In recent years, climate change has often taken center stage when considering the most pressing issues facing the world. To avoid its worst effects, governments of all levels, private companies, and citizens have made pledges and set targets to cut greenhouse gas (GHG) emissions in the coming years and decades. Central to human-induced climate change has been the exponential rise of energy consumption, which has historically mainly come in the form of burning fossil fuels – namely coal, oil, and gas.
When considering who contributes the most to this worrying trend, it is difficult to glance past the largest oil companies, which, according to one study, account directly and indirectly for over a third of total global emissions since 1965. Among these 20 companies are British Petroleum (BP) and Exxon Mobil, two of the five largest oil majors on earth. Both companies trace their roots to the late 19th and early 20th centuries when oil was fast becoming the fuel of choice over coal, and the age of the automobile was dawning. Since then, they have evolved to become multinational conglomerates with operations and assets all over the world.
Like other companies, BP and Exxon have come under intense pressure from investors and activists to decrease emissions and abandon new oil and gas exploration. The two companies have responded to the impending climate crisis in markedly different ways. In February of 2020, BP pledged to become carbon neutral by 2050 and is investing billions in renewable energy capacity, while Exxon has indicated only meager emission reduction targets and currently has no plans to become carbon neutral.
This divergence in strategy has implications for the fight against climate change, given both their huge market share and industry influence. The strategies that these oil majors pursue as energy companies will also have ramifications for their futures as investments in renewable energy and emerging technologies may determine their economic viability. This can be expected as affordable renewable energies and widespread climate policies push the world towards a lower carbon future.
As large corporations whose emissions are also carried down supply chains, Exxon and BP have become the subject of intense scrutiny from shareholders and activists within the framework of Environmental, Social and Governance (ESG). ESG has become a popular tool for investors to evaluate the societal impacts of companies ranging from treatment of their workforce to environmental impacts. If used by a large percentage of shareholders, ESG pressure can force changes in a company’s strategy.
This was the case when BP finally committed to offsetting its “scope 3 emissions” when it announced its goal to become net zero. Scope 3 emissions refer to fuels burned further upstream or downstream on a company’s supply chain. In this context, it usually alludes to fuel burned from cars and trucks, which historically oil companies have claimed to be a consumer’s responsibility. In fact, Exxon is still making this claim and has to date offered no strategy to reduce its scope 3 emissions, a move that has angered investors. On the other hand, BP indicating its intent to address scope 3 emissions is significant in itself, as they can account for up to 80-90% of a company’s total emissions. This means that if oil companies are serious about reducing emissions, making commitments to tackle their scope 3 emissions will be essential.
Investor demands are not the only source of pressure these companies are facing. Market and government forces outside of their control could cause oil demand to fall, disrupting their entire business model of continued oil production and exploration. This is the theory of peak oil demand, where at some point in the next few decades, and perhaps already, global demand for oil will begin to trend downward.
BP has hinted that due to the massive fall in oil demand triggered by the COVID-19 pandemic, the world may have reached peak oil, but there is disagreement over whether this is indeed the case. Before the pandemic, global demand for oil had been steadily increasing, a trend that Exxon predicts will continue for some time following eventual economic recovery. However, peak oil is difficult to predict, given the multitude of variables that can influence global demand. This can vary from increased electrification and the adoption of electric vehicles to the growth in oil demand throughout large emerging economies like China and India. Regardless, BP is positioning itself far better than Exxon when this inevitable peak is reached. By diversifying to become a company with a foot in multiple sources of energy, rather than maintaining its standing as an oil corporation, BP will be able to use its logistical and business expertise on alternative sources of energy that are projected to only grow.
A Bet on New Technologies
In the fight against climate change, there is a host of new technologies that offer promising solutions to make progress against global warming. In this space, BP and Exxon have again chosen different paths, with one being more pragmatic in its strategy by investing in renewable power that is scalable and economical, while the other places a bet on a technology still years away from maturity.
BP’s own energy outlook to 2040 forecasts renewables, including wind and solar, as the fastest growing source of energy. It is expected to increase from a current total of less than 5% to nearly 20% in 2040. In this vein, BP has to date installed 2000 Megawatts (MW) of wind and solar power, with plans to invest more as part of its net-zero goal. Currently, Exxon has installed no renewable energy, and instead has chosen to become an investor in carbon capture and storage (CCS) and direct air capture (DAC). These technologies, which prevent carbon from being released into the atmosphere and suck out carbon already emitted, are promising but still emergent and not yet commercially viable. Instead of investing in alternative energy sources, Exxon’s decision to focus on CCS and DAC shows that they plan to continue exploring and drilling for new sources of oil, further distancing themselves from the energy transition.
The Need for More
Despite some positive steps and the promise of new technologies, there is still a clear and urgent need for both BP and Exxon to do more. The International Energy Agency estimates that oil companies currently invest only 1% of their capital expenditure outside of their core business of oil production, with the most forward-thinking companies still at just 5%. While BP’s net-zero pledge is hopeful, it excludes its 20% stake in Rosneft, a Russian oil company, leaving BP with a heavy asterisk beside these promises.
These figures clearly speak to the need for higher levels of investment in the energy transition, and a diversification away from the current business models. They will likely be unable to do so alone, and government regulations and incentives will be crucial in forcing a shift in production. BP and Exxon are entrenched behemoths who became household names during the hydrocarbon age. However, with a new era of energy dawning, they must decide whether to remain invested in the resource that is necessitating urgent action towards climate change, or to use their institutional capacity to become part of the energy transition.