The Odd Couple of the Energy Transition: The Case of Chevron and ExxonMobil

By Gerard Kreeft

An early depiction of John D. Rockefeller, founder and president of Standard Oil.

Standard Oil, founded by the world’s first oil tycoon, John D. Rockefeller, was broken apart in 1911 by the Supreme Court of the United States, guilty of having captured too much of the country’s oil market. Today, Rockefeller’s company has two heirs, ExxonMobil and Chevron, who stand unrepentant and sullen at the back of the courtroom of international opinion. Shareholders have found the company’s executives guilty of mismanagement of and of squandering assets—a far cry from Rockefeller’s business genius. My, how the mighty have fallen!

Both ExxonMobil and Chevron continue to maintain their blind faith in oil. Meanwhile, other oil majors have moved on. Yes, those companies’ books are still filled with oil and gas projects. But their future, they have determined, will be greener, more innovative—and highly profitable, which is certainly in the best tradition of John D. Rockefeller. They will profit from the new market demand and the new market greed: green solutions. The direction of the energy transition is not in doubt. Only the timing is uncertain.

Yet is there a business case to be made for ExxonMobil and Chevron? Has the Russian-Ukraine conflict, which has driven oil and gas prices to an all-time high, given both companies a reprieve and a get-free card? A pyrrhic victory or a new business opportunity?  Will $100 oil and exhaustion of spare production capacity give the industry a new lease on life?

The share price of both companies is of critical importance to the world’s investors. Whether a company is an oil company or an energy company seems to matter little to the investor community. Instead, the clarity of the message is key.  That is why only Chevron, with the exception of Equinor, is on track to make 2022 the 35th consecutive year with an increase in annual dividend payout per share, maintaining its value. Of the oil majors, BP, ENI, ExxonMobil, Shell, Repsol, and TOTALEnergies, have been industry laggards between 2018 and 2022. Among that crowd Chevron and especially Equinor stand out very positively.

 During this 5-year period the share price of the oil majors is as follows:

  • ENI down 20 percent
  • BP is down 18 percent
  • Repsol remains flat
  • Shell is up 2 percent
  • TOTALEnergies up 4 percent
  • ExxonMobil up 10 percent
  • Chevron’s stock up 41 percent, and
  • Equinor up 106 percent.

These results highlight the importance of projecting a clear corporate message. The worst performing share prices are the European supermajors—BP, ENI, Shell, Repsol and TOTALEnergies—who have tried to leaven their massive interests in hydrocarbons with a dash of renewables. There is sufficient evidence to illustrate that renewables are only a second-tier after-thought.

TOTALEnergie’s capital expenditures for the period 2022-2025 is anticipated to be between $13Billion-$16Billion per year: 50 percent  ($6.5Billion-$8Billion) on hydrocarbons and only 25 percent ($3.25Billion-$4Billion) on renewables.

Shell’s capital expenditures follow a similar path. Of a total of some $21-$23Billion at least 35 percent is devoted to hydrocarbons. Renewables and energy solutions $2-$3Billion or approximately 10 percent of the total expenditures budget.

Yet Chevron’s New Energies division, established in 2021, is pledging to spend $10Billion through 2028—about $2Billion per year, or 12.5-14 percent of Chevron’s projected capital budget. Certainly within the range of what TOTALEnergies and Shell are spending on renewables.

Yet the best performer by far is Equinor, the company that has executed the most dramatic pivot away from hydrocarbons and towards new energy technologies. By 2030 the company will have more than 50 percent of its capital spending dedicated to renewables.

Should European energy companies make their pivot to low carbon solutions a major priority much in the tradition of Equinor? Would Chevron be a willing participant or would it simply double down to ensure its hydrocarbon future?

A key scenario could be a good bank/bad scenario in which the oil companies—BP, ENI, Shell, Repsol and TOTALEnergies — create separate entities in which renewables and hydrocarbons are spun off to create real shareholder value. This will also create real business opportunities for both Chevron and ExxonMobil. Will $100 oil and exhaustion of spare production capacity be enough to hasten such a scenario?

