Assessing the Arctic
Nina Röhrbein questions the oil industry’s claims to have cleaned up its act enough after Deepwater Horizon to be trusted in the pristine waters of the Arctic.
Approaching the second anniversary of BP’s Deepwater Horizon oil spill in the Gulf of Mexico, environmental risks have not disappeared from the quest for oil. On the contrary, with increased drilling in environmentally sensitive areas such as deep water or the Arctic, investors need to ask even more questions of oil and gas companies.
In the aftermath of Deepwater Horizon, risk assessment was seriously re-considered. “At the regulatory and company level, everyone scrutinises the infrastructure to see how changes at an operational level will affect safety,” says Yulia Reuter, senior oil and gas analyst at MSCI environmental, social and governance (ESG) research in Toronto. “That means additional testing, third party reviews and international standards for specific items such as blow-up preventers. Companies are designing best practices for such developments, as well as training and monitoring contractors.”
MSCI’s ESG research finds that overall the oil industry has become better at managing its routine hydrocarbon spills. In 2011, an integrated oil and gas company spilled on average 10,000 barrels versus 18,000 in 2008.
“Operationally the environmental management systems are improving,” says Reuter.
“However, the wild cards remain the large scale accidents, such as Deepwater Horizon and the three other major spills off the coast of Brazil, China and Australia over the last four years. They are often a function of poor risk management mechanisms and human error. In the case of the industry’s increased interest in unconventional petroleum found in harsher operating environments like the Arctic, sometimes it is a matter of taking on more risk that they can stomach. By pushing the technological frontiers in their quest for oil, companies eventually overextend themselves. It is a systemic issue across the industry.”
Munich-based ESG ratings agency Oekom Research, does not believe that oil companies are better prepared for situations such as blowouts originating from reservoirs in challenging conditions than before Deepwater Horizon. “However, some companies have shown more due diligence in their safety procedures and decision-making, which can lower, or limit, the probability of such an event,” says Kristina Rüter, research director at Oekom and analyst in charge of the oil and gas sector.
With the move into more hostile environments, there is not only the risk of spills but also the risk that companies will incur material damages to their assets.
Oil companies do seem better prepared for incidents in the Gulf of Mexico post-Deepwater Horizon. One reason for this is the creation of two companies that respond to oil spills – the Marine Well Containment and the Helix Energy Spill Containment companies, responsible for 75 and 63 drilling permits in the Gulf of Mexico respectively.
“Although, the financial impact of spills remains difficult to assess in the short term, we have seen markets reacting to spill news,” says Dayna Linley, senior analyst at ESG research firm Sustainalytics. “Financial impacts vary in the long term. The US government could fine BP up to $4,300 (€3,334) a barrel but Nigeria’s government is asking Shell for $125,000 a barrel for its Bonga oil spill. In terms of preparedness, BP has rolled out voluntary drilling standards at its Gulf of Mexico operations, but that is part of the problem – the new standards are only for the Gulf of Mexico. BP may be better prepared in one deep water region, but not worldwide.”
According to Linley, companies have tended to focus on high frequency, low risk events. But, she says, internally they have started to track and report the high impact events as well.
“Traditionally, oil companies were looking at lagging indicators, such as fatalities and injury rates,” she says. “Now there is a definite shift towards forward-looking and process safety indicators.” But while the right public statements may be made, on closer examination, a lot of big questions have been left unanswered.
“Shell appears to emphasise the prevention of a spill,” says Louise Rouse, director of engagement at responsible investment charity FairPensions. “But oil companies also have to demonstrate that they are adequately prepared to deal with a possible spill.”
Shell’s Arctic adventure came to a halt in September 2012 after a number of problems such as a delay in getting coastguard certification for its spill containment vessel and the failure of well-capping equipment, which was untested in icy waters. “Investors ought to be concerned because lessons from Deepwater Horizon do not appear to have been learned when you look at Shell’s attempt in the Arctic,” says Rouse.
Rouse admits that, post-Deepwater Horizon, a lot of investors engaged on health and safety, particularly at BP. She doubts that the investment community has yet exercised the full weight of its shareholder power in relation to Arctic drilling.
“The problem with the Arctic is that we do not yet understand what the impact of a spill would be and how it could be cleaned up,” says Linley. “We know it is a very sensitive environment which does not have the capacity to deal with a large oil spill the way warmer, more active environments would. We do not yet know what the best practices are for the Arctic.”
In September 2012, the CEO of French oil company Total said the risks were too high to proceed with Arctic crude oil projects – a stance that was an exception among oil companies. However, Total still drills for gas in the Arctic.
Different laws for different jurisdictions do not necessarily help risk management either.
“Canada decided a company drilling in the Arctic would have to drill a relief well in the same season,” says Linley. “This essentially means companies have to have two rigs onsite, one for drilling and one for relief – which becomes so cost-prohibitive that it essentially is a moratorium.”
Oekom’s rating of oil companies – and their distinction between prime and not-prime rated companies – has hardly changed over the last two years. “Companies that have better safety procedures, better decision-making processes or more active and prudent risk management in place can limit their risk in the first place but also react better if an accident occurs,” says Rüter. “This helps their ranking.”
Oekom Research, for example, awarded prime status to oil major Total despite the company being no stranger to controversy in the past. “At Total, we see much better management of these issues than at BP, Chevron or Shell,” Rüter adds.
The MSCI ESG IVA industry report notes a high exposure by BP and Chevron to environmental risks including oil spills. They were rated BB and B respectively, while Statoil and BG were the highest-ranked companies with a rating of AAA.
“In a highly competitive environment, priorities are to deliver projects within time and budget but making safety and operational integrity a priority sends a clear message to everyone,” says Reuter. “This is where we see regulators, industry and stakeholder groups stepping in. However, regulatory changes in the aftermath of the Deepwater Horizon spill fell short of expectations, so to prevent financial and reputational losses it ultimately comes down to self-regulation.”
Investors can help push for better environmental risk management by listening to different expert and NGO voices and asking for more independent oversight.
One of the leading indicators investors should pay attention to is a company’s budgetary commitment to environment and safety. However, MSCI’s ESG research found this information was only available from four out of the 30 companies it rated.
Disclosure of the percentage of reserves in high-risk areas would be helpful to assess a company’s risk. Linley wants to see industry-standardised, meaningful metrics for spill reporting, rather than the current generic reporting.
“Some companies only report spills as defined by local regulatory requirements or merely the number of spills, not actually the quantity spilled,” she says.
“From an environmental perspective, Deepwater Horizon changed everything because it jeopardised BP’s social license to operate,” says Rouse. “One well in the Gulf of Mexico almost destroyed BP. Is the Arctic gamble worth the risk it may present to a company as a whole if there is a significant oil spill?”