ExxonMobil (XOM) recently said that if low energy prices persist through the end of the year, it will make adjustments in the value of its crude reserves.
That will mean a write-down or elimination from the balance sheet of about 4.6 billion barrels of oil sand reserves in Canada, which become uneconomical to extract. If prices rise again, ExxonMobil will simply re-book the reserves.
This technical adjustment is the kind of exercise performed by all energy companies, which take pains to estimate the future value of what they own, as accurately as possible for their shareholders.
An accounting adjustment, if it occurs, absolutely shouldn't be confused with the kind of write-down that some environmental activists are demanding from ExxonMobil and other energy companies. The activists, backed by New York Attorney General Eric Schneiderman, want ExxonMobil to make the judgment that future climate change regulations and changes in consumer demand will be so extreme that they will render huge quantities of reserves useless.
The activists have embarked on a campaign of political blackmail, but ExxonMobil won't succumb. That is the right decision.
Shareholders are served poorly when companies make accounting changes to conform to ideology.
Schneiderman's war on ExxonMobil didn't begin the deployment of climate change disclosure requirements as a weapon.
Standing with a half-dozen other attorneys general and former Vice President Al Gore, Schneiderman initially announced with great fanfare in March that he would pursue ExxonMobil for hiding the truth about climate change, much as tobacco companies suppressed their knowledge of the harm of smoking.
That claim, however, was soon rendered ludicrous. Since 1983, ExxonMobil scientists have published dozens of mainstream climate change research papers in peer-reviewed journals.
As his attorneys general colleagues dropped their investigations, Schneiderman changed direction. Now, he wants to nail ExxonMobil for making inaccurate forecasts of the impact of climate change on its business.
Schneiderman, for example, is looking at whether ExxonMobil is discounting the risk of climate change by placing too high a valuation on its oil reserves in official disclosures with the Securities and Exchange Commission.
If global warming accelerates, his logic goes, then ExxonMobil would be stuck with "stranded assets."
In other words, fossil fuel reserves wouldn't be worth what the company says.
"There may be massive securities fraud here," Schneiderman told The New York Times. "If, collectively, the fossil fuel companies are overstating their assets by trillions of dollars, that's a big deal."
Publicly traded companies lay out multiple risks to their businesses in SEC filings such as civic unrest, a general economic downturn or natural disasters.
On Jan. 27, 2010, the SEC issued a 29-page interpretive guidance document to remind companies that climate change may be a risk as well.