Are the lessons of Deepwater Horizon in danger of being ignored?

Re-posted from the EIRIS blog:
http://www.eiris.org/blog/are-the-lessons-of-deepwater-horizon-in-danger-of-being-ignored/

by Josh Brewer

On the 24 April 2012 the US government filed the first criminal charges in connection with the 2010 accident at the BP oil rig in the Gulf of Mexico. A former BP engineer has been charged with deliberately destroying evidence about the scale of the oil spill.

Two years ago on 20 April  2010 the Deepwater Horizon oil rig in the Gulf of Mexico exploded, caught fire and then sank, killing 11 workers and seriously injuring several others.
In the weeks and months that followed the world watched whilst an environmental and economic disaster unfolded as oil from the damaged wellhead gushed into the Gulf. Finally, after an estimated 4.9 million barrels of oil leaked into the sea, the wellhead was capped on 15 July  2010 and a relief well completed on 19 September 2010.

At the time it seemed as if the explosion and subsequent leak would threaten the existence of BP, the company that owns the Macondo well. As it turns out BP has survived, although its liabilities in relation to the incident have run into tens of billions of dollars and its share price still hasn’t recovered, as investors will be aware.

Given the scale and impact of these events it was widely considered that some sort of Rubicon had been crossed for oil exploration, with the future of the industry placing a far greater emphasis upon sustainability and a safety-first approach to extracting oil.

However, a far different picture emerges if we look at some of the major incidents that have occurred over the last year.

In December 2011 a 40,000 barrel spill took place after a tanker accident at the Royal Dutch Shell operated Bonga oil facility, the worst spill in Nigeria in recent years. There are a number of lawsuits that have been filed against the company as a result of the spill.

In June 2011 a 3,000 barrel spill occurred in Bohai Bay, China, from a facility jointly operated by ConocoPhilips and China National Offshore Oil Corporation (CNOOC). ConocoPhilips was fined USD 158m by the Chinese government as a result of the spill.

Chevron has been fined USD 110 million by the Brazilian government for its part in a 3,000 barrel spill in the Frade field in November 2011, about 120 km off the coast of Rio de Janeiro state. This spill is also the subject of a USD 11 billion civil lawsuit.

So why are the oil companies still prepared to take such big risks both financially and in terms of their reputation? Because of the price of oil. The price for a barrel of Brent crude on 20^th April 2012 was around USD 120 and it hasn’t been under USD 100 for the last twelve months, despite there being a global recession.

It seems that at this price level oil companies are prepared to engage in riskier ways of getting at oil because the rewards are so significant. This increased appetite for risk by many oil companies can be seen in the expansion of technically challenging and expensive exploration and extraction activities such as ultra deep water extraction, gas fracking, tar sands, the development of fracking type techniques to get at shale oil deposits and the expansion of exploration activities into the Arctic.

All three of the companies listed above have significant stakes in tarsands projects, Chevron and Shell have both invested heavily in ultra deepwater exploration and Shell is involved in oil exploration in the Arctic.

Given the significant oil spill incidents these companies have experienced recently it is vitally important for investors to understand how these companies are managing the risk of these methods of extraction.

For investors this means that they are likely to get good returns from investment in the sector but they are also being exposed to increased levels of risk due to the potentially severe environmental and social impacts of these riskier methods of extracting oil.

Responsible investors will want to ask these companies exactly what it is that they are doing to mitigate the risk of these methods and, where there is room for improvement, they will need to actively engage with the company in order to get commitment to address the issue effectively.

The Deepwater Horizon disaster is a warning of what can happen if this risk isn’t dealt with in the right way.