Government Takeover: Exxon Stages Christmas Coup
ExxonMobil has long been the definition of a blue chip.
It’s got the history, the management, and the assets.
It’s also used to being on the receiving end of government generosity. After all, the company was even exempt from paying any federal taxes in 2009, despite reaping a record $45 billion in profits.
But this is different.
By nominating its CEO, Rex Tillerson, for Secretary of State and putting Scott Pruitt in charge of the EPA, President-elect Donald Trump has delivered a Christmas coup to the fossil fuel giant.
If they’re confirmed to their respective posts, Exxon will essentially be its own branch of government, dictating policy and rewriting the rulebook to its advantage. These two men alone could deliver billions of dollars to the company’s coffers. And in short order.
Cozying Up to the Bear
Exxon has been one of the companies most harmed by Western sanctions imposed on Russia.
If you remember, back in 2014, Russia invaded Ukraine and seized the Crimean peninsula.
Rather than confront Russian President Vladimir Putin with armed resistance the United States and Europe punished Russia’s economy with sanctions.
Basically, all of Russia’s banking, energy, and defense industries were banned from borrowing from Europe and the United States. They’re also prohibited from buying technology, spare parts, and conducting pretty much any other business activities.
This was a tough blow for Exxon, which has extensive ties with the Russian energy industry.
Indeed, Exxon is the biggest U.S. investor in Russia. The country accounts for roughly 6% of its global production.
Specifically, Exxon has an oil and gas production facility off Sakhalin Island. It’s part of a joint effort with Rosneft to explore the Arctic. That deal, signed in 2011, was personally ratified by Putin.
It included an ambitious oil well that went a mile below the Siberian coast. That well was completed in September 2014, and it could have pumped a billion barrels of oil. But because of the sanctions, Exxon was forced to close it.
In a 2014 SEC filing, Exxon said that the sanctions caused a loss of $1 billion.
“In 2014, the European Union and United States imposed sanctions relating to the Russian energy sector,” the filing read. “In compliance with the sanctions and all general and specific licenses, prohibited activities involving offshore Russia in the Black Sea, Arctic regions, and onshore western Siberia have been wound down. The Corporation’s maximum exposure to loss from these joint ventures as of December 31, 2014, is $1.0 billion.”
Tillerson made at least 20 visits to the White House to speak personally with President Barack Obama about sanctions on Russia, but to no avail.
Something tells me he’ll have more luck with Donald Trump, who has his own business ties to Russia and a personal reverence for Vladimir Putin.
Over the summer, Donald Trump didn’t even know that Russia had already invaded Crimea. To the contrary, he insisted it wouldn’t happen when it already had.
"He's not going into Ukraine, OK, just so you understand. He's not going to go into Ukraine, all right? You can mark it down. You can put it down. You can take it anywhere you want," Trump said in an interview with ABC's George Stephanopoulos.
Again, this was two years AFTER Russia had already annexed Crimea, AFTER two international investigations blamed Russia for the downing of a civilian passenger plane (MH17) in the region, and despite the fact that the Russia-backed rebellion in the eastern part of the country is still ongoing.
Beyond that, Trump has repeatedly insisted Russia didn’t hack American emails and try to influence the presidential election, despite contrary evidence from America’s own intelligence apparatus.
And this is a man who, as President of the United States, can wipe out the Russian sanctions with the stroke of a pen.
Meanwhile, Tillerson just this past June was at the St. Petersburg International Economic Forum, where international companies try to earn the favor of Russian investors. And in 2012, he received the Order of Friendship, an honor that goes to foreign nationals who help strengthen international relationships with Russia.
Oh, and by the way, Tillerson, who has been CEO of Exxon since 2006, holds over 2.6 million shares of the company’s stock. That stake alone is worth roughly $240 million.
I think it’s safe to say the U.S. Russian sanctions are as good as gone.
So, too, are stringent environmental regulations.
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The Second Man Inside
Donald Trump is appointing Scott Pruitt for taking over the EPA.
As Oklahoma’s attorney general, Pruitt worked hand-in-hand with energy companies to sue the very agency he’s now heading.
