By Karen Savage
The second week of Exxon’s climate fraud trial in New York Supreme Court wrapped up last week with testimony by the head of Exxon’s auditing team at PricewaterhouseCoopers, who said he used the terms greenhouse gas cost and proxy cost interchangeably in memos written prior to 2017.
That revelation came from Exxon’s first witness, Richard Auter, head of the Exxon auditing team at PricewaterhouseCoopers (PWC). He was called by Exxon’s lawyers after the New York attorney general’s office rested its case after eight days of testimony by its witnesses.
New York’s lawyers are attempting to prove that Exxon violated the state’s Martin Act by failing to disclose it used two different sets of numbers to assess climate risk, one for shareholders and the other for its own internal calculations. As a result, Exxon shareholders suffered losses totaling between $476 million and $1.6 billion, according to the AG’s office.
Auter’s testimony went right to that issue. “I did not appreciate the distinction of using the words greenhouse gas cost and proxy cost,” he testified.
Investors have testified that Exxon misled them to believe that it used only one number when assessing how climate change would impact the future of its business.
Exxon is expected to call several witnesses in its defense. Following Auter to the stand on Friday was Exxon’s former vice president for corporate strategic planning William Colton, who will resume his testimony Monday. Other witnesses will include current and former employees and experts in corporate finance, accounting and securities law.
Exxon has not denied using two different numbers, but maintains it properly disclosed how it used them. The company finally aligned those two numbers, the proxy cost of carbon and greenhouse gas cost, shortly after the company released its 2014 Energy and Climate and Managing the Risks reports to shareholders. It says its publicly shared proxy cost of carbon was used to project global energy demand, while its greenhouse gas cost was a proprietary internal number used to evaluate investment opportunities.
Exxon 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.
In its defense, it will likely address notes embedded in an internal presentation indicating it 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.
Exxon will continue to try to discredit the AG’s argument that 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. The AG presented emails and documents that it says shows Exxon disregarded the newly aligned number in order to inflate the value of those assets. Witnesses for Exxon will likely reiterate its contention that the greenhouse gas cost listed its DataGuide, an internal planning document, was only a guideline to be used when exact regulatory costs are unknown.
Under the Martin Act, the AG does not need to prove Exxon intended to mislead its shareholders, only that it did and that investors would have considered that misinformation to be important to their investment decision.
Auter’s lack of clarity regarding terms for the two numbers seemed to support the AG’s contention that Exxon misled investors by using the numbers interchangeably, however the bulk of his testimony revolved around the oil company’s 2015 impairment testing of its Mobile Bay gas field.
Exxon attorney Justin Anderson asked Auter about an assessment by Eli Bartov, a financial expert and witness for the AG. Bartov concluded that had the company included greenhouse gas costs in its testing, the gas field would have been impaired in 2015.
Auter told the court he has seen nothing in the AG’s investigation and subsequent lawsuit that would change PWC’s conclusion, which was that it does “not take exception” with Exxon’s conclusion that its Mobile Bay asset had not been impaired. And he said even if it had been impaired, the impact would have been minimal relative to the size of the company.
After Bartov’s testimony, the AG had called another expert, Peter Boukouzis, a former energy mergers and acquisitions investment banker and current business professor at the University of St. Katherine. He said the increased risk to Exxon’s assets is apparent when the greenhouse gas costs in Exxon’s financial models are aligned with the publicly disclosed figures.
Boukouzis told the court that to make that determination, he used spreadsheets containing economic models that Exxon was forced to turn over during the AG’s investigation. The only change he made to the models was to insert the proxy cost of carbon disclosed in the Energy and Climate and Managing the Risks reports.
The results revealed some of Exxon’s assets were not as valuable as shareholders—or company management—had been led to believe, Boukouzis testified.
“These models are building blocks in corporate planning and in investment planning,” Boukouzis said, adding that the resulting data was likely used by Exxon’s management committee, including ex-chief executive Rex Tillerson, when making key investment decisions.
The overly optimistic asset values, as well as its assurance to investors that it was managing the risks of climate change, caused Exxon stock to become overvalued, Boukouzis told the court. He said investors who purchased stock at the higher prices suffered losses when the prices eventually fell.
If the AG’s allegations are proven true, the fraud could cost the company dearly. The state has asked the court to hold the company liable for between $476 million and $1.6 billion in shareholder losses. It is also asking the court to order an examination of Exxon’s past and future accounting methods and to appoint an independent monitor to supervise the process.
Ostrager has given Exxon until Nov. 12 to conclude its defense and has said he will issue a ruling within 30 days of the trial’s conclusion.