State and federal investigators are zeroing in on ExxonMobil's accounting practices as part of two independent probes, asking whether the energy giant might have misled investors about the value of its assets.
Increasingly, those assets are made up of Canadian tar sands oil, among the world's most expensive and dirtiest forms of crude oil.
An InsideClimate News analysis of the company's financial disclosures shows that Exxon's oil sands reserves grew dramatically over the past decade. Doing so has deepened the company's dependence on an oil source that some economists say should be one of the first to be abandoned if governments decide to leave much of the world's fossil fuels in the ground to stave off global warming.
Since 2007, Exxon's tar sands reserves grew to 5.1 billion barrels from 1.4 billion barrels, nearly quadrupling. As a percentage of the company's total liquid reserves, these holdings more than doubled to 35 percent from 17 percent.
The Wall Street Journal reported this month that both the U.S. Securities and Exchange Commission and state attorneys general are examining whether Exxon is adequately accounting for the plunge in petroleum prices and the prospect that governments might limit the use of fossil fuels to fight climate change.
An oil company's most elemental accounting figure is its total reserves, which represents not simply a total of a company's oil and gas in the ground, but an estimate of how much is technically and economically recoverable. The complicated measurement is based on geology and the economics of oil, with high prices opening up harder-to-access stores. The calculation helps investors figure out what a company is worth.
As oil prices have fallen over the past two years, Exxon has maintained that its tar sands reserves are safe. The position may put the company on shaky ground, said Tom Sanzillo, of the Institute for Energy Economics and Financial Analysis, which favors backing away from fossil fuels.
"It is a very expensive process and that requires a very high price of oil," Sanzillo said. "So it is the least likely, if you will, of the Exxon investment portfolio to produce the expected results."
For years, activist shareholders have been pressing the company to reveal more about the risks to its business from climate change. In 2014, Exxon responded with a detailed report that largely brushed aside any concerns, saying oil and gas will remain the dominant sources of energy through 2040 and that it would be able to exploit all of the reserves on its books.
"We are confident that none of our hydrocarbon reserves are now or will become 'stranded,'" the company wrote.
But that position may underestimate the shift to new sources of energy, according to the Carbon Tracker Initiative, a UK-based nonprofit that analyzes the impact of climate change on financial markets. The group published a response to Exxon that same year warning that international efforts to cap greenhouse gas emissions increasingly will turn tar sands and other high-cost projects into bad investments. In fact, the response said, this trend was already dragging down shareholder returns in recent years so that they lagged behind those of the broader stock market and some of Exxon's peers after leading them for decades.
Some analysts, including Fadel Gheit of Oppenheimer and Co., defend the company's position, noting that while oil prices may be low today, they are prone to fluctuation. "Their track record has been right," Gheit said of Exxon.
Reserves are an oil company's primary asset, and they're constantly being depleted as the company drains its oilfields. In order to grow and keep investors happy, a company must relentlessly search for new reserves, a process Gheit likened to running on an ever-accelerating treadmill. Because of their size, the tar sands represent one of surest ways to stay on the treadmill. All you need is lots of money.
"It's a strategic decision that they made because investment in tar sands is very heavy, front-loaded," Gheit said, "and not many companies can make it."
Exxon did not respond to questions for this article, but Rex Tillerson, the company' chairman and chief executive, has defended the policies that are under review by the SEC. The company seeks to avoid reducing the value of, or writing down, its assets, saying it takes conservative positions from the start.
Canada's tar sands deposits lie beneath nearly 55,000 square miles of northern Alberta and hold more than 160 billion barrels of recoverable oil, making them the third-largest proven reserves in the world. They contain a mix of sand, clay and bitumen, a heavy hydrocarbon almost the consistency of peanut butter. Too thick to flow, the bitumen must be heated and separated from the earth before being refined. The energy-intensive process gives off far more greenhouse gases than conventional oil production.
The recent jump in Exxon's tar sands reserves follows decades of investment dating back to the 1960s. Exxon was one of the first companies operating there, primarily through Imperial Oil, a leading Canadian energy company that it controls. In 1964, it was a leading investor in Syncrude, a mining project that continues to extract bitumen from deposits near the surface. That same year, the company began pioneering technology in the Cold Lake region that used steam to extract heavy crude from oil sands deposits that are too deep to mine. Most recently, Exxon developed the Kearl project, another mine that accounts for a third major portion of its Canadian holdings.
As world oil prices climbed to record highs in the mid-to-late 2000s, peaking above $140 a barrel in 2008, energy companies poured money into Canada's tar sands, investing $18.1 billion that year, according to the Canadian oil trade association. Now, with prices hovering around $45 a barrel, capital expenditures in the entire Canadian oil and gas industry have crashed more than 60 percent over the last two years.
"You have them taking that big bet and then having the market fall apart on them, and perhaps much longer term than they've ever seen before," Sanzillo said. The U.S. Energy Information Administration predicts oil prices to rise modestly over the next year, staying below $60 per barrel.
Sanzillo, who once helped oversee New York State's public pension funds as deputy comptroller, said investors need to demand a plan from Exxon to adjust to a new market. "They're too damn big to shrug off," he said.