The times are changing

Sustainability in the fossil fuel industry is around business models

Fossil fuel companies are having a moment, although just how sustainable that moment is may be debated.

In ESG Mindset, I wrote this about the industry through the lens of the corporate pressures building.

Companies are making decisions about electricity purchasing, their building management systems, and logistics around stakeholder pressure to transition to lower emissions. This modernization represents a Governance opportunity for many building and real estate managers.

How fossil fuel companies, refineries, and pipeline companies react to these same pressures is also a Governance issue for them.

There can be no denying that the markets are betting on a sustained energy transition. Just as Larry Fink, CEO of BlackRock, kicked off ESG and the stakeholder economy in his annual CEO letters in the mid-2010s, he includes the energy transition in his latest letter.

Like tobacco, fossil fuel companies are one of those industries that people often question when they see their high scores. If one thing will be tested over the next decade, it will be their governance of this transition. There’s been a few stories around the industry over the past few weeks, so let’s see what they’re dealing with.

A Trump election

On the surface, it seems like a Trump election would bring a windfall for the oil and gas industry. Yet, Biden presided over a historic positive run for fossil fuels despite launching some of the most ambitious government investments in climate progress on the planet. According to CNN:

The top five US-based oil and gas companies by market cap, according to S&P Global — ExxonMobil (XOM), Chevron (CVX), ConocoPhillips (CPP), EOG Resources (EOG) and Schlumberger (SLB) — have raked in more than $250 billion in profits between 2021 and 2023. That’s a 160% jump compared to the first three years of the pro-big-oil Trump administration, according to calculations by CNN.

Over the past few weeks, oil and gas companies have parted from the incoming administration’s campaign messaging, partly because Biden’s Inflation Reduction Act greatly benefits the industry (and conservative states). For example, the CEO of Edison has been working with the Edison Electric Institute to lobby Trump not to roll back the IRA, stating how the incentives translate directly to consumer savings.

And despite the rhetoric, the US government isn’t really responsible for how these individual companies operate. This is evident in Exxon Mobil and TotalEnergies SE's skepticism of Trump’s approach. The mantra of ‘drill, baby, drill’ has a significant downside: supply outstrips demand, resulting in dropping prices.

Compounding this challenge is the uncertainty Trump brings. One area is how his foreign policy will impact the premium on crude oil prices, which has been high since Russia invaded Ukraine. That premium has been coming down as the market has predicted a bearish turn for the past few months.

Borrowing for stock buybacks

This couldn’t come at a worse time. Hedging their bets towards investors who are looking for investment opportunities against the energy transition, many of the biggest fossil fuel companies have initiated share buybacks. Coming off record profits, there still might be trouble on the horizon with that bearish market ahead. Per Bloomberg:

Exxon Mobil Corp., Chevron Corp., Shell Plc, TotalEnergies SE and BP Plc are expected to post a 12 per cent dip in earnings from last quarter to a combined US$24.4 billion when they report results this week.

Historically, fossil fuel companies leveraged stock buybacks to maintain interest in their stock around fluctuations in crude oil prices, but things are different now. These companies have to deal with the realities of a global energy transition in one way or another. What worked in the past may no longer be sustainable.

For example, this week the International Court of Justice kicked off oral arguments in its advisory opinion on the Obligations of States in respect of Climate Change. Per an article in Forbes, these are the two questions at stake:

“What are the obligations of States under international law to ensure the protection of the climate system and other parts of the environment from anthropogenic emissions of greenhouse gases for States and for present and future generations”?

“What are the legal consequences under these obligations for States where they, by their acts and omissions, have caused significant harm to the climate system and other parts of the environment, with respect to: (i) States, including, in particular, small island developing States, which due to their geographical circumstances and level of development, are injured or specially affected by or are particularly vulnerable to the adverse effects of climate change? (ii) Peoples and individuals of the present and future generations affected by the adverse effects of climate change?”

Depending on how the opinion shakes out, this could represent a massive issue for countries with heavy fossil fuel exports as the energy transition could accelerate. Perhaps this could even impact the $7T of global subsidies the industry receives.

Stock buybacks may not protect against transitional changes like these over the long run. On the positive side, if energy models shift, stock buybacks may be unnecessary because these companies could have more stability around other energy sources. Still, these companies would need to be on the transition path.

Don’t overlook plastics

But then again, fossil fuel companies had a big win this week. We often think of fossil fuels as used for transportation, but they are a key component in plastics manufacturing.

In 2022, the Business Coalition for a Global Plastics Treaty was formed to tackle the challenge of plastic waste and make recommendations to the UN. The group has over 275 companies and has held multiple interim meetings, culminating in a global treaty discussion from UN member states this week in Busan, South Korea. The group has been attempting to tackle the entire lifecycle of plastics with recommendations at each stage.

Despite this effort, no treaty was agreed upon.

Fossil fuel-producing states sought to protect their interests by shifting the conversation to waste rather than overall reduction. The coalition will meet again sometime in 2025, but for now, unless individual companies start reducing their plastics consumption, a systemic solution remains out of reach.

The transition is a case study in governance

Regarding this specific industry, we often focus on sustainability challenges because fossil fuel companies represent the Carbon Majors or companies that contribute the most to emissions increases. As I’ve written, carbon isn’t universally material to every company. It is material to these companies and puts critical pressure on them in a way others don’t necessarily see.

For any energy company dealing in fossil fuels, these issues are all ESG considerations, and how they react is a herculean effort in governance. On the other hand, inertia would make it the opposite, and a body at rest tends to stay at rest. Whether or not we see change will come down to the leadership teams at these companies.

As the slow drumbeat through transition continues, we may see short-term shocks to the industry and even missteps that will require quality Governance to navigate. One thing is clear. Even if the fossil fuel industry believes that the status quo is tenable, the world’s stakeholders, companies, and governments are working to transition in a way that impacts the core business model. As these companies tout themselves as ‘energy’ companies, we will see how far and long their traditional business models can stretch.