The real litmus test is the contrast between the performance of the share price of the oil majors and the Dow Jones Industrial Index: between July 2017 and June 2022 the Dow rose 44 percent (21,414 to 30,775) while the oil majors, with the exception of Equinor, have under-performed dramatically.

 Chevron: the present situation

Mike Wirth, Chevron’s Chairman and CEO recently revealed that two-thirds of Chevron’s total production of 3Million barrels of oil will in  2025, come from just two projects: Tengiz in Kazakhstan and the Permian Basin in the United States will each yield 1Million BOEPD. Not exactly diversity of supply.

The company’s market cap is approximately $290Billion. Chevron’s positive image is largely because of its dividend track record: the company has increased dividend payouts for 35 consecutive years.

Chevron management, nonetheless, has suffered important setbacks  at the company’s Annual General Meetings in both in 2021 and 2022.  Over the objections of management, 61 percent of shareholders voted in 2021 for a proposal to encourage the US company to reduce its emissions.  At the 2022 annual shareholders meeting, 39 percent  of shareholders voted for a resolution asking the company to provide quantitative information how a net zero by 2050 will affect key components of Chevron’s financial position, including potential impairments, remaining asset lives and asset retirement obligations.

The company’s new energy division is focusing on the following areas:

  • Renewable natural gas products;
  • Renewable fuel products;
  • Hydrogen production;
  • Carbon capture and storage.

Will Chevron shareholders see Chevron’s new energy division as a new direction or mere symbolism? Certainly, Europe’s supermajors-BP, Shell, and TOTALEnergies-who have a dash of renewables, have seen their share prices remain stagnant. Is the alternative simply to double down and follow the hydrocarbon route? And hive off their renewable divisions?

The company has indicated that over the next 3 years it will spend some $10.5-$12.5Billion yearly in the USA, mostly in the Permian Basin and Gulf of Mexico. This means that at least 75 percent of Chevron’s total capital budget over that period is pledged for the U.S. market.

Outside the USA, Chevron will spend $3.5Billion, or 70 percent of its international budget, to develop its Tengiz asset in Kazakhstan, with the remaining $1.5Billion spent elsewhere. This is not promising for Africa, where Chevron has major operations stretched across the continent, including major projects in Angola, Equatorial Guinea, and Nigeria that have received limited funding in order to bankroll Tengiz. Putting so many of its eggs in the Tengiz basket could be a strategic vulnerability: if Tengiz output falls short, Chevron’s market performance will suffer, potentially dramatically.

 ExxonMobil: the present situation

Once seen as the oil and gas industry leader, ExxonMobil is now in uncharted waters. Its biggest challenges are legal, not the search for oil and gas. ExxonMobil’s management has been forced to accept three new board members, nominated by Engine Number 1, a small but very influential investor, and court challenges that have the potential to derail its deep-water Guyana projects.

Surely, the court decision in the Netherlands ordering Shell to cut its CO2 emissions by 45 percent by 2030 compared to 2019 levels is a decision being followed closely by the courts in Guyana and the boardroom of ExxonMobil. After all, ExxonMobil’s upstream activities in the Netherlands and the UK are joint ventures with Shell.

ExxonMobil has written down between $17–$20Billion in impairment charges and is capping capital spending at $20-$25Billion per year through 2027, a $10Billion reduction from pre-pandemic levels. Its market capitalization is now $360Billion, up from its October 2020 lows of $140Billion.

Researchers from the IEEFA (Institute for Energy Economics and Financial Analysis) recently reported that ExxonMobil invested $61.5Billion on US upstream capital projects from 2013 through 2021, only to report $5.3Billion in cumulative losses (see below).

