Chevron’s Answer to Climate Change Is to Keep Drilling for Oil

(Bloomberg Businessweek) -- Speaking to the Texas Oil & Gas Association in July, Chevron Corp. Chief Executive Officer Mike Wirth assured his audience that the global clamor for clean energy “doesn’t mean the end of oil and gas.” On the contrary, Wirth said, the energy business is simply undergoing another of its natural transitions. “We’ll find ways to make oil and gas more efficient, more environmentally benign,” he said. “And it will be a part of the mix, just as biomass and coal are still enormous parts of the mix today.”

To activists alarmed at the urgency of the climate crisis, Wirth’s comments are as out of touch as they are predictable, coming from someone who profits from the status quo. For unlike its rivals in Europe, Chevron is betting its future less on renewable energies such as wind and solar and more on the subterranean stuff derived from hydrocarbons. It’s a multibillion-dollar gamble that would have been even less surprising before the coronavirus reared its spiky head. By eviscerating demand for petroleum products when business and consumer activity suddenly slowed, Covid-19 has shown the world’s biggest oil and gas companies a vision of a bleak future in which they’re neither wanted nor needed.

A chastened BP Plc responded on Aug. 4 by announcing dramatic steps to address climate change, including an unexpected vow to reduce oil and gas production 40% over the next decade; CEO Bernard Looney said the strategy was “amplified by Covid.” In sharp contrast, Exxon Mobil Corp. has reiterated its commitment to being oil’s last man standing decades from now. Chevron, for all of Wirth’s prognosticating about crude’s bright future, is pursuing a more nuanced path that embraces something frequently alien to Big Oil: flexibility.

A chemical engineer and Chevron lifer, Wirth rose through the business’s refining side, where he says you can’t rely on oil prices and must “make your own margin” each year. He has a wait-and-see, stick-to-what-you-know, no screw-ups approach. The company he took over in 2018 was contending—like Exxon—with a slew of globe-trotting missteps that cost too much and produced too little in returns.

Wirth cut Chevron’s capital spending to half what it was in 2014 and shifted its focus to shale. Although drilling in shale can be more pricey than conventional oil extraction, it also produces energy more quickly. Wells can be drilled and crude flowing within weeks, vs. 5 to 10 years for offshore platforms or liquefied natural gas terminals. Shale wells also can be shut down quickly when falling prices dictate—as they were when oil dropped below zero dollars per barrel in April, and some producers had to pay buyers to take crude off their hands because there was no room to store it. Other supermajors have expanded their shale production, but none has been as aggressive as Chevron. It’s now the biggest producer in West Texas’ prodigious Permian Basin.

The day before Wirth’s speech to the Texas oilmen and -women, Chevron acquired Noble Energy for $5 billion in stock. The rare post-virus deal gave the company additional shale acres in both the Permian and a basin in Colorado, as well as a gas field off the coast of Israel. The price was right; only a few months before, Noble was worth $10 billion.

“We certainly believe that having a balanced capital program that has some large-cycle complex projects but also a very healthy component that is more flexible is the right mix for our company,” Wirth said after the transaction. He likes to talk about being able to react quickly to what he calls “price triggers,” a big departure from the days when standard industry practice was to accumulate as much carbon as possible and pump at full tilt.

So far, Chevron’s public approach to climate change is in contrast to those of BP, Shell, and France’s Total. All three have pledged to speed up their shift to cleaner fuel sources so as to align with the Paris climate agreement and become “carbon zero” by 2050. To underwrite their green transitions at a time of low oil prices, BP and Royal Dutch Shell Plc have cut their highly prized dividends.

Chevron and Exxon, which have pledged to sustain their quarterly payouts, say they support the “goals of the Paris Agreement,” but they haven’t committed to zero carbon. They have targets to reduce emissions from their own operations but not those of their products, unlike the Europeans. Their stances are politically easier in the U.S., where fossil fuels are a big job generator with strong advocates in Congress.

Rather than switching to low-carbon fuels like the Europeans, Chevron is avoiding extravagant bets and resisting moves into renewables, where it has little expertise and perceives returns to be lower. Wirth is leery of repeating mistakes such as Chevron’s disastrous investments in geothermal power 20 years ago. “For our shareholders, we’ve got an obligation to invest in things we can do wisely and that can generate good returns,” he told Bloomberg last year. “We haven’t seen that in the power sector.” A Chevron spokesman says many experts believe oil and gas will constitute half of global energy consumption for at least two more decades, especially in developing countries. “All our actions are consistent with our long-standing financial priorities—and No. 1 is to protect the dividend,” he says.

In theory, Chevron wants to become a nimble, low-cost energy operator, capable of swift responses to global demand patterns. In practice, that’s a ways off. Just last year the company admitted it ran 25% over budget on a $45 billion oil project in Kazakhstan, recalling some of the worst excesses of the days before 2014, when oil traded at more than $100 a barrel. Chevron also posted a second-quarter loss of $3 billion—its worst in at least three decades—and wrote down $4.4 billion in assets. It’s ratcheting back on the Permian and other shale plays. To Wirth, this is flexibility in action. To critics, the deep losses are another nail in the coffin of fossil fuels.

Climate activists scoff at Chevron’s relatively small investments in biofuels, wind, and solar to support oil production, claiming they have little discernible effect on global emissions. But Mariana Liakopoulou, energy security research fellow at the NATO Association of Canada, says Chevron’s approach, though not purely climate-driven, “can help them generate the quickest possible cash flows in the short to medium term.” She says that revenue could then be used “to progressively diversify into low-carbon assets and renewables, provided that climate change is also recognized as a priority of the U.S. administration.”

But what if oil demand doesn’t recover for years, as Shell CEO Ben van Beurden recently suggested? And BP’s Looney won’t rule out the possibility that post-pandemic demand has already peaked. Those are horrifying prospects for oil companies, which have long thrived as providers of a scarce resource that underpins the world economy. The resource is scarce no longer, because of shale, and BP is predicting that crude prices in coming decades could trend as much as 20% lower than the company forecast only two months ago.

The risk for Chevron is that it gets left behind, producing a lot of climate-endangering oil and gas that no one needs. Wirth insists he’s comfortable with that risk, because, like so many energy transitions, this one is “misunderstood.” As he told the Texas Oil & Gas Association, new technologies buttressed by free markets will help oil giants prosper even as they tackle climate issues.

Wirth pointed to whales as a case in which oil companies were able to expand their traditional business while producing positive change for the environment. Back in the 19th century, the creatures “were being whaled into extinction,” Wirth said, because their oil was needed as fuel for lighting. Then crude oil companies came along with kerosene to replace it. “Ironically, ‘Save the whales’ is a catchphrase for saving the environment,” he said. “In fact, our industry helped save the whales.” Whether sticking with fossil fuels will make endangered species of Chevron and its brethren remains to be seen.
 
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