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Oil Industry Braces For Blowback From Exxon Scandal

Nick Cunningham

After years of anticipation, ExxonMobil goes on trial this week.

The oil major has been under scrutiny for years by several state attorneys general over allegations that the company intentionally misled shareholders over its risk to climate change. At issue is what Exxon told its investors versus what it documented internally.

The New York Attorney General argues that the oil company privately knew that its risk to climate change was much greater than what it divulged publicly. The question is if that gap amounts to defrauding investors.

“Exxon in effect erected a Potemkin village to create the illusion that it had fully considered the risks of future climate-change regulation,” the complaint from the NY AG filed last year reads. Exxon engaged in “a longstanding fraudulent scheme…to deceive investors and the investment community,” the document said.

For years, Exxon has assured investors that while climate regulation was likely, its oil and gas reserves would remain profitable to produce. The company has claimed that it has applied a proxy cost for carbon since 2007 and that its projects can withstand that cost. As a result, there was little reason to worry. Internally, however, the NY AG claims that Exxon did not apply that standard, and either used a lower proxy cost or none at all.

ExxonMobil’s oil sands assets in Canada are of particular note, both because they were costly and because they are carbon-intensive. The lawsuit says that understating the climate risk meant Exxon failed to disclose $25 billion worth of costs. In one specific example, Exxon underreported $11 billion of costs for its Kearl oil sands project. InsideClimate News published a comprehensive backstory on the case last week.

If true, the upshot is that Exxon is knowingly sitting on assets that might become stranded in a carbon-constrained world, and it simultaneously misled investors on that reality. Put another way, Exxon had two sets of books, according to the allegations, which obscured billions of dollars in potential costs. 

The NY AG says that the “fraud” was sanctioned “at the highest levels of the company,” which includes former CEO Rex Tillerson.

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For its part, Exxon denies any wrongdoing and accuses the attorneys general of being motivated by politics. It has fought aggressively to stave off the lawsuits, but the case brought by New York is the first to go to trial. Meanwhile, Massachusetts is pressing a similar case against ExxonMobil. The company has fought this case for several years, but state and federal courts have allowed it to proceed.

If the oil major loses at trial, it could be required to pay back “all amounts gained or retained as a result of the fraud.” More worrying for the entire oil industry would be the fact that a loss for Exxon could lead to a proliferation of litigation against oil companies. “It could open up a big can of worms,” Jennifer Rowland, an analyst at financial-services firm Edward Jones, told the Wall Street Journal. “Other companies could be looked at and questioned about what assumptions they have made.”

Litigation experts also note that Exxon is likely worried about the discovery phase of the case, which could unearth more damaging information about what the company knew and when it knew it. Again, InsideClimate News published a bombshell investigation in 2015 that documented Exxon’s extensive knowledge of climate change, dating back decades, and also the company’s efforts to sow and manufacture doubt about climate science. The InsideClimate News report one a Pulitzer Prize. The story sparked even more investigation into oil industry’s role in obscuring the science behind climate change.

In recent years, even as Exxon has fought to kill litigation, it has also struck a more measured public stance, advocating for a carbon tax and, more recently, opposing the Trump administration’s efforts to gut regulations on methane. The oil major clearly sees that climate denial is no longer a tenable position.

But it continues full steam ahead on finding and extracting new oil and gas reserves. Exxon argues that it did not defraud investors, but its future survival is very much contingent on the world not acting on climate change.

By Nick Cunningham of Oilprice.com

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