In one instance, Pruitt simply put his name on a letter written by lawyers for the Oklahoma-based Devon Energy (NYSE: DVN). The letter accused federal regulators of grossly overestimating the amount of air pollution caused by energy companies drilling new natural gas wells in the state.
“Outstanding!” a Devon Energy representative cheered in a note to Pruitt’s office. “The timing of the letter is great, given our meeting this Friday with both E.P.A. and the White House.”
The letter protesting a proposed fracking regulation was also sent two days after Devon contributed $125,000 to an association led by Pruitt on March 31. Furthermore, during his 2010 race, Pruitt’s campaign fund received $5,000 from Devon’s PAC and $5,000 from Executive Chairman Larry Nichols.
And Devon Energy is hardly Pruitt’s only suitor.
Pruitt, who spent two years at the Republican Attorneys General Association, has also received thousands of dollars from Chevron, ConocoPhilips, Koch Industries, and others.
According to a New York Times investigation, energy industry lobbyists have drafted letters for him to send not just to the EPA, but the Interior Department, the Office of Management and Budget, and even President Obama.
Industries that he regulates have also joined him as plaintiffs in court challenges. That’s unusual for a state attorney general, who traditionally sues companies to force compliance with state law.
And incidentally, Pruitt has publicly decried investigations by Democratic attorneys general who have accused ExxonMobil of misleading shareholders by funding climate denial groups. He argued in an op-ed in the National Review last May that debate on climate change "is far from settled" and that the company is exercising free speech. "Dissent is not a crime," it said.
No doubt, Exxon has paid enormous sums for environmental regulations over the past several decades. Just since 2010 Exxon has been targeted with 70 violations totaling $81,397,203 in penalties.
Beyond that the company's track record looks something like this:
- $600 million of fines and damages related to the 1989 Exxon Valdez spill. And more than $1 million for a Baton Rouge refinery explosion that same year.
- In 1991, the U.S. EPA proposed a penalty of $575,000 against Mobil's facility in Paulsboro, New Jersey for failure to report several accidental releases of hazardous substances.
- In 1993, Exxon Chemical agreed to pay more than $3.8 million in fines and restitutions to resolve federal charges for submitting false test reports to the U.S. Army to qualify for contracts to supply fuel additives.
- In 1998, the U.S. Justice Department, acting on behalf of the EPA, sued Exxon USA for violations of the Clean Air Act and demanded up to $4.7 million in fines. Later that year, Exxon and two other oil companies agreed to pay $4.8 million to settle a lawsuit claiming the firms had discharged unacceptable levels of toxic selenium into San Francisco Bay.
- In 2001 ExxonMobil agreed to pay $11.2 million to settle a 1990s federal case in which Mobil was accused of dumping waste with carcinogenic benzene into the Arthur Kill waterway of Staten Island in New York City — and then lying about its actions.
- In 2008, ExxonMobil agreed to pay about $6 million to resolve charges that it violated the terms of a 2005 Clean Air Act settlement concerning emissions from its refineries in Texas, Louisiana, and California.
- Also in 2008, ExxonMobil agreed to pay $2.64 million to settle EPA charges that it violated the Toxic Substances Control Act by improperly handling and disposing of PCBs on an offshore oil and gas platform in the Santa Barbara Channel off the Southern California coast.
- And in 2009, a federal jury found ExxonMobil liable for contaminating ground water in New York with the gasoline additive MTBE and awarded the city $104 million in compensatory damages.
Needless to say, having a friend running the EPA is really going to help this company stay out of trouble.
Between Pruitt and Tillerson, it’s hard to say who’s more valuable. This is Exxon’s dream cabinet.
Any help at all from oil and gas prices in the next few years would just be gravy.
I think I’m gonna go call my broker.
Jason Simpkins is a seven-year veteran of the financial publishing industry, where he's served as a reporter, analyst, investment strategist and prognosticator. He's written more than 1,000 articles pertaining to personal finance and macroeconomics. Simpkins also served as the chief investment analyst for a trading service that focused exclusively on high-flying energy stocks. For more on Jason, check out his editor's page.