Analysis: How Exxon Is Being Forced To Accept The Reality Of Bad Fossil Fuel Investments

Analysis
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Last August,ย ExxonMobil warned that it may need to remove 20 percent of its oil and gas proved reserves from its books. While that was a shocking number from the oil major, reality proved to be even more of a shock to the company. On February 24, Exxon reported that it would actually remove over 30 percent of its proved reserves from its books โ€” essentially wiping out the value of its Canadian tar sands holdings from itsย books.ย 

According to the Securities and Exchange Commission (SEC), proved reservesย are โ€œthe estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operatingย conditions.โ€

Proved reserves are the concept on whichย the whole oil business is based.ย It is a main factor in how oil and gas companies are valued and in determining how much money banks will loan companies. Much of oil and gas lending is known as reserved-basedย lending.

Exxonโ€™s latest move is even more remarkable, however, because it has a reputation for being resistant to properly valuing reserves, often lagging behind the other oil major companies in making these downwardย adjustments.ย 

In this case, the market โ€” and the SECโ€” forced Exxonโ€™s hand on the matter. SEC rules require that oil and gas companies value reserves based on the average price of oil from the previous 12ย months.

In its latest SEC filing released this week, Exxon explains that this requirement essentially meant removing all of the value for its Canadian tar sands investments from itsย reserves.

Along with wiping out the value of its tar sands holdings, Exxon also noted that it wrote off โ€œapproximately 1.5 billion oil-equivalent barrels, mainly related to unconventional drilling in the United States.โ€ Unconventional drilling refers to the fracking business, which has been a financial disaster for many of thoseย involved.

Fraud Allegations Related to Exxonย Accounting

Exxonโ€™s resistance to properly valuing its reserves and assets has been the focus of multiple recent fraud allegations against the company. Earlier this month, DeSmog reported on claims made by former Exxon employee Franklin Bennett who, in an SEC complaint, accuses Exxon of overvaluing its assets by $56ย billion.

Bennettโ€™s accusations focus on Exxonโ€™s purchase of the shale gas company XTO in 2009 โ€” which is considered one of the worst oil and gas investments ever made. Late last year Exxon wrote off $20 billion related to the XTO deal but that likely isnโ€™t the last of the company’sย frackingย write-offs.

The financial industry has been aware that Exxon has been reluctant to write down the value of its assets.ย In 2018 an analyst for oil industry consulting firm Raymond James noted that the whole XTO investment was likely a loss. โ€œThat was one of the worst acquisitions in the history of the energy business. It was exquisitely poorly timed,โ€ Pavel Molchanov, an energy analyst at Raymond James, told CNN in 2018.ย  โ€œโ€ฆIt was essentially $40 billion down theย drain.โ€ย 

And in a 2015 interview, former CEO Rex Tillerson,ย who oversaw Exxonโ€™s purchase of XTO, stated the company policy on this matter: โ€œWe donโ€™t doย write-downs.โ€

While that is a bold statement from an oil and gas CEO, it is also a recipe for potential fraud.ย Overestimating reserves values is at the heart of manyย instances of fraud in the oil and gas industry.

In addition to the accusations related to the XTO acquisition, Exxon is already facing an SEC investigation for potentially overstating the value of its Permian assets inย Texas.

Tillerson was wrong about XTO, which was a bet on the future profitability of fracking for natural gas that didn’t pay off. Tillerson was also wrong about Exxonโ€™s policy on write-downs. As with much of the oil industry these days, it is becoming increasingly hard for these companies to hide the grim financial realities of the oil and gas business, and accusations of fraud are starting toย emerge.ย 

In September 2020, for example, Bloomberg reportedย a whistleblower complaint and shareholder lawsuit against the oil and gas company Anadarko.ย The complaint alleges that Anadarko management overstated reserves and the potential of its Shenandoah oil field in the Gulf of Mexico. Anadarko management was touting this field as its top asset, despite aย senior engineer informing management that this simply wasn’t true. According to Bloomberg, Anadarko ended up writing off the full value of Shenandoah andย โ€œThe project had gone from a multibillion-dollar golden goose to worthless.ย 

Lawyers for Anadarko attempted to have the shareholder lawsuit dismissed, arguing that the shareholders could’t prove management statements were madeย โ€œwith an intent to deceive, manipulate or defraud.โ€ย  That effort wasย denied.

