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What should Chevron expect?
It was recently reported by The Wall Street Journal that Exxon was considering abandoning two massive natural gas projects: the 75 trillion cubic foot (tcf ) Rovuma LNG project (capital cost $30 bn) and the 5 tcf Ca Voi Xanh offshore-Vietnam as project (capital cost $10 bn). Exxon board members (most likely including the three supported by Engine No. 1) have publically expressed concerns about both projects.
According to internal reports, these projects are among the highest CO2 producers in Exxon’s pipeline; it is no surprise these projects have been called into question. However, we find the plight of both fields to be perplexing since production would almost certainly be used to displace coal in electricity generation, cutting CO2 emissions by nearly 50%. This fact seems to be lost on the new Exxon board members.
Vietnam’s electricity generation is 50% coal-based while only 8% comes from natural gas. The country has stated its long-term goal is to have 80% of its electricity come from natural gas. If Vietnam is successful in its ambitious goal, it would reduce carbon emissions by nearly 30%. The development of the Ca Voi Xanh field is a critical part of this plan.
Similarly, large volumes of Rovuma LNG will likely go to displacing coal in India. Only 7% of all Indian electricity comes from natural gas while coal represents 55%. India wants natural gas to represent 15% of its energy mix by 2030. Cancelling the Rovuma LNG project would certainly complicate this goal with large implications for CO2 reduction.
A global natural gas shortage has already developed and we believe this is only the beginning of a long period of structural deficit. The world desperately needs the development of massive natural gas fields like Ca Voi Xanh and Rovuma to meet demand going forward.
Royal Dutch Shell’s ESG challenges continue unabated. A Dutch court ruled in May that Royal Dutch Shell must cut its CO2 output by 45% by 2030 to align their policies with the Paris Climate Accord. In a statement issued after the verdict, a Shell spokesperson acknowledged that “urgent action is needed on climate change and the company is accelerating efforts to reduce emissions.” If the pressure from the Dutch court system was not enough, an activist shareholder has proposed breaking the company apart to address ESG concerns. On October 27th, Third Point Management announced the following.
“If Shell pursues this type of strategy it would probably lead to an acceleration of carbon dioxide reduction. […] Breaking Shell into two operating units would create a standalone legacy energy business (upstream, refining, and chemicals) that could slow capex beyond what is has already promised, sell assets, and prioritize return of cash to shareholder which can be reallocated into low-carbon areas of the market.”