Last week brought stunning news about ExxonMobil’s financial position. First came a warning that the company may be in an “irreversible decline.”
Then the company announced lousy third quarter financial results, sending its stock into a tailspin.
And finally—and perhaps most significantly—ExxonMobil admitted that nearly one-fifth of its oil and gas reserves may no longer be profitable to produce.
Most of the discussion around these developments has focused on low oil prices, which are certainly disrupting the oil business, but I look at ExxonMobil’s future through a very different lens: its climate-related policies and actions. And it’s becoming increasingly clear that business as usual—the unabated extraction and burning of planet-warming fossil fuels—is a risky and dangerous path, not only for the planet, but for ExxonMobil’s own financial future.
I was not surprised to hear that ExxonMobil is falling short of expectations in this area. As the world moves to address climate change, the company must respond to evolving regulations and market forces. And yet our recent analysis found that ExxonMobil earned “poor” scores for failing to fully disclose climate risks or plan for a world free from carbon pollution.
Failing to Plan
As the Paris Climate Agreement takes effect, nations have agreed to a long-term goal of holding “the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change.”
Today, ExxonMobil issued a statement recognizing the Paris Climate Agreement as “an important step forward” and asserting that the the company “supports the work of the Paris signatories, acknowledges the ambitious goals of this agreement and believes [it] has a constructive role to play in developing solutions.”
Yet ExxonMobil and other fossil fuel companies continue to maintain business models that plan for emissions—and resulting temperature increases—that are far in excess of these international climate goals.
These assumptions are dangerous and must be challenged. Given the world’s commitment to address climate change, it’s imperative that fossil fuel companies now explain how they will change their business models to adapt to a world with fewer carbon emissions, taking into account emissions that result both from their operations and from the use of their products
This year, ExxonMobil faced a shareholder proposal calling on the company to increase capital distributions to shareholders in light of the climate change-related risks of stranded carbon assets (such as oil and gas reserves that become unprofitable to produce).
In opposing the proposal, ExxonMobil said, “The Board is confident that the Company’s robust planning and investment processes adequately contemplate and address climate change related risks. . . Our Outlook [for Energy] by no means represents a ‘business as usual’ case and it includes a significant reduction in projected energy use and greenhouse gas (GHG) emissions due to energy efficiency initiatives. . . The Company also stress tests its oil and natural gas capital investment opportunities. . .”
The company responded similarly to a separate resolution asking ExxonMobil to report on how its business will be affected by worldwide climate policies, citing “robust planning and investment processes” that “ensur[e] the viability of its assets.” ExxonMobil’s board recommended that shareholders vote against the resolution, which had been filed by the New York State Comptroller and Church Commissioners for England. Despite the company’s opposition, the resolution received the highest vote ever (38%) for a climate change proposal at ExxonMobil.
In opposing both shareholder proposals, ExxonMobil touted its 2014 report “Energy and Carbon – Managing the Risks,” which it claimed was an accurate description of how the company integrates climate change risks into planning processes and investment evaluation. The company also assured shareholders “that producing our existing hydrocarbon resources is essential to meeting growing global energy demand.”
What a difference a few months makes!
ExxonMobil has significant investments in Canada’s oil sands, where the company is believed to be among the lowest-cost producers. These holdings constitute the vast majority of the company’s reserves that may now be unprofitable to produce, according to a Wall Street Journal report. (InsideClimate News reported last month that oil sands account for 35% of ExxonMobil’s liquid reserves, up from 17% a decade ago.)
In a recent blog post, my colleague Jeremy Martin argued that ExxonMobil and other fossil energy companies need to get smart about which oils to extract in a carbon-constrained world. In particular, they should avoid the dirtiest sources—the tar sands being the best known example.
As Jeremy noted, “In theory, technology may be able to mitigate the additional emissions from these fossil fuel resources, particularly if carbon emissions from the extraction and refining process can be cost effectively captured and safely sequestered. But at the present time, this technology is not commercially available, and its technical and economic prospects are unclear. Until the cost effectiveness of these strategies is clear, these fossil resources are clearly disadvantaged.”
In The Climate Accountability Scorecard, one of the metrics evaluated whether companies have a commitment and mechanism to measure and reduce the carbon intensity of their supply chains. Specifically, we looked for a public commitment not to invest in higher-carbon fuel sources, such as tar sands; or a public commitment to measure and reduce carbon emissions in its own operations.
ExxonMobil has done neither, and scored “poor” on this metric.
There has been a 45 percent drop in ExxonMobil’s revenue over the past five years and the company’s stock performance has trailed the S&P 500 for 10 quarters in a row, according to two key metrics cited in Red Flags on ExxonMobil.
Report author Tom Sanzillo, a former New York State deputy comptroller, notes that “Institutional investors face issues not only related to lower shareholder payouts but also involving ExxonMobil’s corporate philosophy and its long-term strategy. Urgent questions raised now by investors require frank and honest answers from the company. ExxonMobil is under considerable financial stress.”
Meanwhile, the Securities and Exchange Commission (SEC) and the New York Attorney General are investigating ExxonMobil’s accounting practices—specifically, whether the company is adequately accounting for the drop in oil prices and the prospect of stronger climate change regulations.
The associated subpoena from the New York Attorney General confirms that his investigation focuses on financial fraud. Last week, the New York Supreme Court ordered ExxonMobil to comply with the subpoena, overruling the company’s claim of “accountant-client privilege.”
Since 2010, the SEC has asked companies to report on material, regulatory, physical, and indirect risks and opportunities related to climate change. In The Climate Accountability Scorecard, UCS examined disclosures of climate-related risks by ExxonMobil and other major fossil fuel companies from January 2015 through May 2016. Our findings highlighted a lack of transparency—something that might be of concern to analysts and investors puzzling over the sudden downturn in ExxonMobil’s fortunes.
The company scored “poor” in the area of “fully disclosing climate risks.” Specifically, ExxonMobil:
- generally mentions risk associated with current or proposed laws relating to climate change, but does not cite specific laws or regulations
- acknowledges physical risks it faces and includes some discussion of climate change as a contributor to those risks, but provides few or no details about the nature of those risks, their magnitude, or how they may impact the company
- identifies competition from renewable energy, changing consumer preferences, and changing technology as risks that it faces, but provides limited analysis of their potential financial impacts
- provides no disclosure of corporate governance on climate issues
As low oil prices slow the pace of investments in assets like the oil sands, ExxonMobil has a responsibility to support—rather than fight or delay—climate policies that discourage development of these high-carbon reserves.
And shareholders and the public have an opportunity—and a responsibility—to hold the company’s feet to the fire as part of this effort.