ImpactAlpha, May 12 – The COVID crisis cratered demand, and prices, for oil. Now it’s forcing oil and gas majors to reckon with a broken business model.
“The world has fundamentally changed,” declared Shell CEO Ben van Beurden last week as he slashed the oil giant’s dividend by two-thirds – the first such move since the 1940s. Other oil giants may be forced to follow suit, removing the rationale for investors to stick with an indebted industry in long-term decline.
“Cutting dividends signals to investors the business-as-usual growth strategy is no longer working,” CarbonTracker’s Mike Coffin told ImpactAlpha.
Value over volume
Oil companies have two possible strategies: harvesting existing assets or transitioning to renewable sources of energy says Coffin. “Even under stable business conditions, management should be incentivised to create value, rather than growing production simply to get bigger,” Coffin recently wrote. In the face of a global oil glut, “the need for a value focus is magnified.”
Executive pay incentives that reward ever-more production of oil and gas are outdated. All but four of the 30 global oil companies (Diamondback Energy, Equinor, OMV and Origin Energy) analyzed by CarbonTracker had growth metrics, such as production or reserves replacement, in their 2019 incentive structures. That’s starting to change: BP has removed direct growth metrics as part of its pledge to be net-zero by 2050, while a significant portion of Repsol executives’ pay will be linked to decarbonization and sustainability, says Coffin.
Exxon, Chevron and BP hold their annual shareholder meetings on May 27, where they will face shareholder pressure to detail their climate targets and plans. Aligning pay incentives with decarbonization plans “is the next phase,” says Coffin. Another closely watched resolution: The Church of England and The New York State Common Fund are looking to eject the entire Exxon board for the second year in a row.