Uncertainty is as much a part of the oil and gas business as metal and dirt. Investors know this. They know oil and gas originate in unseen realms subject to complex forces never conveniently measurable.
Investors never know precisely how much oil and gas a producing company has discovered and eventually will produce. That value-reserves-changes with reservoir knowledge, drilling results, and commodity prices. But investors understand the dynamics and accept the oil and gas industry's outsize capacity for surprise, profitable and otherwise.
Not many years ago, the framework for investment decisions included assumptions that global oil production soon would peak. Thanks to deepwater resources and unconventional reservoirs, that once-solid framework has changed. In the oil and gas business, certainty is perishable. An appreciation for changeability would serve investors well as companies adapt financial reports to speculation about a low-carbon energy future.
At annual meetings on May 31, shareholders of ExxonMobil Corp. and Chevron Corp. voted on proposals for yearly reports on how technical changes and climate-change policies might affect long-term investments. The ExxonMobil proposal passed with 62.3% of votes cast. The Chevron initiative failed, with 73% voting negatively. ExxonMobil opposed the proposal, arguing that it, like many other oil companies, accounts for climate risks in existing disclosures.
Activist shareholders advocating new measures cite the 2015 Paris Climate Agreement's goal for global average temperature. The ExxonMobil proposal said the company "should analyze the impacts on ExxonMobil's oil and gas reserves and resources under a scenario in which reduction in demand results from carbon restrictions and related rules or commitments adopted by governments consistent with the globally agreed upon 2°[C.] target."
Another proposal to ExxonMobil was illuminating. It unsuccessfully called on the company to increase dividends and share buybacks, citing an estimate that fossil-fuel reserves made "unburnable" by the Paris Agreement represent more than $100 trillion in assets potentially stranded through 2050. Because of speculative arithmetic incorporating theoretical targets of an unenforceable agreement, therefore, ExxonMobil should steer strategy toward self-liquidation. Otherwise, activists don't ask for much.
Confusion such as this thrives, exerting unmerited influence on policy, because advocacy groups escape challenge when they assert their own conclusions. The shareholder proposals embrace unruly assumptions. Greenhouse gas limits needed to achieve temperature targets assume relationships still poorly understood. Estimates of oil and gas reserves decades from now are guesswork. Who knows what commodity prices will do next year, let alone over the next several decades? These imponderables alone make estimates like $100 trillion for potentially stranded assets three decades from now little more than interesting fabrication. Yet activist shareholders seem to want companies and their investors to base immediate decisions on them.
And activists ignore another variable more reliably predictable than the many murky factors of their calculations: politics. They assume countries will comply with the Paris Agreement. They assume citizens of those countries won't balk when costs hit, as already has happened in Europe and elsewhere. And they assume a defiant US president can be nagged into leaving Americans in a snare of costly commitments-on which they didn't vote-underwritten by opponents of capitalism and individual liberty. Activist shareholders assume quite a lot.
In the real world, energy requirements remain high and continue to grow. Under most scenarios, energy from the sun, wind, and biomatter will grow rapidly. But oil and gas still will be needed-in large and growing amounts. Oil and gas companies still need to invest in fossil energy. They'll do so at rates that make contemporaneous sense in relation to economic, technical, and regulatory forces that are difficult to assess year by year and impossible to forecast usefully long term. Greenhouse-gas emissions might even subside faster than expected-but of course not fast enough to satisfy opponents of resource development.
Activists should let progress happen. Nature chastens preemptive certitude about energy and the environment. Demanding always to stipulate the unpredictable, activism discredits its own agenda.
