New York argues in fraud trial that Exxon hid climate risks to its tar sands assetsThe New York attorney general alleges Exxon misled investors about the value of its assets in the Canadian oil sands. Photo credit: Mark Ralston/AFP via Getty Images
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By Karen Savage

Exxon’s investment in the Canadian tar sands were far more at risk from climate change than the company had previously indicated, according to testimony and emails presented by the New York attorney general’s office Monday in the case against Exxon for climate fraud. The trial has now entered its second week in New York Supreme Court.

Testimony and emails showed that Exxon updated its greenhouse gas cost and applied it to the Canadian assets soon after. That update was made in its DataGuide, an internal planning document, shortly after the company’s greenhouse gas manager shared a presentation indicating the company had “implied” in its 2014 Energy and Climate and Managing the Risks reports to shareholders that it used its proxy cost of carbon when evaluating investments. In fact, according to Exxon, it used a different number—the greenhouse gas cost—when evaluating investments.

The company contends the alignment of the two numbers was based on the world’s progress on climate change and its anticipation of a global agreement on the regulation of greenhouse gas emissions. But when it did that, the company did not announce the update to shareholders or issue a change or correction to its previous disclosure.

New York Attorney General Leticia James alleges that Exxon deceived investors and violated the state’s powerful Martin Act by using different sets of climate risk numbers for its own calculations and for shareholders.

Exxon doesn’t deny it used different numbers, but says it used what it refers to as its proxy cost of carbon to determine future energy demand and the separate greenhouse gas cost to evaluate investments. The oil giant says those are different calculations and maintains it has made accurate disclosures about the two numbers to investors.

The Martin Act does not require the NY AG to prove Exxon intended to mislead investors, just that they were misled.

The AG alleges that when the greenhouse gas cost was aligned and applied to evaluate investments, Exxon planners soon discovered the company’s Canadian oil sands assets, which at the time accounted for about 25 percent of its total resource base, were at a much greater risk from climate change than previously understood.  

In western Canada, the risk was “very material,” according to an email sent by Jason Iwanika, development planner for Canadian-based Imperial Oil, to Guy Powell, Exxon’s greenhouse manager, in 2014. Exxon has a controlling interest in Imperial Oil.

“The new [greenhouse gas cost] has an impact on [certain oil sands] opportunities in the magnitude of [a] 0.5-1% [decrease in cash flow],” Iwanika wrote.

“This being significant certainly drew my attention and I wanted to get it right,” Iwanika testified.

The AG alleges that to hide the risk, Exxon did not apply the aligned greenhouse gas cost as outlined in the DataGuide, but instead applied the lower cost of existing regulations, thus making its oil sand assets—which are highly vulnerable to climate risk—appear more valuable than they would otherwise be.

Exxon has said the greenhouse gas cost listed in its DataGuide serves only as an estimation to be used when exact regulatory costs are unknown. It maintains that planners are encouraged to consult local experts and to use existing greenhouse gas emission-related legislation and policies when available. 

The AG’s office presented the court with emails indicating Iwanika and others responsible for Exxon’s Canadian assets were concerned about the effects of the aligned greenhouse gas cost. Those emails requested guidance on how to best proceed in light of the resulting decrease in the value of company assets.

One email said when applied, the aligned greenhouse gas cost would “result in enough additional [operating expenses] to shorten asset life and reduce gross reserves.” 

Another said it would “result in large write-downs” of Exxon’s Alberta assets. Yet another said proved reserves at its Cold Lake field was reduced by about 20 million barrels when calculated with the aligned greenhouse gas cost.

The AG’s office also presented documents created by Imperial Oil employee Susan Swan, an expert in Alberta’s greenhouse gas regulations, which included guidelines on the evaluation of the company’s Canadian assets based on then-current regulations. The AG said Exxon’s planners disregarded that guidance. 

What Exxon did instead, was to use an “alternative methodology.” That method, which made the assets appear more valuable, failed to take into account potential future changes to those regulations, according the the AG. 

“This projection may have been consistent with the regulations in place in 2015, but by assuming that those regulations would not grow more stringent over the next 50 years, it was inconsistent with the company’s public representations,” the AG wrote in court filings, referring to Exxon’s Kearl oil sands assets.

“In total, ExxonMobil applied an effective cost of less than $5 per ton of GHG emissions in 2040—approximately 94% less than the $80 per ton figure that ExxonMobil publicly represented for 2040 in that jurisdiction,” the AG wrote.

Iwanika testified that when the greenhouse gas cost was aligned, Exxon had already invested billions in Kearl. The AG presented documents indicating it the company had spent more than $300 million on its Aspen oil sands assets, also located in western Canada.

Emails show Iwanika and others at Imperial Oil continued to question the methodology through at least 2016.

“For the past few years there has been a lot of last minute recycle around GHG tax forecasts. Last year, after initial guidance to use the [ExxonMobil] corporate forecast (despite warnings it would result in large write-downs) we had to redo our calculations using legislated GHG taxes,” Imperial Oil’s Christina Stobart wrote. “This year I would like to get buy-in from the Houston reserves team to use legislated GHG taxes at the beginning of the process.”

The AG is arguing its case to Judge Barry Ostrager and when it concludes, Exxon will present its defense. The trial is expected to continue through Nov. 12 and Ostrager has said he intends to render a decision no more than 30 days after the trial ends.

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