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Shareholders Assess Climate Risks To Oil Majors

Transocean rig

On May 12, shareholders of Occidental Petroleum - the $46 billion company oil and gas company - passed a resolution calling on the company to assess its vulnerability to climate change, a milestone in the shareholder activist movement to pressure companies to adapt to a carbon-constrained world.

Crucially, the resolution passed with the support of BlackRock, the largest asset manager in the world. BlackRock said that it was concerned with the amount of detail that Occidental has thus far disclosed regarding its exposure to potential climate action in the future. As a result, BlackRock, which owns 8 percent of Occidental’s shares, helped pass the first successful climate resolution at a major oil and gas company.

"Today’s historic vote puts the oil and gas industry on notice – the climate is changing and so are investor expectations of how companies should respond," Laura Campos, a director at the Nathan Cummings Foundation, one of the resolution's proponents, said in a statement.

The impetus for such resolutions is straightforward. Shareholders are growing increasingly concerned that a concerted push, driven by both policy and market forces, to transition the global economy from fossil fuels to cleaner sources of energy could leave oil companies out in the cold.

And there is no guarantee that such a transition would be orderly. As seen over the past few years in the utility sector, it only takes a modest loss of market share to upend the economics of the industry. Utilities have suffered steep financial losses resulting from the small slice of business taken by wind and solar.

It is reasonable to assume that the oil industry could suffer a similar fate. After all, the ramp up of U.S. shale production, which added only 4 million barrels of new oil supply in a few years (roughly 4 to 5 percent of global supply) caused a once-in-a-generation meltdown in prices. If electric vehicles take a similar-sized or larger bite out of oil demand, it could wreak havoc on the finances of oil companies. Moreover, other climate policies could have a more direct impact: carbon taxes, limits on extraction, etc. Related: Oil Prices Rise As Most OPEC Members Back Deal Extension

But the industry has been reluctant to disclose their exposure to a carbon-constrained world. Thus, shareholders hope to force them to own up to these vulnerabilities.

Up until now, such votes have failed to pass muster at shareholder meetings. Exxon beat back such a campaign a year ago. But the support from BlackRock in the Occidental vote suggests that even dispassionate investors from a massive private equity firm are concerned about the exposure of their investments to the coming energy transition.

The Occidental vote calls on the company to produce a report laying out its climate risks by 2018. This “climate stress test” will evaluate how the company could perform and adapt to a world in which governments attempt to keep warming capped at 2 degrees Celsius – a scenario that is looking increasingly difficult to achieve and would require much more aggressive climate policies.

"We remain concerned about the lack of discernable improvements to the company's reporting practices" on climate change, BlackRock said in a statement.

Moreover, the financial risks related to climate change lurk on multiple fronts. ExxonMobil is in the midst of fighting an investigation from the New York Attorney General into whether or not it has misled shareholders on its exposure to climate change. The accusation is based on the notion that Exxon has assured its shareholders that it will be able to produce all of the oil and gas on its books, whereas the AG argues such an outcome is not possible under likely forthcoming climate regulation. Related: Tight Supply Boosts Natural Gas Prices In 2017

Another recent example can be found in Alberta, where Kinder Morgan just suffered a setback over its plan to sell shares to finance the expansion of the Trans Mountain pipeline, which would carry crude oil to Canada’s Pacific Coast. Greenpeace sent a request to the Alberta Securities Commission to halt the sale of shares, arguing that “Kinder Morgan’s business plan only works if the world fails to act on climate change,” as Keith Stewart, Senior Energy Strategist for Greenpeace Canada, said in a statement. “They may think that’s a good bet, but they should be honest with potential investors about the risks being taken with their money.” Greenpeace argued that Kinder Morgan is using outdated and increasingly unlikely oil demand forecasts that assume steady demand growth over time. Alberta’s Securities Commission agreed to consider Greenpeace’s challenge.

Shareholder activism is only going to grow over time as clean energy becomes cheaper and governments move to implement policies to reduce emissions and comply with agreements such as the Paris Climate Accord. ExxonMobil faces a shareholder vote later this months related to climate change and the threat of a low-carbon transition.

By Nick Cunningham of Oilprice.com

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