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For Big Oil’s future, look at Big Tobacco’s past

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For Big Oil’s future, look at Big Tobacco’s past

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If you want to know the future of Big Oil, look at Big Tobacco’s past. Depending on who you believe, they will either be environmentally laundered money-dispensers or transformed companies dedicated to reversing the damage their old products have done to the planet and health. Confusingly, they could be both.

From the 1980s until a few years ago, Big Tobacco was a slot machine. Cigarette sales dropped a little each year, but prices rose more than enough to compensate and profit margins were, well, to die for. New technology has changed everything. The development of e-cigarettes, and to a lesser extent of heated tobacco, has upset the business model and marketing. Today, Big Tobacco is trying to portray itself as a leader on environmental, social and governance, and even health issues.

“We see ourselves as having an ‘H+’ ESG strategy: ‘H’ for health,” says Kingsley Wheaton, chief marketing officer at British American Tobacco, or BAT, the largest tobacco company by sales. “It’s the sine qua non of our transformation.

ESG, environmental, social and governance investing has taken over the world of finance and, according to its adherents, can help change the world. I took a critical look at the ESG trend in a series of Streetwise columns. Tobacco offers a guide because 40 years ago it faced similar challenges from investors who took a moral stance against its products and from governments who wanted to tax and regulate it.

Oil has proven to be as addictive to the economy as nicotine is to smokers. Environmentalists and governments want to wean customers onto alternatives, including electric cars but potentially also hydrogen or simply lower fuel consumption. Just as the prospect of ever-increasing regulations, combined with marketing limits, made it almost impossible to launch a new tobacco company, the prospect of a fossil fuel stock has hit investments in new drilling. . Many investors believe the limited supply expansion means high oil prices could last.

The oil industry and its investors are now torn between Big Tobacco’s two approaches.

On the one hand, there are those who believe that the path to lower oil consumption will resemble that of tobacco from the 1980s to the 2000s. Volumes will fall, but higher prices will boost profit margins. Addicted customers meant that cigarette sales continued even when marketing expenditure was reduced due to legal restrictions. Gasoline sales will continue for many years to come, but oil companies may not spend the huge sums they have spent in the past exploring and drilling new wells, leading to higher prices and even bigger margins. if existing wells are depleted.

As with tobacco, this strategy cannot last forever, but if governments are serious about their promises of net zero emissions by 2050, there is no future in drilling anyway. And in the meantime, oil companies could pay shareholders the big dividends that tobacco stocks have offered for decades.

Most of the companies that follow this strategy are private companies, buying assets sold by listed companies trying to reduce their emissions. In practice, emissions simply continue under the new owner. But the creation of a self-sustaining oil producer with a limited life was part of the rhetoric of hedge fund activist Daniel Loeb, who is pushing to break up British oil major Shell.

On the other side are the oil majors, mainly in Europe, who believe the future involves a steady shift from oil to new energies such as wind farms. Just like Big Tobacco recently, they use part of the profits from the sale of oil to inject money into the new areas.

Like Big Tobacco, these oil companies trumpet their environmental projects, as well as social and corporate governance projects. It disgusts campaigners, who call it “greenwashing”, designed to distract customers and investors from the harm they are causing. BAT even removed the word “tobacco” from its brand in 2020, as well as the tobacco leaf from its logo and added the slogan “A Better Tomorrow”.

“Despite all the emphasis the newly renamed BAT places on ESG, what is pretty clear is that although the leopard may have changed the colors of its spots from black to green, BAT is still a leopard” , says Andy Rowell of the Tobacco Control Research Group at the University of Bath in England.

During an interview at BAT’s London headquarters, Mr Wheaton cringed that his efforts were focused on distraction. “If you knew the energy that went into building the new business, you wouldn’t think it was greenwashing,” he said. “When you leave the office, I won’t say ‘hahaha, he believed everything’.”

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Will Big Oil follow in the footsteps of tobacco?

At least some of the agencies that rate companies on ESG characteristics believe so. Last year, BAT was ranked third in the FTSE 100 by Refinitiv and Sustainalytics, which is part of Morningstar,

rates it medium risk, 88th out of 598 companies it assesses in what it calls the “foodstuffs” industry globally. S&P Global thinks BAT is among the top tobacco companies, while MSCI doesn’t buy the story, calling BAT average in the tobacco industry. But MSCI thinks Shell is great for an oil company, giving it AA, its second-highest rating, while Refinitiv says Shell has the best governance in the world.

The historical arguments used by both industries evolved in the same way: first, denial (of cancer or climate change), then fierce lobbying campaigns to avoid restrictive laws, in some cases triggering accusations of corruption. pure and simple. The current argument is that people will want or need cigarettes and fossil fuels for many years to come, so they must be supplied – and are better supplied by a large public company than by private companies with no transparency.

Some in Big Tobacco have reached the stage of acceptance that cigarettes will eventually die out and their business must change or die. Not all the oil companies are there yet, but the debate is on. Shell and others in Europe are spending a lot on change. But at least some investors prefer the die-off option, with big profits to be made along the way and perhaps a longer lifespan than environmentalists want.

ESG investors who expect high carbon emitters to get their just deserts should think again. There is a lot of money to be made with petroleum before dirty fuel is no longer needed, just as there was with cigarettes. And that money could end up going to investors who simply don’t care about ESG.

Write to James Mackintosh at james.mackintosh@wsj.com

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For Big Oil’s future, look at Big Tobacco’s past

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