To meet the green challenge, ExxonMobil has unveiled a plan to build one of the world’s largest carbon capture and storage (CCS) projects along the Houston Ship Channel in Texas. The project would cost $100Billion and would capture and store 100Million tons of CO2 per year. The emissions saved would be equivalent to removing one out of every twelve cars on US roads, the company says. ExxonMobil is proposing to build infrastructure to capture its own CO2 emissions as well as those from power plants, oil refineries, and chemical plants in the Houston area.

To succeed, the project requires major public funding and the introduction of a price on carbon in the US. ExxonMobil says the project could be fully operational by 2040.

ExxonMobil has recently unveiled its energy transition strategy. Some 150 measures were announced, including hydrogen and biofuel initiatives. Over the next six years, the company plans to invest more than $15Billion in lower-emission initiatives, including large-scale projects to lower greenhouse gas emissions, a significant share of which will be directed toward its low carbon solutions business.

The Business Case for ExxonMobil

 Hiccups in the energy transition—particularly spiking prices due to the war in Ukraine—have given ExxonMobil and Chevron a reprieve with shareholders and an opportunity to re-evaluate their strategies. They have responded by dumping low return assets and consolidating others. ExxonMobil has for example sold many of its African operations. Seplat Energy PLC has in Nigeria now has taken over the assets of Mobil Producing Nigeria Unlimited (MPNU), formerly owned by ExxonMobil, for a purchase price of $1.2Billion. Savannah Energy has taken over all of ExxonMobil’s upstream and midstream assets in Chad and Cameroon.

Instead, the company is focusing on high value assets. Two examples:

 Guyana:ExxonMobil has sanctioned four projects in the 26,800 square km Stabroek Block off the Guyana coast. Discovered in 2015, Stabroek boasts reserves of more than 11Billion BOE. The Liza-1 well, the first well on the Stabroek Block, was drilled to 5,433 m in 1,742 m of water.

Liza Phase 1 is producing approximately 130,000 barrels oil per day; Liza Phase 2 is steadily ramping up to its capacity of 220,000 barrels oil per day; and the third project, Payara, is expected to produce 220,000 barrels oil per day. The fourth project, Yellowtail, is expected to produce 250,000 barrels oil per day.

This adds up to 820,000barrels of oil per day. ExxonMobil has a 45 percent share in the project, so it will be accruing 369,000BOPD from Guyana which will be one of its largest sources of crude oil from its portfolio of oil production. ExxonMobil must pray that Guyana stays politically stable and not decide to make substantial changes in terms of their production sharing agreements.

Mozambique:The Rovuma LNG project contains more than 85 TCF (trillion cubic feet) of natural gas. ExxonMobil will lead the construction and operation of all future natural gas liquefaction and related facilities, while ENI will continue to lead the Coral floating LNG project and all upstream operations.

ExxonMobil and its partners are jointly optimizing development plans and determining technical milestones such as final investment decision (FID) and startup timing accordingly.

 The Business Case for Chevron

Tengiz

The Caspian Region, particularly Kazakhstan, has been a key frontier for Chevron since the break-up of the Soviet Union. Tengiz, Kashagan and Karachaganak were all major projects taken on at great risk, but they garnished great financial wealth which in turn generated cashflow for the majors to develop projects around the globe, including Africa.

This is about to change. WoodMackenzie is predicting that, by 2030, annual capital spending on upstream oil and gas projects in the Caspian Region will drop 50 percent from its 2018 peak of $20Billion.

Most of the largest pre-FID (Final Investment Decisions), both brownfield and greenfield, do not generate an  IRR(Internal Rate of Return) above 20 percent, Woodmac explains. Tax issues, cost overruns and project delays are key constraints. Add carbon neutrality to the mix and you have the ingredients for a perfect storm.

When the Soviet Union broke up in the early 90s and Kazakhstan emerged as a new oil province, Chevron was seen as an ambassador of US goodwill. Chevron’s prize was operatorship of Tengiz (50 percent) and ExxonMobil gained a 25 percent share. Chevron also has an 18 percent share in the large Karachaganak Gas Field. ExxonMobil has a 16.81 percent share of the troubled Kashagan Project.

