ExxonMobil - Issue Analysis

This year, ExxonMobil shareholders will be asked to consider two resolutions which aim to enhance shareholder value by improving ExxonMobil ’s competitive positioning in response to changing energy markets and impending regulations associated with public policies that address global warming.

In particular, the proponents believe that ExxonMobil ’s competitors have responded in a forward-looking manner to anticipate these market and regulatory changes, and that ExxonMobil management needs to improve its leadership and strategic positioning among its peers.

There is no dispute that ExxonMobil presently returns execptional dividends to shareholders based on its oil and gas expertise. However, shareholders should be increasingly concerned with ExxonMobil ’s understanding of the future of energy and how well the company is preparing itself to respond to it.

Since investments in the oil industry have a maturation period of some twenty years, long-term shareholders should be looking forward that same length of time, if not longer. Current oil reserves and oil development started now may have a very different value in the future due to the changing demands of the market 1.

The first resolution calls for the development of a policy to promote renewable energy and to develop strategic plans to help bring bioenergy and other renewable energy sources into ExxonMobil ’s energy mix. The second resolution requests that the Board Compensation Committee should consider non-financial factors, including social and environmental concerns, in determining compensation for top executives.

This document summarizes the many ways in which we believe support for these resolutions will increase shareholder value in the company. Additional information on the economic threats of global warming and ExxonMobil ’s professionalism in handling the issue may be found in Campaign ExxonMobil ’s shareholder briefing booklets found at www.campaignexxonmobil.org.

All over the world, governments are demanding energy sources with greatly reduced or eliminated emissions. The European Union recently announced its plans to derive 20%of all its energy needs from renewable energy sources by 2010; India recently passed a similar mandate to derive 15%of all energy needs from renewable energy.

Because of public policy, energy deregulation, and technological advances alternative energy sources are gaining strength in the energy sector. Wind power, for instance, has been the fastest growing energy source in the world for the last several years running 2.

Oil is a finite resource. While technological advances mean that previously unrecoverable oil can now be obtained, oil sources will gradually deplete over the next 30 years .A recent survey of ultimately recoverable oil reserves by the World Resources Institute found that resources would begin to decline due to resource constraints between 2007 and 2013.("Oil as a finite resource: When is global production likely to peak?" by James J. MacKenzie for the World Resources Institute, March 1996,Updated March 2000).

The growth in demand for clean energy puts competitive pressure on ExxonMobil, to which the company is not realistically responding. The company has some low-emissions projects in the works 3. However, these represent very small steps compared to the long-term approach ExxonMobil ’s competitors are taking.

BP/Amoco and Shell have invested hundreds of millions in modern renewable technologies 4. While renewables presently are not profit centers for these companies, ExxonMobil ’s competitors are gaining vital experience in these areas and are likely to be best positioned in the future.

Texaco recently purchased a 20%share in a fuel cell technology company to allow it to establish leadership beyond oil and gas, to hydrogen – a step many energy experts consider to be the final destination of current energy transitions 5 .

The Economist recently pointed out that ExxonMobil may be vulnerable to a rapidly changing industry. "Even the most sophisticated energy firms may not be prepared for the biggest risk they face from the rise of market forces: the emergence of a truly disruptive innovation that changes all the rules of the game. Even well-run firms that dominate their industry may be knocked sideways by disruptive technologies such as personal computers and cellular telephony, as IBM and AT&T discovered to their cost."6

Jeff Skilling, the chief executive of Enron, a highly successful energy brokerage, is an example of such a threat to established energy majors. The Economist reported that "Skilling is convinced that market forces will oblige Big Oil, along with Big Coal and Big Everything Else, to split up into thousands of firms, each of which will focus on its own particular niche."7

Skilling is quoted as saying "The energy industry is on the verge of massive, massive change, and it is coming fast."

