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September 12, 2014
Carbon Tracker Analysis Refutes Exxon Claims
    by Robert Kropp

The analysis reveals that unconventional oil and gas exploration has contributed to ExxonMobil underperforming the S&P 500 by eight percent over five years, and that the company has not adequately stress tested a future low carbon scenario.

Sustainable investors and other advocates for the transition to a low-carbon economy were pleased—and no doubt somewhat surprised—in March, when ExxonMobil became the first oil and gas company to agree to a shareowner request that it report on financial risks associated with stranded fossil fuel assets. As a result of the agreement, As You Sow and Arjuna Capital withdrew their resolution requesting that the company do so.

Alas, the pleasure was short-lived. A scenario in which global temperature increases are limited to two degrees Celsius “means that some fossil fuel companies will not be able to sell some or all of their reserves, thereby stranding those assets and causing the value of the company to decline,” As You Sow stated after Exxon released its report. “Rather than providing information as to whether its reserves would be stranded, Exxon ignored the question. In its response, the company said it believed that any future capping of carbon-based fuels to the levels of a 'low carbon scenario' is highly unlikely due to pressing social needs for energy.”

“Exxon to World: Drop Dead,” the nongovernmental organization (NGO) Oil Change International stated in response to Exxon's report.

According to a recent analysis by Carbon Tracker Initiative (CTI)—the organization whose 2011 formulation of the stranded assets scenario was crucial in launching the rapidly growing fossil fuel divestment campaign—Exxon's report to shareowners fell short on at least two important fronts.

First, largely on account of the company's increased investments in unconventional exploration such as tar sands and heavy oil, it has underperformed the S&P 500 by eight percent over the last five years. “Looking at Exxon's resource estimates, the proportion of such high capital, lower return projects is likely to continue to rise, potentially lowering group returns—unless management changes course,” CTI states. “If, as we believe, Exxon's investment in low return, high cost projects is a factor behind its deteriorating returns, increasing investment in such projects seems at odds with Exxon's emphasis on improving shareholder returns.”

Second, “Exxon's report uses limited and highly favorable assumptions to support its conclusion that a low-carbon scenario is 'extremely unlikely,'” CTI continued. “Exxon's assumption of continuing high growth culd leave it unprepared for a shift in the oil market, much as it was unprepared for the structural change in the US gas market following the shale boom.”

Arriving late in the game to natural gas, Exxon sought to buy its way in with the $41 billion acquisition of XTO Energy, according to author Steve Coll in his book Private Empire: ExxonMobil and American Power. However, "It looked to analysts and investors that (CEO Rex) Tillerson had overpaid for Simpson's company and that ExxonMobil had made risky assumptions about future natural gas prices," Coll wrote. "Investors hammered ExxonMobil's share price, relative to its peer group, in a way the corporation had not experienced for many years."

Engaging with a 2°C scenario implies that Exxon needs “to evaluate how the demand and price conditions of such a low-carbon world will affect the profitability of future high-cost production,” CTI concluded. “It should be worrying for investors that Exxon...continues with an investment strategy that seems to assume business as usual.”

“A fossil fuel volume play in the face of climate risk is faulty logic,” Natasha Lamb of Arjuna Capital said. “As investors, we prefer Exxon protect value by diverting capital from high risk, high carbon projects to low carbon alternatives.”


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