In defence of Exxon

Posted by William M. Connolley on May 20, 2008
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Ha. Now you know I really have gone over to the Dark Side. Prompted by British funds back Rockefellers’ green rebellion to bring in new ExxonMobil chairman. The complaint appears to be that The firm has refused to follow rival oil companies in committing large-scale capital investment to environmentally friendly technology… Exxon maintains that present green technologies are not financially viable. But critics fear that the company’s reluctance to explore alternative energy will prove to be bad business judgment in the long run as rivals such as BP seek to capture public affection by re-branding themselves as environmentally sensitive enterprises… The Rockefellers point out that Exxon has $25bn (£13bn) of capital investment planned in carbon-based fuel but its environmental commitment is centred on $100m to fund a Stanford University project on climate change.

So: take for a moment the position that Exxon is the Dark Side and has been obstructive over climate change. I still don’t see why it should be expected to invest in renewables (the quote above suggests that it should do so for PR purposes; well, I imagine they have considered that. Its hardly the moral high grounds, though). Exxon an oil company. It knows f*ck all about wind turbines. A company that specialised in renewable energy could spend research money more effectively than Exxon could. If the market decides that renewables will offer a better return than Exxon shares, people will sell said shares and invest them in renewables. At the moment thats not happening, for obvious reasons.

[Update: I've had various interesting replies, see the comments. To pick out a few:

Given that oil isn't going to last a whole heck of a lot longer, would not a good business strategy be to start investing in some form of renewable energy? Possibly. But now you're framing this as a pure business question. They understand their business better than you or I do.

For the same reason that Ford and GM should have looked in at ?environmental? cars earlier to cling on to the top of the market I don't think this is a fair comparison. Green cars are just different types of cars; car makers already have the expertise. Switching from oil to windmills or solar is utterly different. Even biofuels is a stretch (and is anyway a disaster area; I bet if Exxon were doing biofuels they'd be being slammed for it).

Nobody right now is the Exxon/General Motors of solar and wind. Exxon isn't at a disadvantage in investing in those fields True, but nor is it at an *advantage*.

-W]

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  1. #1 guthrie
    2008/05/20

    Hey, its just capitalism at work. The owners get what the owners want.

  2. #2 decrepitoldfool
    2008/05/20

    Man, I have SO little sympathy for Exxon. If they want to be an energy company they need to look over the horizon; with their money they could fund any amount of research into renewables. Don’t know much about windmills, solar, etc? Just from a corporate survival perspective, better start learning, and fast. Carbon is the low-hanging energy fruit and soon to become an economic dead end. What company wants to keep going down a dead end?

    [I have no sympathy for Exxon. They are a large multi-national and don't need my sympathy. "with their money they could fund any amount of research into..." yes, they could. Any number of areas. But why should they pick renewable energy? They have no expertise in it. Why shouldn't they pick... making vaccines for poor folk. Or any number of other worthy causes. If you think their corporate survival is in danger because of their reliance on fossil fuels, then you have a profitable remedy: short their stock! -W]

  3. #3 bwv
    2008/05/20

    Good point

    Why does anyone think the oil majors are supposed to be the dominant players in clean energy?

    Creative destruction is what its about

    But these are the same people who believe government bureaucrats can lead the way in alternative energy

  4. #4 guthrie
    2008/05/20

    Bmv- in this case it looks like the actual investors who have issues. These are not usually the same people who think the gvt can lead the way in alternative energy.

    FUnnily enough here in the UK the gvt has led the way in alternative energy supplies, as well as blocking it on occaision, eg Salters Ducks.

  5. #5 decrepitoldfool
    2008/05/20

    But why should they pick renewable energy?

    Because they have a head start. They know how to handle energy. They already have an energy-delivery infrastructure. They already have legions of chemists, and refineries, and project managers who know how to handle magatonnage of raw materials in process to produce liquid fuels. They could use electricity from windmills to refine cellulose biofuels, or hydrogen. It probably wouldn’t be that big a stretch to get into concentrated-solar powered desalination – it’s just a big industrial process and they know how to do that on every level.

  6. #6 Brian Schmidt
    2008/05/20

    1. Nobody right now is the Exxon/General Motors of solar and wind. Exxon isn’t at a disadvantage in investing in those fields in big money terms (except for the 10-15 years that BP has been doing it, but still Exxon has the cash to catch up).

    2. Exxon does know about energy forecasting, electrical energy generation industry (natural gas), relationships with utilities, and how to navigate energy infrastructure, both physical and regulatory.

    3. It knows how to build and most importantly to finance big projects. Renewables don’t have to be big, but they also don’t have to be small.

    4. Its refusal to diversify IMO is a kind of poison pill action against climate change regulation (“don’t force your regulations on us because we’ll have no choice but to go bankrupt, and Exxon is too big for anyone to let go bankrupt”). In other words, a political decision, not an economic one.

    5. Its other choice is to acknowledge it will become a smaller company as oil declines in importance. That’s not an entirely illogical choice, but most companies want to grow, not shrink.

