The Little Hedge Fund Taking Down Big Oil

As they planned the campaign, James retreated from San Francisco to his ranch and spent the summer learning about what it would mean to rejigger the way society powers itself. What he found astounded him. As a tech investor, he was used to innovations growing on an S-curve, with a long tail of early adopters that suddenly became mainstream. Through conversations with experts, researchers and power-grid operators, he began to see potential energy-sector S-curves everywhere. Grids often rely on natural gas to help bridge over times of peak energy consumption, for example, but James talked to experts who said battery technology had advanced enough that it was poised to replace gas by storing renewably produced energy for later use. Internal-combustion engines in cars waste around 75 percent of the energy produced burning gasoline. James became convinced that, because electric vehicles use energy much more efficiently, they would simply beat out everything else in the market. He had initially thought that, optimistically, maybe half the cars on roads would be electric in the next two decades; now he revised it up to at least 80 percent. “At a price point in the energy transition,” James said, “adoption could just explode.”

One of the most difficult parts of building a system powered by something other than hydrocarbons is that it’s not clear what technology will outpace others in the market; from the perspective of oil executives, that means any particular path is fraught with potentially costly missteps. Companies like Exxon Mobil have more readily committed to reducing emissions intensity by lowering the amount of carbon released per unit of gas or oil than agreed to reduce absolute emissions. Still, in order to keep global warming under certain thresholds, there’s only so much more carbon dioxide that can be emitted into the atmosphere. According to most experts, annual carbon emissions must start declining in the next few years, be halved by 2030 and reach net zero by 2050 in order to stay within that budget. But in the largest areas of fossil-fuel consumption, which include transportation, buildings, industrial manufacturing and power generation, there are still unresolved problems about how to decarbonize.

Because the cost of wind and solar power has fallen so much over the last 10 years, to the point that they can compete with natural gas and coal, converting power grids to renewable energy and then electrifying as much as possible is one of the most popular routes to zero carbon. The approach could work in transportation with electric vehicles, but also in buildings, if gas-and-oil-consuming appliances and heating systems are systematically replaced with electrics and heat pumps. That would mean substituting the notion of energy efficiency, which still ultimately relies on fossil fuels, with the goal of emissions efficiency. “The shorthand for decarbonization is basically electrify everything and then decarbonize that electricity,” said Ed Crooks, a researcher at Wood Mackenzie, an energy consultancy. Some industrial sectors, like steel, whose production emits twice as much carbon annually as global airplane travel, are among the most difficult to decarbonize, because chemical reactions in the manufacturing process create carbon. But it’s possible that using hydrogen could lower some of the sector’s emissions, because it burns clean. Hydrogen could also play a role in long-haul trucking, but isolating it is energy-intensive, and green hydrogen, which is produced using renewable energy, currently amounts to only less than 1 percent of the roughly 100 million tons of hydrogen produced each year.

Just over a week before Penner and James’s proxy battle with Exxon Mobil culminated in the shareholder meeting, the International Energy Agency — the world’s leading energy-policy organization, with vast influence over governments’ plans — released a report that called for global investment in new gas and oil fields to stop immediately. In its assessment, the agency outlined a net-carbon-free future in which solar and wind power doubled in four years, grids were net zero by 2040, sales of internal-combustion-engine vehicles ceased by 2035 and half the world’s heating was supplied electrically by pumps by 2045. By 2050, more than 90 percent of heavy industrial manufacturing was to be converted to low-emissions processes. In addition to laying out a scenario relying primarily on clean electricity, the agency also slashed the role of fossil fuels. After years of forecasting rising demand for oil in the decade to come, the I.E.A. said the world now has 20 years to cut it in half.

Among the world’s major, publicly traded oil companies, Exxon Mobil has carved out a unique place. Before Engine No. 1 began the proxy battle, as other oil companies unveiled plans to reimagine their business models by laying out their own paths to zero carbon by 2050, Exxon Mobil entrenched itself. Last October, leaked internal Exxon Mobil documents obtained by Bloomberg showed that the company’s preliminary assessment of its investment plan included a projected 17 percent increase in its annual emissions — to 143 million metric tons of CO2 — by 2025. That represented emissions generated only by the company’s own operations; it didn’t include “scope 3” emissions, caused by consumers burning Exxon Mobil’s product. The company’s plan, based on expectations of continued growth, preceded the pandemic, but it gave an indication of how executives intended to chart the next few decades. Even as the coronavirus was causing countries around the world to shutter early last year, Woods, the chief executive and architect of the company’s growth plan, promised that Exxon Mobil would continue “leaning into this market when others have pulled back.”

One thing the company has pointed to as a sign of its commitment to addressing climate risk is its carbon-capture and storage projects, an area that oil companies advertise as making use of their expertise with subsurface mining. Most scenarios for reducing global carbon emissions to zero by 2050 include some form of removing carbon; Shell’s plan for the company’s path, for example, includes offsetting 120 million tons of carbon per year by 2030, in large part by planting millions of trees. Carbon capture as it currently exists isolates and removes the molecule at the point of production. Exxon Mobil has removed carbon dioxide as a byproduct of natural-gas extraction for decades; its most significant carbon-capture facility, near LaBarge, Wyo., separates carbon from its main end products, gas and helium, brought up from limestone at least 15,000 feet below the Earth’s surface. Most of the carbon dioxide is offered to other oil companies for use in something called enhanced oil recovery, which means that it is injected at other wells to retrieve more oil. The carbon dioxide that’s injected for oil extraction generally stays in the subsurface, but because that isn’t the end purpose, there’s little monitoring for leaks.

If the market isn’t strong enough to make selling carbon dioxide worthwhile, the company injects it back into the ground, to depths where pressure forces it to take fluid form, keeping it sealed. Researchers have also developed methods for storing carbon in saline aquifers, which are areas of porous rock filled with salty water deep underneath the Earth’s surface. Most carbon stored for environmental reasons is kept in these aquifers rather than in old oil fields. According to Steve Davis, a former Exxon Mobil employee and researcher currently affiliated with Stanford University, of the approximately 40 million tons of carbon dioxide captured annually on a global scale, only about five million is intentionally stored in saline aquifers so that it doesn’t enter the atmosphere. The rest is injected to extract more oil.