Unleashing Exxon’s Resources for Low-Carbon Fuels

December 17, 2009

UMass-Boston part of new international research project on corporate climate strategies

by David L. Levy

The transition to a global low-carbon economy will require the large-scale mobilization of financial, technological, and organizational resources. With government coffers depleted by the recession and bailouts, the vast majority of these resources will have to come from the private sector (see Beyond Copenhagen). Understanding the decision processes behind corporate strategy is therefore essential. We need to know the factors that lead some companies to invest billions of dollars to develop new low-carbon products and technologies and which sectors they are choosing. In light of current concerns about green jobs and regional competitiveness, it’s also important to know how companies choose where to invest.

The Harbor at UMass-Boston

The Harbor at UMass-Boston

The Center for Sustainable Enterprise and Regional Competitiveness at the University of Massachusetts, Boston, is part of a new international comparative study of corporate climate strategies in energy intense industries, a project designed to tackle these important questions. The research is a collaboration among Oxford University’s Smith School for Enterprise and Environment, the University of Western Sydney, and UMass-Boston, and is funded by a AUD300,000 3-year award from the Australian Research Council under the National Competitive Grants program. We’ll be examining corporate strategies in several energy-intense sectors, including oil, utilities, automobiles, chemicals, and metals, in the US, Germany, the UK, and Australia. We will also be looking at the influence of governmental policies and NGO strategies on corporate strategies.

The importance of corporate strategies was made clear this week with the news of Exxon’s $41 billion acquisition of XTO, a major player in the US gas industry with substantial interests in unconventional shale sources (see The Economist on Exxon’s long term strategy). Private decisions to allocate large chunks of capital to a particular technology or fuel source have a significant impact on the direction of energy development and the trajectory of carbon emissions. Burning natural gas to generate electricity creates only half the CO2 emissions of coal, so offers the prospect of large-scale reductions in greenhouse gas emissions in countries where coal still accounts for a large share of power, such as Australia, China, and the US. There has been considerable uncertainty regarding the technical difficulties, the costs, and the environmental impacts of recovering shale gas. For Joe Romm, shale gas is a game changer that will make it easy for the US to meet a 20% emission reduction target (and see this NYT piece). The environmental impact of deep drilling and injection of chemicals near groundwater resources is giving cause for concern, however. Tom Konrad thinks shale gas has been somewhat over-hyped.

shale gas

The biggest energy deal of the year signals that Exxon, a very risk averse company, has enough confidence in shale gas for this investment, and assures that the company’s vast resources will be devoted to developing the technologies needed to recover gas in a cost effective manner – and perhaps to overcoming the environmental concerns. For Ed Crooks at the Financial Times, it’s also “a play on the likelihood that that the US will make further moves to curb greenhouse gases.” Exxon has long been the most powerful corporate opponent of mandatory emission curbs, so its encouraging to see the company look past the chaos and deadlock in Copenhagen. The other oil companies have also been increasing their gas investments, and climate change is not the only driver. As Crooks observes:

Getting XTO gives Exxon a powerful position in US “unconventional” gas, including shale gas, where it has not been one of the leaders in the revolution that has opened up the huge new source of US gas supplies. With many of the resource-rich countries around the world still making life difficult for foreign investors (viz Exxon’s travails in Russia and Venezuela), resources in a stable developed country are attractive, and in Exxon’s own back yard particularly so.

In addition to those attractions, however, an important part of the case for buying gas assets in the US today is the prospect that energy and climate change legislation will tilt the balance of the energy mix away from coal and towards gas for power generation.

In an earlier post, Back to Petroleum, I explored the US-European oil industry convergence on a compromise strategy of “hydrocarbon neutrality.” While retreating from heavy investments in renewables, the industry realizes that it can live with inevitable advent of carbon controls, in the form of a flexible regime with low carbon prices. This would not threaten core business operations in the short-to-medium term, leaving adequate time and resources for longer-term strategic repositioning as the climate issue plays out. Gas is the perfect medium-term play.

Exxon knows that its core expertise lies in geology, hydrocarbon chemistry, extraction technologies, and distribution, and the XTO acquisition allows it to extend these capabilities to a vast new market. Exxon has also joined the other oil companies in making more modest investments in biofuels. It announced in July 2009 a $600 million algae biofuels project with biotech company Synthetic Genomics. Biofuels clearly represent a better strategic fit than solar or wind, and though more risky than gas, promise to extend the age of liquid hydrocarbon fuels.

The corollary, of course, is that several decades of plentiful natural gas (and nuclear) might hurt investment in renewables and delay the era of zero-emission power. There have recently been setbacks with geothermal power, the only other prospect for short-term renewable (baseload) energy [see Tom Konrad’s comment below].

3 Responses to “Unleashing Exxon’s Resources for Low-Carbon Fuels”

  1. “geothermal power, the only other prospect for short-term renewable energy” – what ever happened to biomass and wind?

    Besides, the project you refer to is an enhanced geothermal systems (EGS) project, which is not a short-term hope… conventional geothermal is small scale, but already here, while EGS is a research project, but has the potential to scale.

  2. You’re right, geothermal is not the only short-term prospect. I think I’m suffering from post Brokenhagen blues. I was thinking reliable baseload power. Wind has its intermittency problems, maxes out around 20% of the grid, though that could change with advanced storage and transmission. I’m more pessimistic about biomass – local co-firing of wood waste is cost effective but limited in scale, and biofuels are for transportation, have a long way to go technologically, compete with food, soak up the water resources, etc.

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