their business operations, particularly on oil exploration. Still, for a long time, the $85tn asset management industry largely ignored environmental grass-roots movements and favored the myopic maximization of short-term financial returns. A profound change was ignited by landmark moments, such as the financial crisis and the 2015 Paris accord, but also by the realization of the financial risk associated to these investments (e.g. the potential for collateral damage on the totality of their investment portfolios, starting from agri-food stocks suffering if crops fail to falling share prices of companies operating coastal infrastructure).

Activist investors, to be found among asset managers, pension groups and sovereign wealth funds, are now utilizing their financial standing to be at the forefront of environmental change. Among the recurring goals, we often find cutting carbon emissions, boosting disclosure on climate risk (and hence increasing managers’ accountability), and reducing explorations in favor of increased investments toward lower-carbon technologies and alternative energy sources.

However, going back to the decrease in demand that was initially underlined, estimations still point towards a supply gap. For this reason, Angela Wilkinson, secretary-general at the World Energy Council, says that “we have an energy demand tsunami coming towards us and we can’t grow the renewable footprint at the same pace,” and even if energy companies should certainly not devise a business plan for an oil-only future, this will likely be somehow part of the equation.

Corporations are hence trying to find a balance between the continuance of exploring and the improvement of environmental credentials. Eni, for instance, has devised, in the own words of chief executive Claudio Descalzi, “a strategy that combines economic sustainability with environmental sustainability” aiming at slashing emissions by 80% across all divisions. Even more responsible and innovative practices could be adopted when having to decide when and where to invest, such as taking into account the carbon intensity of barrels, a metric that combines both the energy used to extract more viscous oils, and the associated and unwanted gas that is released and often flared. Not only this could improve standing in the disclosure of emissions rates, but will also likely contribute to a competitive advantage given future developments in carbon pricing and taxes.

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