Oil and Gas Investor Energy Policy: Understanding the Power of Momentum

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[Editor's note: A version of this story appears in the July 2021 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

You can never overestimate the power of momentum, which for America’s energy industry was in plain sight during the last week of May 2021 when shareholder activity successfully thwarted the will of the boards of the two largest U.S. oil and gas companies. At Exxon Mobil Corp., it was the election of three new board members put forth by investment firm Engine No. 1.

Meanwhile, at Chevron Corp.’s annual general meeting, shareholders proposed a resolution not supported by the board, calling for the integrated major to reduce its Scope III greenhouse-gas (GHG) emissions—those in which the company doesn’t directly control but come from what it produces (like fuel)—in addition to its existing commitments to reduce Scope I & II emissions (those that come directly from its operations or from purchased energy). It passed with 61% of the vote.

The purpose of these activist shareholder actions was to push Exxon Mobil and Chevron to make bigger commitments to reduce carbon emissions, address climate change and improve ESG performance more broadly. With passage of the resolutions, activists captured big headlines that went beyond the trade press. And, they weren’t the only big news headlines that week impacting the oil and gas industry and ESG.

In another development, Halliburton Co.’s shareholders rejected an executive compensation package supported by its board. In the Netherlands, a Dutch court ruled that Royal Dutch Shell Plc must reduce its GHG emissions by 45% from 2019 levels by 2030. Shell had already made commitments to reduce its carbon intensity by 20% by 2030, and 100% by 2050, from 2016 levels.

Collectively, these developments represent a major wave of sentiment—as reflected by shareholders and the judicial system alike—in favor of pushing the oil industry to make even greater commitments in their GHG reduction, climate mitigation and ESG efforts.

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The shareholder resolution votes were especially noteworthy because, for the first time, activist investors successfully won proxy votes that were opposed by corporate boards of these two companies. Now emboldened to pursue these initiatives further, the question is not whether they will continue to push, but rather how far they will move the chains, including in the public policy realm.

The ESG phenomenon, which thus far has primarily been led by investors, fueled by non-governmental organizations, and largely embraced by the financial community, is now being addressed by regulators and the legislators. In the U.S., the Securities and Exchange Commission (SEC) has asked all interested parties to provide comments on potential future requirements for disclosures by public and possibly even private companies on climate change and ESG data and information. Presumably, the comment period will drive future rulemaking activity. While there is a fine line between what can be required under existing statute and what will require new legislation (and may have to be settled in the courts), the SEC, which could now be further emboldened by recent shareholder developments, is clearly interested in moving the bar.

During the past several months, there has been much anticipation over what kind of energy/climate and infrastructure packages might materialize that could pass the 50:50 Senate. Speculation has been rampant that a bill might move that eliminates oil and gas development tax incentives (e.g., percentage depletion allowance and expensing of geological and geophysical expenses) or create a new clean energy standard or tax on carbon.

It has long been known that Sen. Joe Manchin (D-WV), who hails from a state with large coal and natural gas production, would have a lot of say in what kind of a compromise bill, if any, would emerge from the Senate. The stated opposition of Manchin to eliminating the filibuster has made the path much more difficult for President Biden and the Democrats to pass significant legislation subject to filibuster, including climate. Even on budget-related bills that address issues such as taxes and only require a simple majority for passage, Manchin holds all the cards.

The U.S. oil and gas industry has already seen executive and regulatory actions by the Biden administration on climate, leasing, permitting and environmental thresholds, often to the detriment of industry. For now, it is the new norm. The real question is whether more permanent changes might emerge in any energy or climate legislation and whether the momentum from the boardrooms will spill over into the Senate or be quelled by Sen. Manchin and the filibuster.