ExxonMobil's recent warning to investors that it might slash the estimate of its Canadian tar sands reserves could undermine investor confidence in the company's future. But the shift appears unlikely to affect the oil giant's climate impact any time soon.
In a financial disclosure filed Oct. 28, Exxon warned shareholders that after nearly quadrupling its reserves in the oil sands over the past decade and defending its assessment of their worth, it may be forced to erase most of those deposits from its books.
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.
For one thing, prices might rebound, allowing Exxon to add the reserves back on its books. Exxon could also lower its operating costs to restore the project's viability.
Either way, Exxon said, it will continue to produce just as much as oil from the tar sands.
Exxon Under Pressure From Authorities
Oil companies use reserve accounting to help investors estimate their worth. It's a complex calculus that determines an amount of the company's oil and gas that is technically and economically recoverable based on the recent price of oil.
So by claiming reserves in its financial disclosures, Exxon is asserting that they can be developed at a profit.
In its statement, Exxon said that in addition to de-booking reserves, it may use another accounting measure, called an impairment or a "write-down," to reduce the value it assigns to some of its projects. That move, which would be expressed in its annual financial disclosure as a one-time charge in dollars rather than barrels, "requires significant management judgment, particularly in cases where an asset's life is expected to extend decades into the future," the company said.
Until Exxon completes its accounting and issues its annual report in a few months, "it is not practicable to reasonably estimate" how big the hit might be, it said. If the company de-books 4.6 billion barrels, as it suggested, it would represent almost 20 percent of its global reserves, including 70 percent of its tar sands oil.
"That's a meaningful amount of reserves and something investors will be looking at very carefully," said Luana Siegfried, a research associate with Raymond James & Associates.
Given Exxon's size, however, the move might not have as much of an impact on the company as it would on many others, she said. A smaller company, for example, might face constraints on borrowing because of falling collateral value, while Exxon's broad portfolio, which extends into refining and chemicals, could protect it. The company will likely add reserves from other sources that would at least partially compensate for any loss.
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.