Exxon underestimating risks of climate action to its business, according to finance analysts

12th September 2014

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James Heffron

ExxonMobil is underperforming on the stockmarket due to a business model which sees it investing in high-risk, low-return projects such as oil sands, according to finance risk experts the Carbon Tracker Initiative (CTI).

The CTI was responding to a report a published by ExxonMobil earlier this year.

This aimed to reassure investors that the company was managing climate-related risk after shareholders Arjuna Capital and As You Sow raised concerns that oil giant’s carbon assets would become stranded due to global action on climate change.

In its report, ExxonMobil rebuffed criticism that its hydrocarbon reserves will become stranded.

“We believe producing these assets is essential to meeting growing energy demand worldwide, and in preventing consumers – especially those in the least developed and most vulnerable economies – from themselves becoming stranded in the global pursuit of higher living standards and greater economic opportunity,” it said.

However, in its response, the CTI claims that ExxonMobil has lost its previous market leadership and lagged behind competitors over the past five years, despite oil prices remaining high.

The CTI acknowledges that there have been industry-wide trends, such as rising costs and fiscal changes that have affected ExxonMobil, but says the firm’s performance also reflects its choice to invest more in capital-intensive, low-return projects including tar sands, heavy oil and arctic developments.

In 2007, such projects accounted for 7.5% of ExxonMobil’s proven gas and oil reserves and around 15% of its liquid reserves.

However, the CTI points out that, by the end of 2013, this had risen to 17% and 32% respectively, while conventional projects fell from 45% to 33% of total proven reserves.

Paul Spedding, lead analyst of the CTI report, said: "Continuing to invest in high-cost, high-carbon investments could pressure future returns and - just as important – increase ExxonMobil's operational gearing to the potential consequences of action on carbon, including higher environmental costs and downward pressure on oil prices. Maybe it is time to consider a "shrink-to-grow" strategy?"

ExxonMobil’s definition of stranded assets is very narrow, essentially taking it to mean “unburnable” and referring to proven reserves only, the CTI argues.

It believes that ExxonMobil should adopt a definition that includes the potential for investments to become uneconomic due to changing market and regulatory forces, including lower future oil prices.

“Any one or combination of these factors could result in previously sunk costs never being fully recovered and/or projects delivering an unacceptably low return to shareholders,” the CTI report states.

ExxonMobil did not respond to a request for comment.

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