• Ceres Asks SEC to Review Oil Company Reporting
  • May 25, 2015 | Author: Charles T. Wehland
  • Law Firm: Jones Day - Chicago Office
  • The investor group Ceres asked the SEC to scrutinize the alleged failure of oil companies to disclose carbon asset risk by oil companies. An April 17, 2015 letter from Ceres on behalf of investors representing more than $1.9 trillion in assets under management specifically requests the SEC to issue comments asking issuers to "address reduced demand scenarios, risks associated with capital expenditures on high cost unconventional resource projects and associated stranded asset risks."

    While the letter is a continuation of efforts by some investors to obtain disclosure of more information related to climate change and sustainability, it also signals a departure from previous general requests to the SEC because it identifies three issuers that the investors want the SEC to give special scrutiny. The main complaint by the investors is that the SEC filings by these three oil companies do not discuss future scenarios where hydrocarbon demand goes down and how these scenarios affect decisions on capital and exploration expenditures. The investors profess a concern that upcoming capital expenditures and their associated payback periods and break-even prices cannot be justified if the low hydrocarbon demand scenarios come to fruition.

    The investors suggest that their request is supported by the changing economics of the oil industry, including an estimate by the Carbon Tracker Initiative that approximately $1.1 trillion in capital expenditures will occur in the next 10 years on carbon-intensive projects that require at least an $80 per barrel break-even price. The investors note that the SEC rules require disclosure of material trends and uncertainties and that 2010 SEC guidance on climate change disclosure specifically suggested disclosing as a material uncertainty the potential decreased demand for goods that produce significant greenhouse gas emissions. As a result, the investors variously state that they "require" information about (i) the carbon content of reserves, (ii) capital expenditure plans for new reserves, including payback periods and alternative uses of capital, (iii) long-term risks to unproduced reserves, and (iv) the trend toward high-cost, carbon-intensive exploration projects. For contrast, the letter points to two other oil companies that agreed to provide information about low-carbon scenario assessments starting in 2016.

    The Ceres letter continues the drumbeat of investor demands for more disclosure on these topics, and not just qualitative discussion but also quantitative analysis. This letter could be viewed as part of a campaign to discourage carbon-intensive oil and gas production more than it is an effort to obtain information needed for investment decision. After all, if an oil company's assessment of the risk of possible future low-carbon scenarios is relevant to an investor, the absence of that discussion by the three companies identified in the Ceres letter should tell the investor all that it needs to know.