Let's not forget about deepwater and Arctic drilling

In Canada we have recently been very focused on oil from Alberta’s oil sands, with respect to both the oil companies themselves and the companies owning the pipelines that may be transporting that oil. However, equally dangerous are new sources of oil, accessed through deep water drilling and Arctic exploration.

In a comprehensive report, Deeper and Colder: the Impacts and Risks of Deepwater and Arctic Hydrocarbon Development, complemented by a webinar this morning, Sustainalytic’s analyst Alberto Serna Martin, lays out the potential dangers of our quest for oil in these uncharted territories.

Key impacts are:

• Biodiversity, with negative impacts on air, habitat degradation and as a result of planned discharges. Unplanned discharges, or oil spills, are our worst nightmare. According to a report by the WWF, the Arctic offers the highest level of ecological sensitivity and the lowest level of capacity to clean up after an oil spill.

• Social, including employee and contractor health and safety as well as impacts on local and aboriginal communities.

Key risks are regulatory, litigation, reputational and operational. While the first three are SRI standards, the level of operational risk in these projects is significantly higher than normal. This is due to the harsh and remote environments, increased reliance on new technologies and the ever mounting uncertainty inherent in these activities. There is a low probability but extremely high cost to unplanned events. (Black Swan, anyone?). Deep pockets are therefore needed to bear the liability of any negative occurrences. The tab for the Deepwater Horizon disaster is coming in at around 40 billion dollars, but we will likely not know the true costs for many more years.

Deep water drilling is primarily taking place in the Gulf of Mexico, Brazil and West Africa. To the extent that these are less transparent and weaker regulatory environments, they present further risks, particularly on the social side, as well as risks associated with corruption. Serna Martin suggests that companies can and should mitigate risk by having high company wide standards, rather than geographic specific standards.

The report then offers a number of best practices that could be adopted, along with specific examples of companies who have addressed these issues. In conclusion, there are some suggestions for engagement, along with the caveat that ‘While the practices outlined above are important and should be encouraged, it should be noted that they do nothing to address or mitigate the contribution of fossil fuel consumption – specifically oil and natural gas – to climate change. In fact, a positive feedback cycle exists in that, as more oil and gas is extracted from Arctic environments, the associated increase in carbon dioxide decreases the amount of Arctic ice. More ice-free days translate into easier drilling conditions and the production of even more Arctic oil and gas. Therefore, while pushing for impact mitigation in the deepwater and Arctic oil and gas industry, responsible investors should also push for investment in renewable energy and for regulatory environments that incentivize such investments.’