ExxonMobil 'underestimates' CO2 risks

Market: Emissions
11/09/14

ExxonMobil underestimates the risks to its business from climate change curbs and its pursuit of high capital, lower-return projects threaten shareholder value, carbon risk analysis firm the Carbon Tracker Initiative (CTI) said today.

ExxonMobil's returns have fallen and its share price performance has deteriorated as it invested in capital intensive, low-return projects such as oil sands, CTI said in a report, Responding to Exxon — A Strategic Perspective.

"Exxon's underperformance over the past five years may be associated with its increased investment in lower return, capital-intensive assets. These high-cost projects include carbon intensive tar sand and arctic assets — high carbon and high cost often go hand in hand," CTI chief executive Anthony Hobley said.

Tar sands and heavy oil accounted for 7.5pc of ExxonMolbil's proven oil and gas reserves and around 15pc of its liquid reserves in 2007. By the end of 2013, this had risen to 17pc and 32pc, respectively. By contrast, conventional projects fell from 45pc to 33pc of total proven reserves, the report said.

Also, based on ExxonMobil's resource estimates, the proportion of such high capital, lower-return projects is likely to continue to rise and could potentially weigh on group returns — unless the company's management changes course.

"A strategy focusing on lower cost projects, stricter capital discipline and increased distribution to shareholders may boost group returns and lower risk, CTI said.

CTI's analysis is in response to a March statement from ExxonMobil, Energy and Carbon — Managing the Risks, which aimed to assure investors that the company was managing its climate-related risks. This was in response to a resolution from activist shareholders Arjuna Capital and As You Sow that questioned ExxonMobil's potential carbon asset risks.

ExxonMobil was one of the first oil and gas companies to react to an initiative by CTI and sustainability campaign group CERES to engage with fossil fuel majors on their carbon asset risks. As part of this initiative, the two think-tanks earlier this year released a report, Carbon Supply Cost Curves: Evaluating Financial Risk to Oil Capital Expenditures.

The earlier study highlighted the risks that lower demand for fossil fuels, more ambitious emissions regulation, technological advances and improved efficiency pose for highest–risk, highest–cost oil projects and shareholder value. It further identified ExxonMobil as having the second-highest total capital expenditure exposure to 2025.

Today's study said that ExxonMobil's narrow definition of stranded assets may leave it unprepared for a shift in the oil market and could risk projects delivering an unacceptably low return to shareholders.

"Exxon does not seem to consider the financial risk to it and other oil producers from the potential for global oil demand to begin declining within the next 10-15 years, even without robust climate policies," it said.

According to ExxonMobil, it is difficult to envision governments opting for a low-carbon path. But contrary to ExxonMobil's assumption, the share of global GHG emissions subject to national legislation or emission-reduction strategies rose to 67pc from 45pc between 2007 and 2012, the CTI study points out.

As such, a strategy focusing on lower-cost projects, stricter capital discipline and increased distribution to shareholders may boost group returns and lower risk, the report said.

ExxonMobil ought to consider more seriously the likelihood of a 2°C rise scenario and the implications for its business model, the report said. "It should be worrying for investors that Exxon, although recognising the need to manage climate change risks, continues with an investment strategy that seems to assume business as usual," the report said.

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