In today’s era of rapid technological and geopolitical change, compounded by the growing impacts of the energy transition, companies’ financial statements, which are built on assumptions about the future, must be transparent and strategically aligned with existing reporting. However, the current state of climate-related information in U.S. oil and gas companies’ financial statement reporting is poor, exposing investors to unquantifiable financial and transition risks.
California’s oil refining sector has emerged as a flashpoint. The state’s ambitious climate policy framework means oil and gas refiners, as well as producers, face heightened transition pressure. For years, investors have raised concerns about Asset Retirement Obligations (AROs), questioning whether financial statements are adequately capturing the real costs of plant closures, decommissioning, and remediation. These risks are no longer distant hypotheticals; the financial impacts are beginning to materialize.
A development by Valero Energy in April 2025 provides a stark example. The company disclosed plans to “idle, restructure, or cease operations at Valero’s Benicia Refinery by the end of April 2026,” triggering a pre-tax impairment charge of $1.1 billion USD. Just four months earlier, however, Valero had asserted that its refinery asset lives were “indeterminate” and thus carried no recognized ARO provisions.
The sudden shift—from declaring the refinery’s life “indeterminate” to announcing plans to idle or cease operations within one year—raises a serious need for longer-term, forward-looking and consistent approach across the sector. Impairments and retirement obligations are material to investors and should not be left off balance sheets until the final moment.
What led to this shift? The company cited high operating costs driven by California’s climate and energy policies as part of the basis for its decision. It said it is also evaluating “strategic alternatives” for its remaining California operations, which includes its Wilmington Refinery.
“While the stated impairment represents just 4% of reported year end net assets, the lack of disclosure around remaining off-balance sheet AROs is a legitimate question for investors to raise with Valero’s Board. Beyond directors, however, shareholders should be asking equally searching questions of their auditors. How did KPMG get comfortable with ‘indefinite life’ designation for AROs at year end, given the sudden change in heart just four months later? A deeper dive into Valero’s remaining AROs would seem timely” – Natasha Landell-Mills, CFA, Head of Stewardship, Sarasin & Partners
The delay in this disclosure was permitted under an exception in U.S. Generally Accepted Accounting Principles (GAAP), which allows companies to avoid recognizing or estimating AROs for assets deemed by the company to have “indeterminate lives,” even when it is clear those assets will eventually require decommissioning. However, the GAAP standard emphasizes that companies should generally have enough information to estimate these costs, drawing on industry practice, past experience, or using a range of potential settlement dates. In other words, the “indeterminate life” exception should be an outlier occurrence. When companies choose to label assets as “indeterminate,” they withhold critical visibility into significant future liabilities which investors can reasonably expect to be recognized today.
“Investors require long-term transparency to assess financial resilience and capital allocation discipline. Failure to record AROs in a timely manner obscures a company’s true financial position and understates future liabilities. Companies must provide clear, comprehensive disclosures in their financial statements, including the assumptions underpinning ARO estimates, to enable informed evaluation of their transition readiness and balance sheet strength.”– Andrew Logan, Senior Director of Oil and Gas, Ceres
Asset Retirement Obligations Pose a Material Risk for the Entire Oil and Gas Sector
AROs are expected to grow significantly as the energy transition accelerates, particularly for companies with extensive fossil fuel infrastructure in jurisdictions that have adopted ambitious decarbonization targets. Decommissioning of oil and gas wells, pipelines, refineries, and coal-fired power plants will increasingly shift from future contingencies to imminent liabilities. Belated recognition of unrecorded AROs can have a distortive effect on performance, impacting investors’ ability to determine future cashflows and ongoing profitability. This undermines the ability to assess a company’s long-term value and risk exposure. Timely and transparent recognition of AROs is therefore essential to preserve comparability across companies and ensure accurate, decision-useful financial reporting.
Due to ongoing investor scrutiny, Climate Accounting has emerged as a thematic engagement within the Climate Action 100+ initiative, driving engagement across multiple regions.
“Accounting for climate-related financial risks has been on the investor agenda for years, with shareholders repeatedly filing proposals on this topic in the U.S. Notably, a proposal seeking an assessment of the impact of a net zero scenario on underlying financial statements won majority support at ExxonMobil Corporation in 2022. Specific to the refining sector, a proposal seeking transparency on asset retirement obligations received 22.8% support at Marathon Petroleum Corporation in 2023. The strong backing from investors on these disclosure asks underscores the importance of robust, transparent accounting practices that fully reflect all material risks.” – Jeanne Chow Collins, CAIA, Senior Analyst – Responsible Investing, KBI Global Investors
Climate Action 100+, with data provider Carbon Tracker, annually evaluates whether a company’s financial statements and the auditor’s report reflect the financial effects of climate-related risk. In 2024, none of the assessed U.S. oil and gas companies took the basic first step to demonstrate how material climate-related matters are incorporated into financial statements, as compared to all peers in Europe receiving at least partial credit against disclosure expectations.