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Is ExxonMobil Actually Only Worth A Fraction Of What It Says?

Oil rigs dusk

The investigation by a handful of attorneys general into ExxonMobil has much more to do with the oil major misleading investors than it does about covering up climate science.

The legal headache stems from several news reports that ExxonMobil buried decades of internal climate science in order to protect its interests. That has environmental groups crying foul, blaming the oil company for decades of policy inaction to stop the growth of greenhouse gas emissions. That also was a key reason that New York attorney general Eric Schneiderman, along with several other AGs from different states, opened up an investigation into the company.

But as The New York Times recently noted, Schneiderman emphasizes that the probe is focused on securities fraud, which hinges on recent statements that Exxon has given to shareholders and securities regulators, not on the company’s alleged cover up of climate science decades ago.

Schneiderman’s argument is straightforward: forthcoming policies to address climate change will severely limit Exxon’s ability to produce all of the oil and gas in its possession. Nobody knows this better than Exxon, Schneiderman alleges, since the company has been at the forefront of climate research since at least the 1970s. If Exxon cannot produce all of its oil reserves because they become either legally off limits or so regulated and/or taxed that they are uneconomical to produce, then the company itself is actually worth a lot less than shareholders think. And if Exxon knows this, then they are committing securities fraud, Schneiderman says. “If, collectively, the fossil fuel companies are overstating their assets by trillions of dollars, that’s a big deal,” Schneiderman said, according to the NYT. Related: Chesapeake Making Moves To Recover From The Crash

He is looking at an Exxon report from 2014 in which the company told shareholders that climate action from the U.S. government and the international community would not prevent Exxon from producing oil, even decades into the future.

Exxon dismisses the allegations, saying that if it ends up with so-called “stranded assets,” it will because it simply misjudged changing market conditions, which is not a crime. “If it turns out to be wrong, that’s not fraud, that’s wrong,” said Alan Jeffers, an Exxon spokesman, referring to its 2014 forecast. “That’s why we adjust our outlook every year, and that’s why we issue the annual forecast publicly, so people can know the basis of our forecasting.”

And of course, if the world fails to implement climate policies that might hold back oil production, Exxon might still be able to extract its reserves unencumbered, which means its original forecast was not wrong about the value of its assets.

By Charles Kennedy of Oilprice.com

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  • Jack Wold on August 22 2016 said:
    If the world does not pursue immediate climate action, yes Exxon will be able to use those stranded assets, but there won't be anyone to buy there product. We'll be dead from all the climate impacts.
  • JHM on August 22 2016 said:
    It's not so much a question of how much Exxon can produce. Rather it is a question of what reserves are worth. If you assume a 2 or 3 degree scenario, that places a cap on total reserves that will ever be produced across the industry. So surplus reserves leads to a situation where all reserves lose significant value, regardless of who produces what.

    Indeed the decline of reserve valuations may already be at work. For example, the Saudi strategy pivot is easily accounted for by declining reserve values. If you assume that reserve values decline to say $1/b within 20 years, the rational response for all producers sitting on more than a 20 year reserve is to increase production. This is also why the glut will not ease off until reserves have shrunk to about a 20 year supply.

    So, yes, Exxon is guilty of bad analytics. In my view, they should on value reserves upto what they can economically produce within the next 20 years. Beyond that is anyone's guess.
  • BCL1 on August 23 2016 said:
    So what this article is saying is that government legislation may destroy my investment in ExxonMobile.
  • Adrian on August 23 2016 said:
    BCL, if you're a long-term investor, it's time to start seriously reevaluating oil and gas holdings. Independent of government action, technology changes are threatening the viability of the oil and gas businesses in the long term. Maybe even the medium term (3-10 years).

    The Kodak moment is not that far away.
  • William Mitchell on August 23 2016 said:
    Exxon's value doesn't depend on what Exxon says it's worth. It depends on what the universe of investors in the marketplace says it's worth.

    If Exxon says it will be able to produce its reserves over the next 100 years, but the combined judgment of the marketplace says it will be able to produce over only the next 5 years, whose view will prevail? Not Exxon's.

    Only Exxon holds the drilling and seismic information necessary to estimate its reserves. We can expect the company to report its reserves based on good engineering and good science. It does not, however, have special expertise to predict what governments will do regarding climate change years into the future.

    And, it does not have special expertise - that is to say, expertise that only it and no one else has - on predicting climate change. Schneiderman's investigation is a witch hunt, intended to chill the free exchange of views on climate change, and what should be done about it.

    And for those who keep saying climate change is going to kill everybody, grow up. At it's worst, climate change may cause a lot of harm. But it's not going to "end life on this planet as we know it." It's dishonest to say that it will, so stop trying to use scaremongering to get your way.

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