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Soon enough, Raymond began boasting the opposite—that the company was actually increasing its reserves year after year, as Steve Coll details in his history of Exxon, Private Empire. The Securities and Exchange Commission sets the rules for what companies can report as reserves, and at the time, it did not allow for the inclusion of the oil sands, still a fringe part of the industry. But Exxon included them anyway—as an additional row in their reports so as not to run afoul of the rules. (The SEC modified its rules to permit inclusion of these reserves in 2009.)
Canada's oil sands, also called tar sands, lie beneath a swath of northern Alberta about the size of New York State. They are a viscous mix of sand and bitumen that's generally strip-mined and then heated and treated to produce an oil that can be refined into fuel. (Where the resource is found deeper below the surface, companies melt the mix underground with giant steam injections before pumping it out.)
After a wave of energy nationalizations in the Middle East and elsewhere, Alberta's tarry resource represented one of the world's largest stores of oil that was open to private investment, and Exxon held a competitive advantage there through its controlling stake in Imperial Oil, a top Canadian oil company.
After it agreed on a merger with Mobil Oil in 1998, Exxon acquired a project known as Kearl. Decades later, it would become the company's biggest tar sands operation, with nearly 5 billion barrels of recoverable oil spread across 75 square miles of open pit mines, tailings ponds and industrial facilities in a remote region 280 miles north of Edmonton. For Exxon, this obscure but vast resource represented the difference between shrinking and growing.
It wasn't until 2008, however, when oil prices spiked above $130 per barrel, that Exxon began construction at Kearl. By the following year, the company had pumped $2 billion into the project, roughly doubling Exxon's tar sands reserves over two years to 2.7 billion barrels.
Barack Obama had just been elected president, and Congress was debating a bill to cap greenhouse gas emissions. So just as the tar sands were rising in prominence for Exxon, the company was grappling with what a carbon-constrained future might look like.
All in on Kearl
Calculating the future cost of carbon is fraught with uncertainty. Beyond the impossibility of predicting the future, carbon pricing can take any number of forms. It can be direct—a tax on oil at the pump, or on emissions from big polluters—or can come through more complicated regimes like a cap-and-trade system. For an oil company like Exxon, a carbon tax can fall directly on the emissions from a refinery or oil sands facility, but also indirectly by nudging consumers away from oil towards lower-emissions alternatives. A "proxy" cost helps cut through the uncertainty, providing a stand-in estimate to plan around.
In its 2010 Outlook for Energy report, which scanned 20 years out, Exxon projected carbon prices would rise steadily and eventually reach $60 per ton in 2030. But it turns out that, at the time, Exxon had a second estimate for carbon pricing—it called this one a "greenhouse gas cost" rather than a proxy cost—which company strategists used to evaluate investments and which was not disclosed publicly. This internal greenhouse gas cost estimate did not rise above $40 per ton, according to the complaint.
In a 2011 email exchange cited in the lawsuit, Robert Bailes, the company's greenhouse gas manager, proposed aligning the two cost estimates by using the higher set of figures only.
"Rex has seemed happy with the difference previously," replied Tom Eizember, a planning manager, referring to then-chief executive Rex Tillerson. Apparently, he wrote, Tillerson liked that the lower greenhouse gas costs didn't give as much incentive to invest in efforts to cut emissions.
From this perspective, the low costs were conservative—there was less risk in wasting $1 billion on a carbon capture project, say, that may turn out to be a money-loser if carbon remained cheap. But the opposite was also true, Eizember noted: the low cost estimate would prove to be riskier for assessing polluting projects if carbon prices rose higher.
In a June deposition, Tillerson said he didn't recall discussing the issue with Eizember, suggesting that if they did talk about it, "they weren't substantive discussions because they didn't stick with me."
Also in 2011, the complaint says, an internal presentation by Exxon's vice president of environmental policy and planning warned that high greenhouse gas costs would present a "major concern" for the company's more energy-intensive operations, including oil sands, which he said would be "vulnerable."
It's important to note that the risk in the tar sands is not merely because they are expensive and polluting, but also because the investments last decades. Kearl is expected to continue operating for more than 40 years, past a point when scientists say the world will have to zero out fossil fuel emissions. If a decade gets lopped off the end of a project, that can translate into huge losses.
As Exxon planners were warning in 2011 about the oil sands' the vulnerability to carbon pricing, the company funded an expansion of Kearl, even before the completion of phase one, which came the following year at a total cost of about $13 billion. The project eventually boosted Exxon's tar sands reserves to more than 5 billion barrels, or about one-third of its global oil reserves. This gave Exxon a far bigger stake there than any of its peers and placed the company head and shoulders above its competitors in its total reserves. As oil prices hovered above $100 per barrel in the early 2010s, Exxon was sitting comfortably with profits topping $40 billion in some years.
The industry was projecting that Canada's tar sands production would grow to 5 million barrels per day by 2030—about half of Saudi Arabia's current output. With three major tar sands projects now producing, Exxon applied to build a fourth in 2013, called Aspen, about 20 miles south of Kearl.
At the same time, as scientists continued to report ever more ominous risks posed by climate change, activists and politicians began turning up the pressure for sharply reducing emissions. The math of the global carbon budget was hardening. To avoid dangerous warming, some of the world's oil reserves would have to be left in the ground, the scientists and climate advocates said. The tar sands were like a fatty cut of meat in the world's energy mix—lower in value and higher in carbon—ripe for trimming.
In March 2014, hundreds of protesters were arrested at the White House while urging President Barack Obama to deny a permit for the Keystone XL pipeline. Because the pipeline would carry oil from the tar sands to refineries on the Gulf of Mexico, environmentalists had turned it into an embodiment of the climate fight, something concrete around which to rally activists.
Hundreds of protesters were arrested outside the White House in March 2014 during demonstrations against the Keystone XL pipeline. Credit: NICHOLAS KAMM/AFP/Getty Images
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