By Karen Savage
Former Exxon chief executive Rex Tillerson testified Wednesday that he didn’t know the value of the company’s Canadian oil sands assets dropped dramatically after the company changed how it assessed the risks of climate change to those assets.
Tillerson’s highly anticipated testimony came during the second week of a trial to decide whether Exxon misled investors about the risks posed to its business by climate change, in violation of New York’s powerful Martin Act. He testified in a packed courtroom before New York Supreme Court Judge Barry Ostrager. He is the highest profile witness questioned so far in the trial, having served as not only the oil giant’s chief executive but also Secretary of State under President Trump.
New York Attorney General Leticia James alleges that Exxon deceived investors by failing to disclose it used two different sets of numbers to assess climate risk, one for shareholders and the other for its own internal calculations. She said the deception reached the highest levels of the company, including Tillerson.
As a result, calculations of Exxon’s oil sands assets—which are highly vulnerable to climate risk—appeared more valuable to investors than they would otherwise be, according to the AG’s complaint.
Under questioning by Kim Berger, an attorney for the AG’s office, Tillerson denied that the company misled investors but frequently said he did not recall information related to the allegation.
Exxon maintains its disclosed proxy cost of carbon and internal greenhouse gas cost, which were aligned shortly after the company released its 2014 Energy and Climate and Managing the Risks reports to shareholders, were used for two different purposes. It says the proxy cost of carbon was used to project global energy demand, while the greenhouse gas cost was used to evaluate investment opportunities.
Investors, however, have testified that those reports misled them to believe that the proxy cost of carbon was being used to evaluate investments.
When asked if he would be surprised to learn that the alignment of those numbers resulted in negative financial impacts to calculations of the value of Exxon’s assets in Alberta, Tillerson said he didn’t recall the gloomy projections.
Tillerson said the two reports were issued at the urging of investors who had grown increasingly concerned about risks posed to the company by climate change.
“We were getting a lot of these requests, it shows how important the issue was to society—it’s why we were interested in it too,” he said.
When asked why the two numbers were aligned, Tillerson said he didn’t recall. He said as chief executive he implemented a system to manage Exxon’s climate risk.
When asked by Berger, Tillerson acknowledged that Exxon had acquired large reserves of bitumen, or oil sands assets in 2014, mainly in its Kearl project, which he agreed was a “significant investment” for the company.
The extraction of bitumen from the oil sands is an extremely carbon-intensive process.
“These were very challenged resources,” Tillerson said, adding that Exxon was constantly asking “what can we do to get the cost down in these things.”
Tillerson said he would have expected negative financial information about the value of assets like the Kearl project to have been highlighted in quarterly meetings, which were held to keep the Management Committee abreast of issues with its assets and projects.
“At some point they would explain this—this is how we’re dealing with greenhouse gas costs at Kearl,” Tillerson testified, adding that oil sands have large greenhouse gas footprints.
“I’m confident we had a discussion about it,” Tillerson said.
Berger asked Tillerson if he recalled Exxon’s decision not to apply greenhouse gas costs, which rose to $60 per ton in 2030, to its long-term projections for the Alberta investments, but to instead apply local greenhouse gas regulations that were in place at the time.
Tillerson said he didn’t recall such a decision, but said that would have been in line with Exxon’s policy, as outlined in the company’s DataGuide, one of the company’s internal planning documents.
“The DataGuide very explicitly gives to the local organizations—in fact we encourage the local organizations—to go inform yourselves about the local regulatory environment,” Tillerson said, adding that Kearl is operated by Imperial Oil, a subsidiary controlled by Exxon, but also a publicly traded company with its own board of directors.
“Imperial would have been the organization to do that in this case,” Tillerson said. “They, I’m confident, were doing this.”
Berger pressed further, asking Tillerson if he recalled a decision by planners in Alberta to assume for planning purposes that local legislation would not increase greenhouse gas emissions costs in the future.
“Is it fair to assume Alberta’s legislation would be flat?” Berger asked.
“I don’t think it’s an unreasonable assumption,” Tillerson said, adding that emission costs in the Canadian province have varied.
“It was very clear that the energy industry is crucial to Alberta,” Tillerson said. “The Alberta government doesn’t want to put the oil sands out of business.”
During cross-examination, Theodore V. Wells, lead attorney for Exxon, directed Tillerson’s narrative.
Wells pushed back on the importance of greenhouse gas costs to investment decisions, asking whether that value or the proxy cost of carbon carries more weight.
“Proxy cost is much more important because when you get to an investment opportunity, the price you decide will be price times something,” Tillerson said. “That has a huge impact on that top line of revenue then you deduct expenses … greenhouse gas cost would be one of many.”
Wells then asked if Exxon used both numbers when analyzing new projects, which Tillerson said the company did.
Does Exxon have any incentive to “low ball” the numbers when planning, Wells asked.
“We would be misinforming ourselves—I’m not sure why I’d misinform myself,” Tillerson said. “We have a defined amount of capital we’re able to deploy.”
Wells then asked Tillerson which key items drive the approval of new proposals by the management committee.
“What the cash flow models are telling us—items that have price, volume, certainty and capital expenditures have more importance—that’s because these projects are in the multiple of billions of dollars,” Tillerson said, adding that other factors, such as the local geopolitical environment, are also part of the decision, along with dozens of operating expense factors.
“Of which greenhouse gas costs is just one subcomponent,” Wells asked.
“It’s just one line item in the operating expenses,” Tillerson said. “I don’t ever remember greenhouse gas costs being a material factor.”
“So, as a general rule, the entire [operating expense] category—not just the greenhouse gas component, is not usually a driver,” Wells said, more than asked.
“It’s not that it’s not important,” Tillerson agreed. “The [operating expense] has no impact.
In her redirect, Berger pressed Tillerson on that assertion and whether it applies to the Alberta oil sands assets.
She showed the court Exxon’s internal economics evaluation guidelines, which state that “operating expenses usually have an insignificant impact on a projects economics, however in some unconventional developments, such as oil sands and unconventional gas, operating expense impacts can be significant.”
In order to prove fraud under the Martin Act, the AG must establish that potentially deceptive information provided by Exxon was false and that investors would have considered that misinformation to be important to their investment decision.
Ostrager has allowed the AG, which is expected to call several more witnesses, including financial experts, shareholders and Exxon employees, until Monday to wrap up its case. Exxon will then have until Nov. 12 to present its defense. Ostrager has said he intends to render a decision no more than 30 days after the trial ends.