Analysis: How Exxon is being forced to accept the reality of bad fossil fuel investments

Last August, ExxonMobil warned that it may need to take 20 percent of its proven oil and gas reserves off its books. While this is a shocking figure from the oil major, the reality has turned out to be even more shocking for the company. February 24, Exxon indicated that it would in fact remove more than 30 percent of its proven reserves from its books – essentially wiping the value of its Canadian oil sands holdings from its books.

According to the Securities and Exchange Commission (SECOND), proven reserves are “the estimated quantities of crude oil, natural gas and natural gas liquids whose geological and technical data demonstrate with reasonable certainty that they can be recovered in the coming years from known reservoirs under economic conditions and existing operations ”.

Proven reserves are the concept on which all petroleum activity is based. It is a critical factor in how oil and gas companies are valued and in determining how much money banks will lend to companies. Much of the oil and gas lending is known as reserved loans.

Even more remarkable is Exxon’s latest move, however, because he has a reputation to be reluctant to properly assess reserves, often lagging behind other major oil companies by making these downward adjustments.

In this case, the market – and the SECOND– forced Exxon’s hand on the matter. SECOND rules require oil and gas companies to assess reserves based on average oil price from 12 previous months.

In his last SECOND deposit Released this week, Exxon explains that the requirement essentially meant removing from its reserves the full value of its investments in Canada’s oil sands.

In addition to wiping out the value of its oil sands holdings, Exxon also noted that it had written off “about 1.5 billion barrels of oil equivalent, mostly related to unconventional drilling in the United States.” Unconventional drilling refers to the activity of hydraulic fracturing, which has been a financial disaster for many of those affected.

Exxon Accounting Fraud Allegations

Exxon’s resistance to properly valuing its reserves and assets has been at the center of several recent fraud allegations against the company. Earlier this month, DeSmog reported on claims made by former Exxon employee Franklin Bennett who in a SECOND complaint, accuses Exxon of overvaluing its assets by $ 56 billion.

Bennett’s accusations focus on Exxon’s takeover of shale gas company XTO in 2009 – which is considered one of the worst oil and gas investments never done. At the end of last year, Exxon wrote off $ 20 billion related to the XTO but this is probably not the last of the company’s fracking radiations.

The financial sector is aware that Exxon is reluctant to write down the value of its assets. In 2018, an analyst at the oil industry consulting firm Raymond James noted that the set XTO investment was probably a loss. “It was one of the worst acquisitions in the history of the energy sector. It was extremely poorly timed, ”said Pavel Molchanov, energy analyst at Raymond James. CNN in 2018. “… It was basically $ 40 billion lost.”

And in a interview 2015, old CEO Rex Tillerson, who oversaw Exxon’s purchase of XTO, stated the company policy on this matter: “We don’t write down. “

Although this is a bold statement from an oil and gas company CEO, it is also a recipe for potential fraud. The overestimation of the reserve values ​​is at the heart of many fraud cases in the oil and gas industry.

In addition to the charges related to XTO acquisition, Exxon is already facing a SECOND investigation for potentially overestimating the value of its Permian Texas assets.

Tillerson was wrong about XTO, what was a bet on the future profitability of hydraulic fracturing for natural gas, which has not borne fruit. Tillerson was also wrong about Exxon’s depreciation policy. As with much of the oil industry these days, it is becoming increasingly difficult for these companies to hide the grim financial realities of the oil and gas industry, and accusations of fraud are starting to emerge.

In September 2020, for example, Bloomberg reported a whistleblower complaint and shareholder lawsuit against oil and gas company Anadarko. The complaint alleges that Anadarko’s management overestimated the reserves and potential of its Shenandoah oil field in the Gulf of Mexico. Anadarko’s management was touting this area as its main asset, despite a senior engineer advising management that this was simply not true. According to Bloomberg, Anadarko ended up writing off Shenandoah’s full value and “The project had gone from being a multi-billion dollar golden goose to worthless.”

Anadarko’s lawyers attempted to have the shareholders’ lawsuit dismissed, arguing that shareholders could not prove that management’s statements were made “with intent to deceive, manipulate or defraud”. This effort was refused.

Exxon doubles natural gas

Exxon notes in its SECOND stating that the company was forced to reduce the value of its reserves due to SECOND rules and low oil prices of 2020. In the same dossier, the oil giant sets out its plans for the future, which all revolve around natural gas, which is mainly methane. Despite the huge losses of XTO, Exxon is once again betting its financial future on natural gas.

In the SECOND filing, the company writes that “power generation is expected to remain the largest and fastest growing major segment of global primary energy demand” and that “global demand for electricity is expected to increase by approximately 50% from 2018 to 2040 ”.

While these expectations reflect the consensus among industry analysts, it remains to be seen how this electricity will be produced. Exxon is betting on natural gas, but renewable sources like wind and solar can already provide that electricity at lower cost in most places – without producing the methane and carbon emissions created by Exxon products.

Exxon also mentioned other factors that could impact its future financial results, including “technological advances in energy storage that make wind and solar more competitive for power generation.”

Based on current trends, there are many more developments that are likely to make wind and solar even more competitive for power generation, but in many places these combinations are already more than competitive with natural gas.

Much of Exxon’s plans for future profits is a gamble on natural gas overtaking wind and solar for power generation. But recent data from the Energy Information Administration shows that gas is losing this race in 2021 and the economic outlook for natural gas is deteriorating in the future.

Costs of solar versus gas for power generation. Credit: Energy information administration

Exxon’s very bad year

The cancellation of more than 30% of the value of its reserves would normally be the worst news Exxon has faced. But these are not normal times for the oil and gas industry.

Exxon is also under investigation by the SECOND and is fighting multiple fraud charges brought by former employees. In 2020, the company was finally forced to recognize the huge losses associated with the purchase of XTO. Exxon lost a total of $ 22 billion in 2020.

Last year presented the most difficult market conditions that ExxonMobil has ever seen, ”Exxon CEO Darren woods told the New York Times in early February, adding that Exxon ended the year as “a stronger company.”

Exxon, however, has been To borrow money to pay its dividend to shareholders and in doing so quickly increased its overall debt. In November 2020, the financial publication Barron’s reported that Exxon may need borrow $ 8 billion in 2021 to continue to pay its dividend.

In 2018, Exxon had long-term debt of $ 20.5 billion. By 2020, that number had more than doubled to $ 47 billion. This is not the sign of a company that is getting “stronger”.

The increase in the debt of the oil major was the reason it appeared in a Bloomberg article published in November 2020 on “zombie companies”. According to Bloomberg, zombie companies lack the capacity to pay off crushing debts.

Exxon has a well-established history of misleading the public and investors on the risks of climate change, and is involved in a number of city and county lawsuits in this regard. The company now faces multiple charges former employees, alleging that it has also misled the public and investors about its financial outlook.

With the pile of debt facing Exxon – debt that has grown by over $ 20 billion in 2020 and is expected to grow to $ 8 billion this year – the truth about whether the oil company is really “Stronger” should become evident soon enough.

Exxon did not respond to DeSmog’s request for comment at time of posting.

Main picture: “Rex the Tillerson.” Credit: Thomas Falcon, CC THROUGHNC 2.0

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