This is the first in a series of reports on company scenario analyses, focusing on ExxonMobil
This paper seeks to assist investors in navigating climate-related disclosure by companies (in this case Exxon). Using our proprietary framework, we scrutinise companies’ disclosure according to four key themes: 2°C scenario modelling, 2°C scenario outputs, market/price risk and the use of carbon prices.
ExxonMobil (“Exxon”), the largest listed integrated oil and gas company, conducts long-term forecasting to inform its future investment decision-making and business strategy. Its annual publication Outlook for Energy highlights the company’s view of how the energy system will evolve over the long-term. It is largely predicated on business-as-usual growth in oil and gas.
In 2017, over 60% of shareholders voted for Exxon to begin disclosing how the company would be affected in a demand-constrained environment in line with a two-degree scenario, following the Paris Agreement. As a result, in February 2018, Exxon published the Energy and Carbon Summary. The report avoids some of the glaring defects in a 2014 report Exxon published, but still falls short across a number of critical areas. These are outlined in the following sections
In this paper, we review ExxonMobil’s 2017 10K Form, 2016 Corporate Citizen Report, 2018 Energy & Carbon Summary and its 2018 Energy Outlook. This marks our first of a series reports on company scenario analyses in which we focus on four critical elements:
- How the company structures its 2°C scenario analysis, if provided;
- The results of that analysis, and whether they are useful to investors;
- Whether it has evaluated the market risk (i.e., price implications) from secular demand destruction for its commodities, as suggested by most 2°C scenarios; and
- Whether it has used carbon prices in a robust and defensible way as a proxy for a 2°C scenario.
Exxon provides its first 2°C “scenario” analysis–a markedly different future than that in its annual Outlook for Energy. However, this simple approach provides little detail on the underlying assumptions, depriving investors of clarity and comparability.
The data that Exxon relies upon are from old models with dated technology cost assumptions and, as demonstrated by a reliance on significant growth in bio-energy, many of the models appear limited in their capacity to fully capture potential impact upon oil demand.
Despite recognising that lower demand would potentially lead to lower prices and that some projects would likely not be economic in a 2°C scenario, Exxon does not provide a meaningful economic assessment of the potential value impact to their producing reserves and resource base in its 2°C scenario.
In the context of the information requested by Exxon’s shareholders in 2017, we consider Exxon’s disclosure to be inadequate.
Questions for Management
- How would the use of the IEA SDS demand pathway, rather than the average growth rates of a number of differently constructed scenarios, impact Exxon’s analysis?
- What is the value assessment of impact to Exxon’s reserve and resource base in a demand-constrained scenario?
- How would Exxon invest in its resource base differently given acknowledgement that certain liquids resources might likely be stranded in a demand-constrained scenario?