The New York State has filed a lawsuit alleging that Exxon defrauded investors regarding the financial risks the company faces from climate change regulations.
For fossil fuel based firms, the risks from denying culpability, or awareness of the damage their products cause just went up. The New York state attorney general, one of the most powerful law enforcement officials in America, has targeted Exxon Mobil (XOM) over global warming claims. The New York Attorney General Barbara Underwood announced to take the lawsuit further. By using the shield of investor protection, the chances of the lawsuit being accepted have also improved.
— NY AG Underwood (@NewYorkStateAG) October 24, 2018
The three-years investigation into Exxon Mobil’s climate change research by New York’s attorney general came to a resounding conclusion last week. The AG alleges that Exxon Mobil used internal carbon prices that were frequently different than the price that it told the public that it was using.
A more complicated issue is that of damages, as the internal carbon price represents a forecast of climate regulatory costs in future decades rather than an assessment of current conditions.
The suit also alleges that former CEO Rex Tillerson “knew of misrepresentations for years,” the state said in a press release. The lawsuit states Tillerson particularly knew that Exxon was using different cost figures internally than the ones publicly disclosed. The company was making investment decisions using those different figures, the attorney general alleges. Tillerson of course had also been accused of sing to keep shale oil fracking away from his own neighbourhood in Texas, fearing a drop in property prices.
Underwood’s lawsuit says Exxon “for years assured investors” that the company was accounting for costs from increasingly stringent climate change regulations. Exxon did not properly account for those costs, the state alleges, and instead misrepresented how much the company was exposed to the risks from tightening regulatory policies
An important lesson for the company’s peers is that Exxon Mobil could have avoided the lawsuit in the first place had it never implemented its voluntary internal carbon price accounting mechanism. Oil companies, many climate crusaders allege, routinely downplay the possibility that Government policies, rival technologies and carbon taxes make their businesses unviable.
Environmentalists like Jelmer Mommers earlier this year discovered documents as old as 20 years written in 1998 by Shell about the risks of climate change and can be held liable for not acting to prevent further damage. There is a 1988 shell confidential report called ‘The Greenhouse Effect” which further says that company or may be other institutions had prior knowledge climate change (James Hansen, a scientist from NASA testified during a congressional hearing in 1988 that human activities were causing global warming).
Similar files on Exxon also surfaced that describes how Exxon conducted cutting-edge climate research three decades ago and then, without revealing all that it had learned, continued to work with a business-as-usual approach. The oil giant even equipped one of its supertankers, the Esso Atlantic, as an oceanic laboratory to measure for CO2 in the air and water.
These hint towards the ‘Selective scepticism’ oil giants have for the renewable power and non-hydrocarbon fuels. Companies like BP or Exxon mobil estimate costs for renewable energy and Electric vehicles well above the industry estimates which tells its investors that there are strong headwinds facing their businesses in future. Where as internal planners use lower numbers to decide whether or not to allocate capital to such investment projects. The IEA or the International Energy Agency, a body famously funded by the fossil fuel sector, has famously underestimated the growth and impact of renewables for over a decade now.
These numbers as high as $70-$80 per barrel in 2021(increasing 2% thereafter) used by many European and American oil giants have a direct effect on Climate Policies. IEA uses lower estimates like $60 per barrel in 2060, in its “Beyond 2 Degrees” scenario, which assumes just a 50 per cent chance of keeping temperatures to a 1.75 degrees centigrade increase. But these figures also fall above the $35 per barrel long term average since 1861.
Compare them also with the numbers those same companies use for making capex decisions. Royal Dutch Shell uses $40 per barrel for investments against $70 for balance sheet valuations, whereas for BP, it lies between $35-$40 versus $75 for valuations.
So when there are more interventions to cut hydrocarbon demand and to tax emissions, the lower the long term price should sink, potentially leading to balance sheet shrinking impairments.
These numbers can be construed as padding balance sheets to protect the oil companies bonuses and dividends; meanwhile taking a sceptical view on taking new investments. Combine another fact that these companies have been denying climate change as a threat, losing those precious decades, resulting in the near-crisis situation that the planet is in today. Now, the world’s climate experts warn that energy policies must change – both dramatically and quickly – within a decade if the world has any change of minimizing the harm from climate change. All in all, enough to send anyone into a Shell to escape.