Organization: Marathon Oil Corporation

Year: 2015

Description: WHEREAS:  Recognizing the risks of climate change, nearly all nations signed the Cancun Agreement proclaiming “the increase in global temperature should be below 2 degrees Celsius.” In light of these goals, the International Energy Agency (IEA) has developed scenarios to help policymakers and market participants understand potential energy demand futures.  Oil demand would need to begin to decline starting in 2020 under a scenario consistent with policymakers’ 2 degree target. Per HSBC, the equity valuation of oil producers could drop by 40-60 percent under such a low carbon emissions scenario.
 
Climate change concerns are already affecting oil demand through policies related to air quality, fuel efficiency, and lower-carbon energy.  Analysts from Citi, Deutsche Bank and Statoil, among others, predict that global oil demand could peak in the next 10-15 years. Any global action to address climate change will only accelerate these trends.
 
Industry production costs have risen significantly in recent years, leaving many companies vulnerable to any downturn in demand. Carbon Tracker estimates that projects with economic breakevens exceeding $95/barrel are clearly in excess of the requirements for fossil fuel investment in a 2 degree scenario, and that there is an estimated $1.1 trillion of capital expenditures (capex) earmarked for high cost projects out to 2025 needing a price of over $95 to generate an economic return, raising the risk of stranded, or unprofitable, resources. 
 
We recognize the importance of the oil and gas sector in meeting continuing energy needs. However, we are concerned that Marathon Oil’s current business strategy is not sustainable given the changing nature of demand, emerging technologies, and policy interventions aimed at limiting global temperatures.   
 
Investors require additional information on how Marathon Oil is preparing for market conditions in which demand growth for oil and gas is reduced due to a combination of factors.
 
RESOLVED:  Shareholders request that Marathon Oil prepare a report analyzing the consistency of company capital expenditure strategies with policymakers’ goals to limit climate change, including analysis of long- and short- term financial risks to the company associated with high-cost projects in low-demand scenarios, as well as analysis of options to mitigate related risk.  The report should be overseen by a committee of independent directors, omit proprietary information, and be prepared at reasonable cost by September 2015.
 
SUPPORTING STATEMENT:   We recommend the report include:

• Assumptions regarding breakeven costs of production for the company’s highest cost projects.
• Consideration of a range of lower-demand scenarios accounting for more-rapid-than-expected policy and/or technology developments, including the 2 degree scenario as outlined by the IEA.
• An assessment of different capital allocation strategies in the face of low-demand scenarios.
• How the company will manage risks under these scenarios, such as reducing the carbon intensity of its assets, diversifying its business by investing in renewable energy sources, or returning capital to shareholders.
• The Board of Directors’ role in overseeing climate risk reduction strategies and related capital allocation.