BP investors must urge transparency
Catherin Howarth
guardian.co.uk, Friday 7 May 2010
We are going to the ends of the earth to find the next barrel of oil – but at what price?
The as yet unstoppable oil spill gushing from a deepwater rig drilling for BP in the Gulf of Mexico looks set to have dire environmental and social consequences – for fragile ecosystems and wildlife, and for local residents and businesses. And let us not forget the 11 people who lost their lives in the explosion.
But, as City investors who have watched $30bn (£20bn) get wiped off BP's share price are only too aware, the disaster is having a devastating financial impact on BP and its shareholders as well. Clean-up costs are running at $6m per day, and could rise as high as $15bn over the course of the effort. Twenty lawsuits have already been filed against BP. Hefty fines are likely. And the damage to BP's reputation is immeasurable, with some experts predicting that the company could even be forced to abandon its carefully built and incredibly valuable BP brand. In short, the Deepwater Horizon disaster is showing us that environmental and social risks are also financial risks.
Following in the wake of the Texas City refinery and Alaskan pipeline accidents, investors are asking whether BP is doing enough to manage environmental and health-and-safety issues, and the risks they present to shareholder value. Questions are particularly focusing on BP's oversight of its operational partners. Chief executive Tony Hayward has been at pains to lay blame for the disaster with Transocean, the rig's operator, claiming that while BP would accept responsibility for the clean-up costs, the accident was not BP's fault.
This was illustrated by his comments to the BBC – "it was not our equipment, it was not our people, our systems or our processes" – which will likely raise further troubling questions for shareholders. How will BP reassure its investors that it can properly manage the risks involved in unconventional forms of extraction – and drive its best-practice principles through the entire operation – when BP has chosen to delegate operational control to other companies?
The changing regulatory environment presents another risk. With an immediate ban placed on offshore drilling by the Obama administration, and increased regulation in all forms likely as a result of an emerging political backlash, BP's deepwater resources may suddenly seem much less attractive.
Many of the same risks are facing those investing in another source of unconventional oil – Canada's controversial tar sands. Here, too, there are concerns about legal and reputational risks, environmental clean-up costs, uncertainties over unproven technologies, and changing government regulation. The Deepwater Horizon spill will put companies involved in tar sands under greatly increased pressure to show that they are taking these risks seriously. In turn, the need for shareholders to carefully scrutinise the risk-management strategies of the companies they invest in has also been thrown into sharp relief.
Investors will have an opportunity to act on this responsibility at Shell's AGM in two weeks' time, when shareholders will vote on a special resolution calling for a review of the financial, environmental and social risks of tar sands investment. We must hope that, in light of the recent disaster, investors will send a strong signal that greater transparency is required in order to reassure shareholders that everything possible is being done to identify and address the risks arising from unconventional oil extraction.
When the Deepwater Horizon exploded, the assessment of the risks and rewards associated with deepwater drilling changed overnight. We must learn lessons from this disaster. Given how closely the UK economy – and millions of people's retirement savings – depend on the financial health of BP and Shell, they are lessons that we can't afford to ignore when it comes to tar sands.
http://www.guardian.co.uk/commentisfree/2010/may/07/bp-investors-must-ur...
