November 7, 2016 Read More →

Exxon’s Lowering of Its Reserve Estimates Is an Acknowledgement of Its Financial Distress

Nicholas Kuznetz for InsideClimate News:

Exxon said that the average price of oil this year has been so low that 3.6 billion barrels of oil at its Kearl tar sands field, as well as 1 billion barrels of oil and gas equivalent elsewhere in North America, may no longer be claimed under accounting formulas imposed by the Securities and Exchange Commission. The total represents nearly 20 percent of its global reserves.

Exxon is already posting lower earnings as a result of sinking oil prices, and any resulting write-downs could further depress its reported income.

It was a remarkable concession by a company that has long defended its reserve accounting as conservative and unwavering. The disclosure came as Exxon is under pressure from the New York attorney general and the SEC, which separately are examining whether the company has kept investors informed about the value of its assets.

For critics who say Exxon has been reckless in the face of a global attempt to create a clean energy economy, the announcement was momentous—a sign that carbon-heavy tar sands operations are likely to remain bad economic bets for the foreseeable future.

But that’s not how Exxon described it.

“We do not expect the de-booking of reported reserves under the SEC definitions to affect operation of these assets or to alter our outlook for future production volumes,” said Jeff Woodbury, Exxon’s vice president for investor relations, during a conference call with analysts on the day of the announcement.

Tom Sanzillo, director of finance for the Institute for Energy Economics and Financial Analysis, which pushes for reduced reliance on fossil fuels, said the accounting moves would be a sign that Exxon is finally acknowledging some financial stress. His group released a report in October arguing that the oil and gas giant is in the midst of a long-term decline, based on lagging revenue, declining capital expenditures, increased debt and other factors. Earnings last quarter were $2.7 billion, a 38 percent drop from the previous year. Exxon lost its coveted AAA credit rating from Standard & Poor’s in April. The write-down would be a reaction to all this.

“What that tells you from an analytical standpoint is that the company is cleaning up its balance sheet, but it remains in financial distress,” Sanzillo said of the announcement.

The news came one month after the Wall Street Journal reported that the SEC was examining the company’s accounting to see whether it should have written down some assets, as most of its peers had in recent years. A group of state attorneys general has also been investigating whether Exxon misled investors by concealing its knowledge about the risks from climate change. Two days before Exxon’s filing, New York Attorney General Eric Schneiderman scored a victory when the state’s Supreme Court ordered Exxon’s accountant, PricewaterhouseCoopers, to produce documents subpoenaed in the investigation.

Fadel Gheit, an oil and gas analyst with Oppenheimer & Co., said Exxon is finally reacting to the reality of sustained low oil prices, and that the investigations have contributed to the pressure to act. “It’s a nudge,” Gheit said.

Canada’s tar sands are among the most carbon-intensive oil sources in the world, and Exxon is among the biggest players there. Any de-booking of reserves, then, could potentially have broader effects.

“It’s a signal on oil sands,” Sanzillo said. “It’s a strong indicator for the market up there that for the foreseeable future there is going to be reduced activity. You’re already seeing that, but this may be a more significant statement.”

Full article: Exxon’s Oil Sands Reserves Announcement May Mean Little for the Climate

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