    How’s that?

    [4 and 5 seem to be assuming that they are working against their own best interests. Thats possible, but you'll need better evidence and arguments to convince me. 1, 2, 3 - all true; but why is no-one pressuring large cement companies to get into alternative fuels? Or large auto-makers? It seems to me that the argument is "you do fuel. therefore you should do alternative fuel". And this argument is wrong -W]

  7. #7 Anna
    2008/05/20

    Given that Exxon’s a publicly held corp., would there be any way for its shareholders – e.g. the Rockefellers or the aforementioned British funds – to find out just what sort of actions Exxon is taking to delay action on climate?

    We know what Burger King did, we know what Ringling Bros. did… what I would give, to know what Exxon is doing.

  8. #8 Jason Dick
    2008/05/20

    Given that oil isn’t going to last a whole heck of a lot longer, would not a good business strategy be to start investing in some form of renewable energy? Say, biofuels, such as biodiesel made from algae? That would allow them to leverage a good portion of their current infrastructure. Are not such things going to be the future?

  9. #9 ScaredAmoeba
    2008/05/21

    Anna,
    Good point, but the Rockefellers only hold about 0.06% [if I remember the figure mentioned recently] of Exxon shares. But they have been communicating the obvious to Exxon.

    Rockefeller’s descendants tell Exxon to face the reality of climate change

    By Stephen Foley in New York
    Thursday, 1 May 2008

    Quote
    ‘Descendants of John D Rockefeller, America’s first and biggest oil industry magnate, say that ExxonMobil, a company spawned from his 19th-century monopoly Standard Oil, faces becoming obsolete if it does not step up the search for alternative fuels.

    Fifteen family members yesterday went public in an attempt to get Exxon to face up to the realities of climate change, and they promised to join a shareholder rebellion to shake up the board to alter company’s strategy…,’

    http://tinyurl.com/4aaxea

  10. #10 ScaredAmoeba
    2008/05/21

    Oops!
    Just notice the link William placed at the top of the page!
    Sorry!

  11. #11 JCH
    2008/05/21

    I’m an ExxonMobil shareholder. Used to be a lot of shares, but I pared it down a lot lately over several issues I have with them. One is the stock buyback. I reject that lunacy; Cramer likes it. Tells you something. Another thing I objected to was their decision to leave Venezuela, which was a terrible business decision. The rejection of socialism is a lousy reason to drop out of a potentially profitable business – a potential for huge profits.

    Just a bit of history. When Lee Raymond became the CEO he had a whole bunch of green business units that were losing money like crazy. Most were spawned in the 1970s and 1980s. He had been in charge of their nuclear unit, andnukes were basically dead in the water.He had to get rid of them all, and it was very costly. That experience has left ExxonMobil exceedingly suspicious of green initiatives. That is likely to stick until Lee Raymond’s influence wanes. The new guy is his guy. They will eventually invest, but they will be careful. They tend to be pretty conservative in picking their projects. They are not investing enough in oil exploration and so on to satisfy Wall Street, and their stock has taken several hits lately as a result. So they’re not satisfying anybody.

    But WC is right. They are under no obligation to invest a dime in renewable energy, and the government has no business forcing them to do it. If they want to take billions of dollars of their profits and buy back shares of their own stock, then let the morons do it. If they miss the boat on renewable technologies, it will cost them dearly.

    Where did my ExxonMobil money go? I made about a huge bet on hurricanes- underwater construction. Up a lot already in the hurricane preseason, so I’m comfortable with it.

  12. #12 Magnus W
    2008/05/21

    For the same reason that Ford and GM should have looked in at
    “environmental” cars earlier to cling on to the top of the market… now the two “Swedish” carmakers Volvo and SAAB who used to be safe and “environmental” is struggling to survive… ok not spot on but all businesses need to constantly renew.

  13. #13 Tim Worstall
    2008/05/21

    Quite.

    http://timworstall.com/2008/05/02/yes-jeremy/

    The shareholders can sell Exxon and invest in renewables if that’s what they want. It’s what stock markets exist to do.

    What those Rockefellers actually want is that all the other shareholders are forced to invest in renewables.

  14. #14 Brian Schmidt
    2008/05/21

    Tim – the shareholders own the company and have every right to vote to change the direction it’s taking. The magic of capitalism.

    [Tim takes a rather extreme view, which I happen to agree with. In political terms, Tim is a bit like Hobbes In Leviathan: logically coherent and very convincing, but wrong. As to your point: shareholders own the company, of course, and they can vote for it to go off and make cheese if they like, but that doesn't make it sensible -W]

    William – as to whether Exxon understands the energy business better than the shareholders, one point the shareholders make is that other energy companies are investing in renewables. Exxon’s poison pill strategy is a political manipulation designed to promote its business interest, but shareholders have the right to object to it. As to the growing smaller option, that’s an economically rational choice – it’s not illogical to decide a big business can have a finite lifespan, but again that doesn’t seem to be what most corporations want.

