Potential Frauds in Disclosing Carbon Reduction Commitments in the Oil and Gas Industry

One of the likeliest areas of fraud in the oil and gas industry concerns overstating a company’s financial position

Fossil fuels – namely, oil, gas, and coal – played a critical role in the growth of the world economy and continue to provide a large portion of the world’s electricity, heating, and transport fuels. However, rapidly growing demand among policymakers, investors, and everyday citizens for alternative energy sources that avoid carbon pollution is threatening the industries that produce these fuels. Prior to the emergence of the novel coronavirus, total demand growth for fossil fuels had slowed to just 1% a year, and in nearly 40% of the world, fossil demand was already falling. Given the sudden drop in economic activity due to the coronavirus, many experts believe that 2019 was probably the year of peak demand worldwide.

The reasons for this rapid decline in demand are clear: the urgency of climate change and the arrival of alternative technologies. In the past few decades, the private sector, with support from governmental policies, has rapidly scaled up the technologies such as wind energy, solar energy, energy storage, energy efficiency, and electric vehicles that avoid the carbon and other pollution caused by fossil fuels. Suddenly these technologies are price-competitive and increasingly available around the world, and the movement to adopt them is accelerating rapidly.

The backdrop, of course, is climate change. In the past decade, public awareness of the extensive damage caused by carbon pollution (the driver of climate change) has grown exponentially as the world witnessed the devastation of storm surges, wildfires, and other extreme events linked to climate change. Along with this awareness comes intensified public demand for action. Governments around the world have begun responding by putting in place aggressive new limits on carbon pollution and incentives for low-carbon technology.

In the Paris Climate Agreement, ratified in 2016, leaders from virtually every nation agreed to take action to keep average global temperatures below 2°C above preindustrial levels, with a target of 1.5°C. Although the Trump Administration has since withdrawn the U.S. from the Agreement, numerous sub-national governments in the U.S. (including California and New York, which together represent nearly one-quarter of the U.S. GDP) have taken powerful actions in support of the Paris goals.

The business and investor communities have likewise responded to the public’s demand for action. For example, over 200 major companies have committed to power their operations with 100% renewable energy by specified dates.  Over 130 banks collectively holding US$47 trillion in assets, or one-third of the total banking sector, have likewise made specific commitments to engage with the largest greenhouse gas emitters to improve their climate performance and ensure transparency on emissions as part of the Climate Action 100+ initiative. Earlier this year, Blackrock Inc., the world’s largest fund manager, joined this initiative, announcing that climate risk considerations would be at the center of its US$7 trillion strategy.

This rapid shift among policy makers, businesses and investors means that demand for oil and gas as well as coal is virtually guaranteed to fall in the coming decades. The key question is whether the companies in these sectors will honestly acknowledge the declining demand and make adjustments.

Respected industry analysts such as Carbon Tracker refer to this problem as that of a “carbon bubble.” Many if not most fossil fuel companies, including those listed on stock exchanges with rigorous disclosure rules, own assets that cannot be developed without exceeding agreed-upon limits on greenhouse gas emissions. This means that these assets are at great risk of becoming stranded, destroying vast amount of shareholder value.

There are two types of fraud that will need to be guarded against as oil and gas companies grapple with solutions to this challenge: exaggerated commitments of future carbon reductions and fraudulent financial statements.

Exaggerated Carbon Reduction Commitments

In the past few years, many oil companies have acknowledged the importance of the emissions reduction targets in the Paris Agreement on Climate Change and have begun making substantial commitments to cut their own carbon emissions in pursuit of those targets. However, the evidence to date suggests that these carbon reduction commitments must be looked upon skeptically. For example, Carbon Tracker surveyed 30 top oil and gas companies and found that top executives continue to be rewarded for actions inconsistent with their companies’ commitments to carbon reduction.

Moreover, many firms continue to invest heavily in oil and gas infrastructure projects that would undermine the very Paris Agreement targets they claim to support. In fact, a recent study finds that the Paris Agreement’s 2°C target requires that more than 80% of all proven fossil fuel reserves be left in the ground and that investments in such resources may need to be treated as stranded assets. Another study focuses on fossil fuel infrastructure. It finds that fossil fuel projects already in the pipeline may themselves commit the world to enough carbon pollution to seriously jeopardize the targets in the Paris Climate Agreement.