Exxon Doubles Down on Naturalย Gas

Exxon notes in its SEC filing that the companyย was forced to write down its reserves values due to SEC rules and 2020โ€™s low oil prices. In that sameย filing, the oil giant lays out its plans for the future, which are all about natural gas, which is primarily methane. Despite the huge losses on XTO, Exxon is once again betting its financial future on naturalย gas.

In the SEC filing, the company writes that โ€œpower generation is expected to remain the largest and fastest growing major segment of global primary energy demandโ€ and that โ€œGlobal electricity demand is expected to increase approximately 50 percent from 2018 toย 2040.โ€

While these expectations mirror the consensus among industry analysts, what remains to be seen is how that electricity will be generated. Exxon is betting on natural gas, butย renewable sources like wind and solar can already provide that electricityย for a lower costย in most placesย โ€” without producing the methane and carbon emissions which Exxonโ€™s productsย create.

Exxon also mentioned other factors thatย may impact its future financial results, includingย โ€œtechnological advances in energy storage that make wind and solar more competitive for powerย generation.โ€

Based on current trends, many further developments are likely to make wind and solar even more competitive for power generation, but in many places, these combinations are already more than competitive with naturalย gas.

A big part of Exxonโ€™s plans for future profits is aย bet on natural gas beating out wind and solar for power generation. But recent data from the Energy Information Administration shows that gas is losing this race in 2021, and the economic prospects for natural gas get worse in theย future.ย 


Costs of solar vs. gas for power production.ย Credit: Energy Informationย Administration

Exxon’s Very Badย Year

Writing off over 30 percent of the value of its reserves would normally be the worst news Exxon was facing. But these are not normal times for the oil and gasย industry.

Exxon also is being investigated by theย SECย and is battling multiple accusations of fraud made by former employees. In 2020, the company was forced to finally acknowledge the huge losses associated with the purchase of XTO. Exxon lost a total $22 billion dollars inย 2020.

โ€œThe past year presented the most challenging market conditions ExxonMobil has ever experienced,โ€ Exxon CEO Darren Woods told The New York Times in early February, addingย that Exxon ended the year as โ€œa strongerย company.โ€

Exxon, however, has been borrowing money to pay its dividend to shareholders and in the process has been rapidly increasing its overall debt. In November 2020, financial publication Barronโ€™s reported that Exxon might need to borrow $8 billion in 2021 to keep paying itsย dividend.

In 2018, Exxon had $20.5 billion in long-term debt. In 2020, that number had more than doubled to $47 billion. This is not the sign of a company that is becomingย โ€œstronger.โ€

The oil majorโ€™s increased debt was the reason it was featured in a Bloomberg article published in November 2020ย on โ€œzombie companies.โ€ According to Bloomberg, zombie companies donโ€™t have the ability to pay off overwhelmingย debts.

Exxon has a well-established history of misleading the public and investors about the risks of climate change, and is involved in a number of lawsuits from cities and counties over it. The company now faces multiple accusations from former employees, alleging itย also has misled the public and investors about its financialย prospects.

With the pile of debt facing Exxon โ€” debt that increased by over $20 billion in 2020 and is expected to increase by as much as another $8 billion this yearย โ€” the truth about whether the oil company really is โ€œstrongerโ€ should become obvious soonย enough.

Exxon did not respond to DeSmog’s request for comment by time ofย publication.

Main image: โ€œRex the Tillerson.โ€ Credit: Thomas Hawk,ย CC BYNCย 2.0

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Justin Mikulka is a research fellow at New Consensus. Prior to joining New Consensus in October 2021, Justin reported for DeSmog, where he began in 2014. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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