Is There a Carbob Bubble?

The following is a short report that is expected in a week or so from Exxon Mobil about the risk of a "Carbon Bubble", the simple idea that if 80% of the fossil reserves is not to be used then the world is very highly over invested in Carbon.

***************************************************************************************

Exxon Mobil Corp. has agreed to study the risk to its business if the world were to take aggressive action on climate change.

Under a deal reached with activist shareholders yesterday, the company will release a report this month on "carbon asset risk" -- the chance that market forces or policy changes will render some of its product unsellable.

As Exxon Mobil is the world's largest public oil and gas firm, the move is easily the most significant industry acknowledgement of the "carbon bubble."

"To be proactive and respond with a report shows that they're willing to provide transparency to investors, explain the kind of scenario planning they're doing, and let investors decide if they think Exxon is at great risk," said Natasha Lamb, director of equity research and shareholder engagement at Arjuna Capital and a co-leader of the pressure campaign.

Arjuna, a sustainability-focused investing firm, and As You Sow, a nonprofit, filed a shareholder resolution asking for the report in December. That put it on track to be voted on by Exxon Mobil shareholders at the company's annual meeting this spring.

According to Lamb, Exxon Mobil asked the Securities and Exchange Commission to exclude the proposal, saying it was redundant with another shareholder effort on greenhouse gases.
But as the activists and Exxon Mobil approached a deal, Arjuna and As You Sow withdrew their proposal, and Exxon Mobil agreed to do the analysis.

"I don't think that Exxon wanted to have a carbon asset risk proposal on the ballot," Lamb said. "It's a huge black mark, especially considering the [350.org] campaign and the divestment movement, and just highlights that they're not addressing it."

A spokesman for Exxon Mobil would not comment. However, correspondence with company officials, shared with EnergyWire by the investor groups, shows the company agreeing to do the report if the activists relented.

That may be the most recent development, but Exxon Mobil was likely engaging the "carbon bubble" issue as far back as last fall.

Bennett Freeman, senior vice president for sustainability research and policy at Calvert Investments, said the issue came up in a November meeting with the company.

Freeman said the fact that the company is studying the issue doesn't force it to come to any particular conclusion. To him, the move is simply in keeping with the firm's watchful ways.

"This is a company which, whatever else one thinks about them, is very well-managed and is very sensitive to a variety of sources of risk, environmental as well as social," he said. "Stranded assets -- there could be no more fundamental potential risk for them."

Andrew Logan, oil and gas director at Ceres, said Exxon Mobil may have noticed the "carbon bubble" concept gaining cachet among investors, Wall Street analysts and statistical agencies like the International Energy Agency.

But beyond that, he said, the company may want to fend off criticisms that it's been too conservative with investments -- unlike peers, such as Chevron Corp., that have been willing to grow production even if it comes at a higher cost.

"I also think the company believes it has a good story to tell," Logan said by email. "If the Carbon Asset Risk scenario plays out as we fear, at least in the near term XOM's approach could be vindicated."

Breaking the 'carbon bubble'

The supermajor's move represents a significant win for environmentally minded investors. While the idea of the "carbon bubble" has been discussed since 2012, shareholder initiatives on environment can sometimes take many years.

Victory is often measured just by getting a company to allow a vote, getting its acknowledgment of the issue or winning a few more percentage points of shareholder votes.

The "carbon bubble" made its mainstream debut in a Rolling Stone article, penned by climate activist Bill McKibben, published in 2012. It was based on an unorthodox U.K. research group's argument that 80 percent of the world's oil, gas and coal reserves had to remain "stranded" for the goal of limiting global warming to 2 degrees Celsius to be possible.

Over 2012 and 2013, the concept was explored by a few analysts from major Wall Street institutions. Meanwhile, the concept of divestment, urged on by McKibben and the group 350.org, began to spring up new movements at universities.

Then, last October, 70 investors with $3 trillion in assets launched a coordinated effort, through Ceres. It targeted 45 major fossil-fuel and power companies, including Exxon Mobil.

It was probably the combination of all these developments, investor activists say, that turned up the heat on Exxon Mobil.

Break it down

When Exxon Mobil releases the report, it may contain some of the most nuanced information on carbon intensity to date.

Analysts have lamented the lack of granular data on companies' oil and gas reserves. Conventional oil, oil sands, deepwater drilling and shale gas all have different carbon profiles, making these data essential for modeling a company's unique risk profile.

Danielle Fugere, president of As You Sow, said Exxon Mobil has agreed to break down its resource base by type and location.

Under the agreement, Exxon Mobil also will offer other analyses. Among them: how it justifies capital investments in new reserves, whether capital investments are sound under a carbon policy, and whether it's ready if global energy demand is different than forecast.

"They believe they are less climate-intensive in some of their production processes, so we're hopeful they'll talk about that," Fugere said. "My guess is they're going to say they're prepared for a carbon-constrained world, and they're better prepared than other companies."

Action in Europe

Meanwhile, a European group of oil and gas firms is preparing its own position on the carbon bubble -- with similar questions about what that position will actually be.

The London-based group IPIECA, which counts Exxon Mobil, Saudi Aramco, Chevron and other oil heavyweights in its ranks, is working on a fact sheet on the issue of "stranded assets" for release in the next few months.

IPIECA calls itself "the industry's principal channel of communication with the United Nations." But as a trade association, it has no binding power over its members. The group is best known for studying individual technical issues -- under the guidance of a steering committee of oil-company executives -- and issuing them as benchmarks or best practices.

"It simply seeks to explain the theories around a carbon bubble, and explore some of the assumptions necessary to underpin them," Helen Murphy, a spokeswoman for the group, said by email. "It concludes by confirming that our industry has always managed oil price and carbon risks and continues to do so via a number of approaches."