SEC Probes Exxon Over Accounting for Climate Change

September 22, 2016
In The News

The U.S. Securities and Exchange Commission is investigating how Exxon Mobil Corp. values its assets in a world of increasing climate-change regulations, a probe that could have far-reaching consequences for the oil and gas industry.

The SEC sought information and documents in August from Exxon and the company’s auditor, PricewaterhouseCoopers LLP, according to people familiar with the matter. The federal agency has been receiving documents the company submitted as part of a continuing probe into similar issues begun last year by New York Attorney General Eric Schneiderman, the people said.

The SEC’s probe is homing in on how Exxon calculates the impact to its business from the world’s mounting response to climate change, including what figures the company uses to account for the future costs of complying with regulations to curb greenhouse gases as it evaluates the economic viability of its projects.

The decision to step into an Exxon investigation and seek climate-related information represents a moment in the effort to take climate change more seriously in the financial community, said Andrew Logan, director of the oil and gas program at Ceres, a Boston-based advocacy organization that has pushed for more carbon-related disclosure from companies.

“It’s a potential tipping point not just for Exxon, but for the industry as a whole,” he said.

As part of its probe, the SEC is also examining Exxon’s longstanding practice of not writing down the value of its oil and gas reserves when prices fall, people familiar with the matter said. Exxon is the only major U.S. producer that hasn’t taken a write down or impairment since oil prices plunged two years ago. Peers including Chevron Corp. have lowered valuations by a collective $50 billion.

“The SEC is the appropriate entity to examine issues related to impairment, reserves and other communications important to investors,” said Exxon spokesman Alan Jeffers. “We are fully complying with the SEC request for information and are confident our financial reporting meets all legal and accounting requirements.”

A spokeswoman for PwC declined to comment. An SEC spokeswoman declined to comment. A spokesman for Mr. Schneiderman said the attorney general wouldn’t comment on the matter.

The SEC probe isn’t believed to involve other energy companies, according to a person familiar with the matter.

Activists, members of Congress and former government officials have ratcheted up pressure on the SEC in the past year to do more to assess climate risks. Four congressional Democrats including U.S. Rep. Ted Lieu last year asked the SEC to investigate Exxon over its climate-related science and advocacy. Three former U.S. treasury secretaries wrote the SEC in July urging the agency to adopt industry-specific standards for disclosure in company filings.

A potential sticking point in the probe is what price Exxon uses to assess the “price of carbon”—the cost of regulations such as a carbon tax or a cap-and-trade system to push down emissions—when evaluating certain future oil and gas prospects, people familiar with the matter said. The SEC is asking how Exxon’s carbon price affects its balance sheet and the outlook for its future, the people said.

When such a theoretical price for carbon is low, more oil and gas wells would be commercially viable. Conversely, a high carbon price would make more of Exxon’s assets look uneconomic to pull out of the ground in future years.

In 2014, Exxon determined that none of its assets were at risk of being rendered less valuable by impacts from the global response to climate change.

Exxon doesn’t disclose the exact price it uses to determine the commercial viability of its projects—outside of a general range of $20 to $80 a metric ton for the future—but many of its rivals, including Royal Dutch Shell PLC and BP PLC, do. Both Shell and BP said they use an internal price of roughly $40 a metric ton to decide whether to proceed with a project.

By contrast, Houston-based ConocoPhillips said it uses an internal carbon price range of between $6 and $51 a metric ton, depending on a project’s location and annual projected emissions.

Exxon has ardently defended its record of climate research against critics, as well as its view that the use of fossil fuels will grow in coming decades, which corresponds to the predictions of major global energy forecasters.

Still, some investors such as the California Public Employees’ Retirement System say Exxon and other energy companies should acknowledge the growing global response to climate change may mean that it will never be able to tap future wells that make up a great deal of its multibillion-dollar value.

Exxon also has defended its practice of not writing down the value of assets, saying that it is extremely conservative in booking the value of new fields and wells, which lowers its need to reduce the value of those assets if falling prices later affect the reserves’ value.

In response to a report in The Wall Street Journal about the New York attorney general’s probe into write-downs last week, an Exxon spokesman said the company follows all rules and regulations.