Exxon mobil loses a foe and gains an ally – exxon mobil corporation (nyse xom) seeking alpha electricity experiments


Last week was a good one for Exxon Mobil ( XOM) investors, providing them with some much-needed respite in the midst of what can only be described as an underwhelming year to date (see figure). The big market news, which caused a modest rally in the company’s share price on Wednesday, was the Trump administration’s decision to withdraw from the Obama administration’s nuclear non-proliferation deal with Iran. The prospect of sanctions being once again imposed on the country, including its crude exports, has caused the price of WTI crude to climb by 5% in May so far.

The company also benefited from two developments, one expected and one very unexpected, involving the various climate change investigations and lawsuits that it is defending itself against. The expected (but no less important) development was the filing of an amicus brief by the U.S. Department of Justice [DOJ] that had been requested by the judge hearing the climate change lawsuit brought by San Francisco and Oakland against Exxon Mobil and four of its competitors.

While the Trump administration was always unlikely to file a brief in favor of the plaintiff cities’ claims, the DOJ’s brief ultimately lends heavy legal support to Exxon Mobil. First, the brief makes clear that the lawsuit is contrary to the interests of the federal government, both in the form of a recent Executive Order promoting energy independence and past bipartisan legislation making greenhouse gas emission regulation a federal matter. Lawyers for Exxon Mobil and the other defendants have argued that the lawsuit should be dismissed on those same grounds, so having the DOJ reaffirm that argument lends it additional credibility.

The DOJ went one step further and also answered some of the questions regarding legal precedents invoked by the lawsuit that the federal judge overseeing the case had earlier required the plaintiffs and defendants to both respond to. Not surprisingly, the two sides had opposite answers to the questions given that the judge is currently weighing whether or not to dismiss the lawsuit at the request of Exxon Mobil and its competitors. The DOJ’s response leaned on a heavy body of court rulings at the federal level to show exactly why precedent requires that the lawsuit be dismissed.

More importantly, the DOJ also sharply criticized the Cities’ claim that Exxon Mobil and other fossil fuel producers are liable for the carbon that is contained in the fuels that they produce rather than the carbon dioxide that is emitted when the fuels are combusted, describing the distinction as "illusory." How the court interprets this distinction is of critical importance to the lawsuit’s survival because, as I described last month, of the large body of federal legal precedence making carbon dioxide emission regulation the responsibility of the federal government, specifically the executive branch (in the form of the U.S. Environmental Protection Agency). The DOJ’s argument that it is not possible to separate fossil fuels’ carbon from fossil fuel combustion’s carbon dioxide within the context of climate change damages attacks a fundamental component of the Cities’ lawsuit. Moreover, the brief also points to the vast new cause of action that the lawsuit would create if successful, something that the judge hearing the case had also worried about back in March:

If plaintiffs’ theory is correct, why wouldn’t everyone involved in supplying carbon-based fuels (or in otherwise increasing carbon dioxide, e.g., deforestation) be liable upon a showing that they questioned the science of global warming or sponsored research intending to question it?

Exxon Mobil is the subject of multiple lawsuits beyond just those brought by San Francisco and Oakland, including New York City and ( most recently) Boulder, CO. The lawsuits share many similarities, including common focuses on fossil fuel production rather than combustion and damages (in the form of mitigation funds) for the local effects of climate change. While the DOJ has thus far only formally offered its legal opinion on the California lawsuit, its conclusions regarding these other lawsuits are certainly the same.

If Exxon Mobil found a new ally in the form of the DOJ last week, it also lost a dogged foe in the form of New York State’s (former) Attorney General Eric Schneiderman. Mr. Schneiderman has led a lengthy and multi-faceted investigation under the state’s Martin Act into Exxon Mobil on climate change grounds since late 2015. While the investigation has been far from successful to date, leading Mr. Schneiderman to repeatedly change the cause of action when his office failed to find much in the way of legally-incriminating evidence, his effort served as a political lodestone that led to the formation of the "AGs United For Clean Power" coalition and the launching of similar investigations by other Democratic state attorneys general into Exxon Mobil.

Mr. Schneiderman’s downfall came rapidly and in unexpected form last Monday night after a probe launched by The New Yorker into his activities found legally-incriminating evidence of violence against women. Mr. Schneiderman resigned a few hours after the story’s publication and now, rather than leading a civil investigation into Exxon Mobil, he finds himself the subject of a criminal investigation by his former colleagues.

Mr. Schneiderman’s resignation does not, of course, mean the end of his office’s investigation into the company, let alone those that are being led in other states such as Massachusetts. It does raise the prospect, however, that New York State’s investigation will become limited in scope or even allowed to fade away. Before last week, Mr. Schneiderman was considered to be a leading candidate in New York’s gubernatorial election (the sitting governor, Andrew Cuomo, is believed to be preparing a 2020 run for the White House). Leaked emails show that Mr. Schneiderman was mentioning his investigation into Exxon Mobil as part of campaign fundraising efforts as early as 2016. Given that the investigation’s original focuses have come up empty, the fact that it may have been driven in part by political ambitions could lead his successor to take it in a completely different direction.