Finally, many companies’ carbon reduction commitments focus on “Scope 1 and 2” emissions (those resulting from oil and gas operations) rather than “Scope 3” emissions, those generated at the point of oil and gas consumption, where over 90 percent of greenhouse gas pollution from oil and gas happens.

Whistleblowers will be invaluable in exposing actions being undertaken within oil and gas companies that contradict public pronouncements about action on climate change.

Fraudulent Financial Statements

Unless and until they are willing to confront the prospects of liquidation, oil and gas companies will need to make the case to investors for continued expansion of oil and gas infrastructure or a shift to other, less polluting technologies. So far, companies do not appear to be poised to make a major shift to clean energy. Yet making the case for expansion of oil and gas assets with an honest assessment of likely revenues and expenses is becoming increasingly difficult.

The difficulty is especially apparent with respect to development of new oil and gas fields. First, by definition, accessible oil and gas has already been discovered; future discoveries will be in increasingly costly-to-reach locations such as the Arctic and the deep water of the Gulf of Mexico. Second, any case for new investment must show that these locations indeed have significant amounts of recoverable oil and gas. Third, the case must include a showing that there is a long-term market for oil beyond the reserves already on the industry’s books. Finally, the case for new investment must acknowledge the local and regional environmental damage and describe the likely costs of remediating that damage — as well as anticipated taxation of carbon pollution.

Making this case for continued expansion will become increasingly difficult as countries around the globe redouble their commitments to Paris climate targets, which effectively foreclose any significant exploration for new reserves. Unless oil and gas companies are prepared to argue that Paris climate targets are meaningless – so far, they have joined the chorus of voices in support of the targets – companies may be tempted to use deceptive statements, such as overstatement of the value of assets in reserves already on the books, to make their case to investors for further exploration.

Whistleblowers will be invaluable in exposing any fraudulent financial statements designed to justify business-as-usual exploration and production.

Key Whistleblower Tools

Whistleblowers with knowledge of fraud in connection with oil and gas companies’ commitments to carbon reductions, and in connection with the financial statements they use to justify continued exploration and production, have a host of powerful laws available to them. The most powerful of these laws – the False Claims Act, the Dodd-Frank Act, and the whistleblower provisions of the Internal Revenue Code – offer confidentiality, so that those who blow the whistle while remaining inside a company engaged in wrongdoing can avoid retaliation. These laws also offer financial rewards ranging from 10 to 30 percent of the monetary sanctions recovered by prosecutors whose cases benefit from (and often originate from) the whistleblower’s information.

One of the most successful whistleblower laws, the False Claims Act, which now exists in 31 states in addition to in the U.S. Code, has the unique “qui tam” feature that allows the whistleblower to pursue a case in the name of the government if the government elects not to “intervene,” i.e., take over the prosecution of the case.

Although the False Claims Act is best known for reining in fraud in connection government procurement, it also regulates fraud in connection with applications for government permits, such as applications for offshore oil leases.

Whistleblower laws are complex and it is recommended that whistleblowers consult with a qualified attorney before acting on any information about potential wrongdoing. Through its Legal Assistance Program, the National Whistleblower Center helps connect would-be whistleblowers to attorneys specializing in whistleblower law.

Confidentially Report Fraud

Do any of the above types of fraud look familiar? Do you think you’ve witnessed, or you know of another kind of fraud not mentioned here? You could have a whistleblower case.

Providing legal assistance to whistleblowers is a top priority of the National Whistleblower Center (NWC). NWC’s Legal Assistance Program (LAP) helps whistleblowers exercise their rights in three ways. Through the LAP, NWC educates and trains potential whistleblowers; assists them in finding a whistleblower attorney; and supports high-impact whistleblower litigation.

NWC works with an independent public interest law firm, the National Whistleblower Legal Defense and Education Fund (“Fund”), which provides a secure intake form that allows whistleblowers to submit basic information about their case on a confidential basis.

Potential whistleblowers looking for a whistleblower attorney are encouraged to submit their concerns to the Fund’s intake site. Once submitted, the intake form will be reviewed by a highly qualified whistleblower attorney, who may make one of several recommendations.

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