New York Wants to Make Exxon’s Life More Expensive

(Bloomberg Opinion) -- If you really want to tweak Exxon Mobil Corp., forget critiques of its carbon footprint or where it chooses to do business. Question the numbers.

That’s the approach taken in New York Attorney General Barbara Underwood’s suit just filed against the oil major. It accuses Exxon of defrauding its own investors about the impact future climate-change regulations could have on its business.

One prominent allegation is that Exxon for years used internal proxy costs of greenhouse-gas emissions to assess project economics that were lower than the figures it presented to the public. Regarding the Kearl oil sands project in Canada, for example, Exxon is alleged to have used proxy costs in its planning that all but wiped out projected emissions costs relative to those implied by publicly represented figures. Kearl is a particular sore point given its reserves had to be debooked in early 2017 precisely because falling energy prices made them uneconomic under SEC criteria.

For its part, Exxon says the AG’s office has “doubled down on its tainted, meritless investigation,” which has been going on for three years. Exxon calls the allegations “baseless.”

This isn’t the first time New York has targeted a fossil-fuel producer for its climate-risk disclosures. Back in 2007, then-AG Andrew Cuomo launched a similar investigation into coal miner Peabody Energy Corp. (Peabody settled in 2015 and agreed to revise its disclosures.) How the current case with Exxon will play out is anyone’s guess, although the hypothetical nature of the costs cited would seem to make it a long shot for the AG’s office. Still, having the New York AG file a suit accusing the world’s biggest listed oil company of fraud in the first place is a striking development.

It also fits into a broader context. I wrote here recently about fossil-fuel advocates’ broad success in thwarting effective legislation to combat emissions and climate change. But this came at a cost, not merely for the planet, but in terms of the opportunity for the industry to play a trusted role in dealing with an encroaching crisis.

The associated denigration of the scientific discourse about climate change into political hackery, particularly at the federal level, may also have helped foment the equivalent of guerrilla warfare against oil, gas and coal producers.

Environmental activists long ago learned that targeting the logistical networks underpinning the market, such as the Keystone XL pipeline, could be more effective than any “keep it in the ground” campaign, especially as attacks could be launched at multiple levels, from federal courts to county commissions. Even if a new pipeline or terminal ultimately gets built, the magic of discounted cash flow means the ensuing delay or increase in the risk premium put on the capital cost can cripple the economic return anyway. Similarly, campaigns to force pension funds to divest fossil-fuel related securities or highlight the risks of “stranded assets” due to peak fuel demand effectively raise the industry’s cost of capital.

Lawsuits targeting producers or government agencies accused of not protecting citizens from climate change can be viewed in this context, too. Columbia Law School’s Sabin Center for Climate Change Law tracks such litigation, and its database shows a marked increase in the number of cases being brought:

New York Wants to Make Exxon’s Life More Expensive

Different cases take different approaches. Some, such a marquee case involving a group of mostly teenagers in Oregon, are trying to force changes in policy by suing government agencies.

When it comes to companies, one approach is to use the tobacco playbook, suing fossil-fuel producers to pay damages for the harm caused by their products. Another effectively aims to force greater disclosure of the potential costs of mitigating emissions and climate change. In both broad categories, the common theme is cost. The former seeks to “force fossil-fuel companies to internalize the impact of costs that they have historically externalized” is how Michael Burger, an executive director at the Sabin Center, put it to me on Thursday. The other aims to force them “to deal with the reality that for civilization to effectively deal with climate change, their businesses have to change, too,” he added.

The oil and gas industry’s so-called “license to operate” — its unwritten contract with society that allows it to drill wells and the rest of it — is very much a topic of conversation these days. It can seem like an abstract, woolly concept — as can climate change itself. Regarding the latter, a carbon tax, or something similar, could have provided a relatively straightforward way of clarifying this fuzziness, apportioning costs and directing investment in energy accordingly. In its absence, other methods to raise the industry’s cost of doing business are being tested at increasing scale.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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