ExxonMobil frequently states that renewables do not at present represent an attractive business opportunity for the company. This is a very narrow perspective. Given the changes taking place in the energy industry, shareholders should consider investments in alternative energy to be vital groundwork for the future, even though they may not create immediate returns.

The possibility that ExxonMobil will be able to simply buy its way into the renewable energy field when forced to is less certain than the fact that they will need to diversify their energy sources to include clean ones.

The Wall Street Journal featured a study 8 that concluded that ExxonMobil has a strongly negative reputation with the public.Taking a proactive stance on clean energy and global warming could help the company improve its public image, a critical asset,particularly considering the revenues and higher margins associated with non-fuel retail sales at TigerMart stores.

In a retail company, preserving and building brand equity is one of the key responsibilities of management. ExxonMobil has been roundly criticized for its refusal to invest in alternative energy sources. In comparison, BP last year re-branded itself as "beyond petroleum," and will spend about $200 million marketing themselves as the energy company of the future, a company that implicitly is the opposite of ExxonMobil.

ExxonMobil can not stop the transition to clean energy – it can only slow it down or get on board. The United Kingdom, Germany, Denmark, France, Sweden, and Holland have passed domestic measures to force down greenhouse gas emissions. Other countries are taking steps to ensure an increase in the use of renewables.

Experts believe that mandatory limits on CO 2 emissions are likely. According to Price Waterhouse Coopers, "It is generally understood that further and deeper cuts in emissions will be required in the coming decades in order to limit global warming. Many companies perceive that carbon constraints in some form are likely, and are beginning to create strategies that mitigate their risks and identify new business opportunities."9

ExxonMobil, as opposed to its competitors, is not actively preparing itself to meet these changing regulatory requirements.

Royal Dutch Shell group recently chose to incorporate a $5 valuation per ton of carbon for every new project for which they are planning. Incorporating a carbon cost into their modeling assures that the company will be better positioned than its peers to meet the demands of a clean energy future.

Aidan Murphy, vice-president of global climate change at Shell International, says, "The cost of a ton of carbon might be $5,$50,or $100 -we don ’t know. But not zero."10 How is ExxonMobil incorporating demand and regulatory trends into its long-term plans?

Companies are increasingly forced to develop oil reserves in ecologically sensitive areas, politically unstable regions, or places where the local population is resistant to oil development. The environmental and political risks associated with controversial projects have resulted in increased development and mitigation costs, higher costs of capital, expensive delays, and in the worst cases, abandoned assets.

These controversial investments, from Occidental Petroleum ’s Colombian operations, Shell ’s development in the Niger Delta, to the current controversy over drilling in the Arctic National Wildlife Refuge, have resulted in damage to reputations and opportunity costs. Energy companies that make investments in cleaner technologies with fewer adverse social impacts will more successfully manage the "soft issues " associated with energy development, reduce operational risks, and build value for their shareholders.3

ExxonMobil ’s general response to shareholders may be that the company is preparing itself well to respond toincreasing demand for alternative energy supplies and the regulatory pressures of global warming.

If the company is making such preparations, they are not providing much detail on them, which puts shareholders at a disadvantage. In addition, the company has not articulated a long-term strategy for how it will adapt to the future.

Specifics in the company ’s publications are quite scarce. The company notes that it is supporting scientific research into global warming and climate, as well as the development of a gasoline powered fuel-cell car in partnership with General Motors. In addition, the company states that it is "redoubling " its efforts to make its refinery operations more efficient. However, it provides very few numbers on these changes.

This is not very informative given that ExxonMobil will at some point have to change. Fossil fuels are a finite resource. Demand for non-polluting energy sources is growing rapidly. There is no doubt that in order to remain competitive, ExxonMobil will have to have a diversification or transition strategy.

For long-term investors, it would be important to know how ExxonMobil plans adapt to the future. What is ExxonMobil ’s vision for long-term shareholders? How does the company plan to meet the future of energy? Shareholders deserve to know.