Marathon Petroleum Corporation (MPC)
Annual General Meeting, 26th April 2023
Proposal No. 10 – Shareholder proposal seeking an audited report on asset retirement obligations
Proponent: State of New Jersey Common Pension Fund D
Memo submitted by: KBI Global Investors
The full text of this proxy memo may be viewed at this link.
SUMMARY
Expansive goals to reach net zero emissions by 2050 will radically alter the global energy profile. Consequently, oil and gas assets built at a time when they could be expected to operate indefinitely must be reevaluated to consider this shift. If those assets cease to provide sufficient revenue, they will need to be retired and the associated legal liabilities could be material yet are unknown to investors. Disclosure of what those costs would be today, gives investors actionable information to assess long term value.
RATIONALE FOR SUPPORT OF THIS RESOLUTION
- Asset Retirement Obligations could present a material risk to investors in the energy transition. This disclosure will provide insight that is decision useful as investors assess long term value and is consistent with U.S. GAAP.
- Information related to AROs (aka decommissioning) is reported by peers.
- Disclosure of this information is consistent with TCFD guidance and has strong investor support.
- Asset Retirement Obligations could present a material risk to investors in the energy transition.
The energy transition underway necessitates that energy companies re-evaluate assets to understand how each asset will contribute to a low carbon economy. Marathon Petroleum Corporation relies on substantial revenues from products related to transportation, a sector which is undergoing a rapid transformation to electrify, likely dampening the market for gasoline, diesel, and motor oil.
This resolution is seeking the disclosure of the undiscounted value of Asset Retirement Obligations, which can be assessed separately from any assumption relating to the asset life. There are widely different views of how the energy transition may unfold, and this information will allow investors to make their own assessment of the timing for when those liabilities may come due, which may differ from the company’s projections. The resolution is not asking the company to change judgements on timing, but to disclose information that the Company (and its auditors) should be prudently scrutinizing as a matter of course.
- Information related to AROs (aka decommissioning) is reported by peers.
The foundation of this request is that asset lives that were once considered indeterminate may, with the energy transition, have finite lives. The legal obligation to retire those assets would in that case come due. The resolution asks for an “audited report to shareholders that contains the undiscounted expected costs to settle obligations for AROs with indeterminate settlement dates” which would be the amount to settle those liabilities today. Investors could then make their own assessment of when those liabilities might come due.
The Company maintains that “industry practice” is that AROs for assets with indeterminate lives are unreported. We agree and maintain this practice is an accounting loophole that has been exploited to obscure off balance sheet liabilities that may be material. Some companies are reporting the undiscounted cost of asset retirement obligations, and some jurisdictions are requiring bonding provisions[1] [2] for reported upstream AROs to avoid shouldering the burden of these liabilities in the future.
bp, in the 2021 Annual Report includes undiscounted estimates of decommissioning and environmental liabilities. In addition, bp 2021 describes the process for assessing recoverability[3], and how the audit committee considered decommissioning liabilities. bp’s independent auditor, Deloitte, noted decommissioning costs as a key audit matter, challenging managements judgment that decommissioning provisions are not required for refineries as their decommissioning date is indeterminate.[4]
Shell’s 2022 financial report recognizes that the energy transition may impact decommissioning and restoration assumptions. Shell accelerated the assessment of the discount rate from a 30-year term to a 20-year term and recognizes the undiscounted provision at $33 billion.
Marathon Oil’s 2021 Sustainability Report explains that a sensitivity analysis on current ARO liability which reduced asset lives for 10 years, revealed a potential increase in liability from 2% to 3% of net PP&E.[5]
Eni’s 2021 Annual Report includes estimates of future development and decommissioning costs of €32.2 billion, undiscounted.[6]
- Disclosure of this information is consistent with TCFD guidance and has strong investor support.
The request to disclose this information is also consistent with guidance from Task Force on Climate-related Financial Disclosures (TCFD). The Company notes that its reporting is guided by the TCFD framework, which many investors support. TCFD guidance suggests that companies disclose the potential impacts of climate-related risks on the organizations business where such information is material including a description of the “climate-related issues on their financial performance (e.g., revenues, costs) and financial position (e.g., assets, liabilities).”[7]
For energy companies, the TCFD notes that transparent and decision-useful climate-related disclosures including “exposure to regulatory changes or changing consumer and investor expectations (e.g., expansion of renewable energy in the mix of energy supply)” are crucial to understanding climate impacts.[8]
In 2022 shareholders at ExxonMobil[9] and Chevron[10] showed solid support for a resolution seeking an audited report assessing the financial impact of the IEA NZE assumptions, including future asset retirement obligations, underscoring the importance of this disclosure to investors.
Please vote FOR proposal No. 10 – shareholder proposal seeking an audited report on asset retirement obligations on Marathon Petroleum Corporation’s proxy card.
[1] https://cogcc.state.co.us/documents/media/Fact_Sheet_FA_Rulemaking_20220301.pdf
[2] https://carbontracker.org/shining-a-light-on-colorados-financial-assurance-plans/
[3] bp annual report and Form 20-F 2021 https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/investors/bp-annual-report-and-form-20f-2021.pdf (p. 112)
[4] bp 2021 (p. 147)
[5] MRO 2021 Sustainability Report, p. 4. https://cdn.sanity.io/files/ghcnw9z2/website/12352ad93f64eb31f82b3e7cc0ba445a65879eba.pdf
[6] Eni Annual Report 2021, p. 132, https://www.eni.com/assets/documents/eng/reports/2021/Annual-Report-2021.pdf
[7] TCFD 2021 https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Implementing_Guidance.pdf (p. 58)
[8] TCFD (p. 64)
[9] ExxonMobil 8-k, Proposal #8, votes cast For = 51.0%. https://www.sec.gov/ix?doc=/Archives/edgar/data/0000034088/000003408822000034/xom-20220525.htm
[10] Chevron 8-k, proposal #6, votes cast For = 38.7%. https://www.sec.gov/ix?doc=/Archives/edgar/data/93410/000009341022000035/cvx-20220525.htm