Exxon: Betting on the Wrong Horse

It was Benjamin Franklin who once said: “Certainty? In this world nothing is certain but death and taxes.”

In these uncertain times, with a volatile oil price, rising temperatures and a sea-change of political will and ideology in the White House, who would envy the CEO of a leading Fortune 500 oil company, plot the company’s future.

You could try and map out a couple of future scenarios of what will happened over the next decade. Say we are suddenly in 2015. After four years in the White House, Obama won a second term with an even stronger mandate. In 2009, a landmark deal on climate change was signed in Copenhagen and an even more progressive one was signed in 2014. Obama’s “green revolution” is beginning to show real results and the country is credited with leading a world-wide green technological revolution.

Billions of subsidies were used to kick start the global economy, ploughing money into renewable energies and energy efficiency programmes. All new cars no longer run on oil. All new buildings are carbon neutral. The demand for oil is steadily declining and what oil is left is effectively controlled by host countries, not western corporations.

China too has started to implement a post-oil strategy.  Demand for oil is declining steadily and is currently $30 a barrel. Although it is too early to say for certain, but the days of the oil industry being a dominant political and economic force are over.

Or take another scenario. Obama’s first term was characterized by infighting with the Democrats over how quickly to respond climate change. Those politicians who came from the industrial heartlands and bastions of the car industry managed to water down the political goals. Copenhagen was a political state-mate with China and India refusing to sign up to anything. After a sluggish start, the American economy is slowly coming back to life, but has been over taken by China that is guzzling oil at the fastest rate ever.

Obama was defeated in 2012 after not living up to the expectation of change. President Palin has let it be known that drilling for oil will be allowed on any public lands in the US, including ANWR and close to coasts. There is a dangerous diplomatic stand-off between Russia and America over rights to drill in the Arctic. It comes at a time that America raids in Iran have gone badly wrong in the Middle East, which has already pushed the price of oil over $40 a barrel. Concern over climate change has been subsumed by nations desperate for more oil.  Big oil rules Washington just like the old days of Bush and co.

Neither of those scenarios will come true. But an Obama victory means that, in all probability, there is a greater chance of us moving towards the first one. Exxon meanwhile is still backing on the second one: a continuation of the hydrocarbon club..

As a great article in the New York Times over the weekend said:  “While other oil companies try to paint themselves greener, Exxon’s executives believe their venerable model has been battle-tested. The company’s mantra is unwavering: brutal honesty about the need for oil and gas to power economies for decades to come.”

The company’s chair, “T-Rex” Tillerson told the paper. “Over the years, there have been many predictions that our industry was in its twilight years, only to be proven wrong,” says Mr. Tillerson. “As Mark Twain said, the news of our demise has been greatly exaggerated.”

As the paper points out, from a purely financial perspective, what Exxon is saying might make sense. The company is worth a whopping £375 billion, more than General Electric, Bank of America and Google combined. The paper argues that the company’s strengths are due to the “Exxon Way” based on the ideals of discipline, patience and long-term vision.

But where Exxon’s long-term vision is based on oil, many people believe it has got that wrong. It is banking on oil being the future for the foreseeable future. It is dismissing the green revolution before it has even started. The company expects to spend $25 billion to $30 billion each year until 2012 to seek and develop hydrocarbons.  That’s a huge amount of money and a huge amount of financial risk, especially if you are betting on the wrong horse.

For a long time, oil was the onmly serious race in town, but not any more. The company faced a shareholder rebellion this year led by the descendants of the oil-legend himself, Mr. Rockefeller, who founded Standard Oil in 1882. One of those descendents, Neva Rockefeller Goodwin, a Tufts University economist, speaking for the family, said: “Exxon Mobil needs to reconnect with the forward-looking and entrepreneurial vision of my great-grandfather. ” The company was focused “on a narrow path that ignores the rapidly shifting energy landscape around the world.”

If Exxon continues to carry on blindingly thinking the oil age will continue for ddecades not only will they help fry the climate, but they will also pour billions of shareholders money into projects that could not be viable. For a company that prides itself on managing risk and getting its vision right, the signs are that it has bet on the wrong horse. And in time that will cost it dearly.

As Andy Stevenson, an energy analyst at the Natural Resources Defense Council told the NYT. “Exxon is a cash machine, and they could be using that cash to invest in clean technologies that would expand their base. Right now, they have no growth story. They are trapped in oil and gas.”