    [Errm, well if the sharefholders think that othe companies are persuing a better stragety by investing in renewables then they can just sell thier shares and invest in those companies. That they don't just do this suggests ulterior motives. "Exxon's poison pill strategy is a political manipulation designed to promote its business interest, but shareholders have the right to object to it." - does this make sense? If Exxons strategy is in its business interst, why are the shareholders objecting? -W]

  15. #15 tidal
    2008/05/21

    If I am not mistaken, Exxon has a return on equity of about 23%. The hurdle rate for new investments (versus alternative uses such as share buybacks) is quite onerous. I think they are actually acting in the classic manner of “maximizing shareholder value” in rejecting many alternative energy investments on this count.

    Furthermore, the power densities of various alternatives – I’m thinking wind in particular – necessitate a very different economic model. It is sometimes difficult to run both under one corporate structure. I’m reminded of books like Clayton Christensen’s “The Innovator’s Dilemma” on this point.

    Yes, we need a massive financing and build-out of alternatives, grids, infrastructure… But it does follow that it needs to the oil incumbents doing so. By the way, wasn’t BP Plc, of “Beyond Petroleum” fame, recently making noises about exiting the renewable energy space themselves? http://media.cleantech.com/2523/bp-may-sell-renewables-business

  16. #16 bigTom
    2008/05/21

    The decision to invest in renewables (or any other project) should be made based upon the expected return on investment. If Exxon chooses not to spend all its cash, it is returned to shareholders either as dividends or share buybacks, or capital appreciation, then the shareholders can reinvest their gains as they see fit. That said they should take into account possible synergies (or dis-synergies) that may alter the corporate ROI. Greenwashing might be one such synergy. Attracting some smart scientists/engineers into the company, who wouldn’t otherwise join, and then allowing them petroleum career paths might be another (despite the fact that oil may be at/near peak, there will be a large and likely unmet future demand for petroleum engineers). Also even if they stick to a strictly petroleum business model, as oil production spreads to fields whose oil is harder to extract, (think low or possibly less than unity energy return on energy investment), other cheap -and possibly intermittent energy sources could be used to pump the high value black gold out of the ground. The current practice of using mostly diesel energy to drive oil extraction won’t make sense much longer, but using local solar or wind might.

  17. #17 JCH
    2008/05/21

    There is a growing call among the United States energy companies for a national energy policy; an admission by oil capitalists that modern life has become too complicated for their C-student executives.

  18. #18 gator
    2008/05/22

    BP is a large player in solar power. They make both residential and industrial PV cells. I haven’t seen the latest numbers, but they had something like 20% of the market a few years ago.

    There’s no reason an oil company can’t shift to being an energy company.

  19. #19 Adam
    2008/05/22

    I can’t be bothered to look, but are the other oil companies’ shares worth more than Exxon’s? If so, that might explain it.

    “Errm, well if the sharefholders think that othe companies are persuing a better stragety by investing in renewables then they can just sell thier shares and invest in those companies. ”

    That does imply that investment in renewables is the only motivation for owning shares in that company. They might have other reasons for owning shares (various drilling rights, ownership of critical refineries, etc.) and want the company to invest in renewables *as well*. One is a short term gain, the other is/may be (perceived as) a long term gain.

    There is a similar issue with Yahoo shareholders complaining about the company’s handling of the MS bid. Why don’t they just buy shares in another company (either Google or MS depending on reasons for disgruntlement). I’m sure there are many others (didn’t BA have similar issues in the past).

    It’s a bit like motivations for being in a particular political party. You probably won’t agree with all the policies but you might try and influence the party to adjust those you don’t agree with.

    The main difference here is that the shareholders probably also own shares in other (oil) companies as well.

    TBH though, I can’t quite see the point of this discussion. Whatever machinations shareholders get up to to influence the direction of their company it’s, nothing to complain about. After all it’s what capitalism is all about – shareholders trying to make as much money as they can.

  20. #20 John
    2008/05/22

    Seems to me that Exxon’s not investing in alternate energy precisely because oil is running out. As supply drops, their product value increases, and they’re making record profits. Why would they stop selling oil, right when it’s turned into diamonds?

    So they invest 0.4% as much (is my math right?) in alternative energy, because, recognizing that there’s a trend towards it, they want to support that trend as little as possible. Surely Exxon figures that the world’s going to find replacements eventually, but until then they know they’re making record profits.

    It’s soulless and evil and mercenary. It’s exactly what it looks like.

    What surprises me is that they’re not spending more money preparing their infrastructure for a switch. With the kind of shipping and processing facilities oil companies have, they’re well poised to take over the new alternate energy when it arrives- probably by absorbing the independent startups that develop it. It seems like they’d want to be quietly putting money into developing wind farms and such, so as to make a smooth transition when the change comes.

    I wonder what the board meetings are like, right now.

  21. #21 Brian Schmidt
    2008/05/27

    “If Exxons [poison pill] strategy is in its business interst, why are the shareholders objecting?”

    1. They may think it violates business ethics.

    2. It’s against the broader interests of the shareholders in physical survival, and they have the right to protect that interest.