In ExxonMobil’s Defense

Because of its long-standing position as the biggest member of the “Big Oil” club, ExxonMobil is a company many love to hate. So, stories about ExxonMobil’s woes generate a lot of schadenfreude, and hence a lot of clicks.

Many people celebrated last year when ExxonMobil’s stock price crashed along with the rest of the oil industry. Meanwhile, many of the people celebrating continued to fuel up at ExxonMobil gas stations. We prefer to blame ExxonMobil for our fossil fuel consumption rather than our own choices.

The latest controversy with the company was reported last week by the The Wall Street Journal. The WSJ reported that the Securities and Exchange Commission has launched an investigation into allegations that the company overstated the value of certain assets in the Permian Basin. ExxonMobil had reportedly fired an employee who complained that unrealistic assumptions were being used to value the asset.

The company has ramping up its activity in the Permian Basin. In 2017, ExxonMobil agreed to buy the Bass family’s Permian assets for up to $6.6 billion. That was a factor that led ExxonMobil CEO Darren Woods to claim in early 2019 that the company would increase oil and gas production in the Permian Basin from 600,000 barrels per day (bpd) to over 1 million bpd.

But last November ExxonMobil dialed those plans back, leading to the charge that they should have known better in the first place to suggest such an ambitious production goal.

Here’s the problem though. We have the benefit of hindsight. It’s easy to look back and see now that certain decisions or assumptions were bad. For instance, ExxonMobil’s 2009 acquisition of XTO Energy looked reasonable when it looked like natural gas prices would remain high for the foreseeable future. But after hydraulic fracturing spurred an explosion in natural gas production — and subsequently a collapse in natural gas prices — the deal looks terrible.

That is going to be ExxonMobil’s defense. Using aggressive projections — even if other ExxonMobil employees thought those projections were too aggressive — is defensible unless it can be reasonably argued that the projections had no realistic basis. Or, unless someone can demonstrate that ExxonMobil knowingly used false numbers.

Many people give oil companies too much credit for anticipating where oil prices are going to be. But oil companies make projections, some of which will be far off the mark. No oil company in 2019 foresaw a pandemic in 2020 that would send oil futures into negative territory. Thus, ExxonMobil will likely reasonably argue that their aggressive plans were upended by the Covid-19 pandemic.

So if you are eagerly anticipating a significant fine or other punishment for ExxonMobil, I think it’s likely you are going to be disappointed.

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