What once was a sign of great wealth—Kazakhstan’s oil riches—could turn sour very quickly. Both Chevron and ExxonMobil, key developers of Kazakhstan’s prosperity are also the two key oil majors lacking any serious decarbonization and energy transition plans. While this is most relevant for the Caspian, it is also a warning for Africa where both companies have major projects.

Expiry date for the Tengiz concession is 2033. What will happen then? Given the huge costs, highly sulfur-based oil and low chance of carbon neutrality, Tengiz could become a vast stranded asset.  To date Shell has abandoned two Kashagan projects in Kazakhstan because of high costs. Tengiz was for most of its duration Chevron’s crown jewel, providing cash to developing assets elsewhere including Africa. Given Chevron’s current strategy it can only hope that Tengiz can continue to squeeze out more oil.

 Permian Basin

What assurances do we have that Chevron’s Permian Basin adventure will fare better than that of past shale operators?

In a 2021 March report, the Institute for Energy Economics and Financial Analysis (IEEFA), found that 30 producers generated $1.8Billion in free cash flows in 2020 after slashing capital spending by $20Billion from the previous year.

“Last year’s positive free cash flows were only possible because shale companies cut their capital spending to the lowest level in more than a decade,” said Clark Williams-Derry, IEEFA energy finance analyst and co-author of the report. “Restraining capital spending could help the fracking sector generate cash, but low levels of investment also undermine the industry’s prospects for growth.”

Since 2010, the 30 companies examined by IEEFA had reported negative free cash flows totaling $158Billion.

“The positive free cash flows pale in comparison to the industry’s accumulated debt loads.”

The 30 shale producers owe almost $90Billion in long-term debt, and the reductions in capital expenditures are unlikely to ensure that the industry grows[1].

What can we anticipate?

Both Chevron and ExxonMobil will continue looking for ways to cut exploration and development costs. Consolidation and cost saving measures could be much more drastic as both companies are increasingly worried about decreasing asset values at a time when shareholders are demanding an increase in their share price and steadily growing dividends.

How long can Chevron afford to keep increasing its dividend while its assets continue to dwindle in value? Will Chevron’s New Energy budget be drastically increased to offset the decreased value of its hydrocarbon assets or will its renewable division simply remain window dressing?  Chevron could borrow a page from Equinor’s new energy strategy. Equinor will be spending more than one-half of its capital spending on low carbon energy by 2030 to become a leader in offshore wind technology. This message is not lost on the investor community and it benefited the Equinor share price which has enjoyed a surge of 119 percent in the last 5 years.

Can ExxonMobil get its house in order so that its share price will not continue to flounder? Will its projects in Mozambique and Guyana continue to support and help develop the company’s strategy in the future? The company’s low carbon solutions are at present ill-defined and lacking clarity.

Oil companies face a growing paradox: the need to merge their activities because of the diminishing value of their asset base; and a reluctance to do so because of huge regulatory hurdles. Instead, at the project level, we can anticipate combined project services such as joint drilling campaigns and operational matters. A pertinent example is the creation of  Azule Energy, a joint venture in Angola in which BP and ENI have combined their operations.

If European companies can get their houses in order in a good-bad bank scenario, Chevron and ExxonMobil could see a merging of sorts, certainly at the project level.

What scenario would John D. Rockefeller follow? No doubt he would follow the money, examining critically the energy scenarios of both companies and would find their plans wanting. No doubt he could unveil green solutions that would be the envy of the rest of the sector, both because of their innovativeness and profitability.

 Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise.  He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe.  Kreeft has Dutch and Canadian citizenship and resides in the Netherlands.  He writes on a regular basis for Africa Oil + Gas Report, and contributes to IEEFA (Institute for Energy Economics and Financial Analysis). His book The 10 Commandments of the Energy Transition is being published this July.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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