In the aftermath of the notorious oil spill in the Gulf of Mexico, which had vast environmental, economic, and social consequences and in light of U.S. renewed dedication to combating climate change under the current administration, oil and gas companies need to pay more attention to several sustainability issues that, as it turned out, can have a direct and significant effect on the companies' bottom lines and shareholder value.
Safety of Operations
Since exploration and production activities are often conducted in extremely challenging environments, they increase the risks of technical failures and natural disasters. As a result, it is extremely important to develop a strong safety culture and establish a thorough and systematic approach to safety, risk management and operational integrity across the company and in relationships with contractors. The Gulf of Mexico oil spill that took place in April 2010 illustrates the risks companies face in their production activities. Such risks are exacerbated when companies are operating in difficult locations to develop unconventional resources, such as deepwater oil. After the oil spill, BP share prices plummeted on increased uncertainty regarding its potential liabilities with estimates of billion of dollars, which raised fears of bankruptcy. Although the stock price has been recovering, on April 29, 2013, it remained at $42.61 per share, still below its $60 price before the spill. Without robust operational safety efforts, the companies are highly prone to accidents, which can significantly lower their returns, blemish reputations, cause costly litigation and fines, as well as cause interruptions in operations and more stringent regulatory management. Each of these consequences can present significant negative impacts on value, with the extent dependent on the severity of safety issues. Companies committed to maintaining excellent operations safety and continuously improving their safety records will protect shareholder value in the long term.
Response to Accidents
The oil and gas industry is prone to environmental risks and hazards. Oil spills, for example, happen several times every year and lead to significant negative consequences. Since BP’s Deepwater Horizon oil spill, several oil spills took place on U.S. territory. Several thousand barrels of oil spilled from Trans-Alaska pipeline in May 2010. In June 2010, a Chevron pipeline ruptured and spilled an estimated 33,000 gallons of oil into a creek near Salt Lake City. In July 2010, an Enbridge pipeline in Michigan spilled over 843,000 gallons of oil into a creek, which flows into the Kalamazoo River. In July 2011, a pipeline beneath Montana's Yellowstone River ruptured and spilled 63,000 barrels of oil into the river. In addition, several oil spills took place in other countries, including Canada, Brazil, UK, New Zealand, and China. While the ultimate goal is to have no accidents, it is very important for Oil and Gas companies to be prepared and equipped for a swift and effective response to potential accidents. In the public opinion, the way BP responded to the Gulf of Mexico oil spill was ineffective and has hurt its reputation and its shareholder value. The company inadequately interacted with the media regarding the accident, provided inaccurate and incomplete information, and spread the blame. It treated the spill as a short-term issue, underestimating its consequences. BP’s indecisiveness and waste of time in the recovery process caused damage to its reputation. As a result, the company spent $50 million alone on an apology commercial, as well as additional millions of dollars to repair its image. Other recent examples of ineffective handling of accidents by Oil and Gas companies demonstrate how lack of solid preparation plans may have significant negative impacts on shareholder value and tarnish the brand in the long term.
Relationship with Contractors
Modern oil and gas operations generally involve a team effort between companies and many specialized contractors and subcontractors. Therefore, to be able to operate successfully and avoid accidents that diminish the value of companies involved, it is important to define and actively manage the relationship between the various parties, as well as to develop and follow clear rules and procedures to guide roles and responsibilities, communication, training, and accountability.
While the operator and contractor/subcontractor relationship can be beneficial in many ways, such teamwork also creates the potential for miscommunication. Investigation of the Deepwater Horizon oil spill highlights communication failures and shows that BP and its contractors, including Halliburton and Transocean, “lost sight of operational risk, compartmentalizing information that would have been useful to other companies carrying out their respective tasks.” While BP relied heavily on its contractors to advise it regarding important decisions, it failed to adequately supervise its contractors and ensure that they, as well as BP’s own employees, were providing all of the relevant information to the respective decision makers. At the same time, Halliburton, failed to alert BP of many potential problems with the work that it was doing. Both companies and their contractors can be negatively impacted by costly lawsuits, if inability to establish a well-structured, functional relationship leads to accidents. For instance, since 2011 BP has been seeking about $40 billion in damages from its contractors, Halliburton, Transocean, and Cameron International. Most recently, in April 2013, the state of Florida filed a lawsuit against both BP and Halliburton over the 2010 oil spill demanding over $5 billion for the companies' misconduct. Therefore, it is very important for both oil and gas companies and their contractors to ensure that their relationships are well structured and governed, and are mutually beneficial. Without such relationships, these companies put themselves at risk of costly litigation and diminished shareholder value.
This has been a challenging decade for cleantech companies seeking funding. Cleantech investing fell out of favor even further in 2012, plunging by about 30 percent compared to 2011, according to various industry groups. Despite their interest in clean technologies and clean energy, investors have been pulling back from risky investments in young cleantech start-ups.
There are several reasons for the plunge in enthusiasm, including recent failures of some clean energy companies, such as Solyndra, Evergreen Solar, Beacon Power, and A123 Systems. Another reason for investor concern is the apparent lack of exits, which prevents investors from earning the returns that they expect when funding start-ups. Very few cleantech companies were bought out or went public in the last few years. As a result, only investors with passion, cash, and patience are willing to fund technologies that often require higher expenditures and longer adoption and commercialization time frames than those in other sectors.
Several companies from China have invested in U.S. cleantech companies in 2012. For instance, Wanxiang Group invested $420 million in GreatPoint Energy Inc., a developer of a coal-to-natural-gas technology. Zhongding Power, one of the largest automotive component conglomerates in China, signed an agreement with EcoMotors and is planning to invest more than $200 million in the construction of a clean combustion engine plant in Anhui Province.
Some U.S. venture capital and private equity firms remain active, but focus on more mature industries and companies, which are not involved in the redistribution of a new commodity, such as wind or solar energy. For example, several firms were involved in last year’s $18.2 million funding round for Next Step Living Inc., a home-energy efficiency firm in Boston.
Going forward, investors will continue to prefer business model innovation over the technical innovation and will veer toward smaller deals and more mature companies. According to several investors from Flagship Ventures and Esplanade Capital, besides energy efficiency and cleanweb, some technologies of interest will include renewable chemicals, agricultural and animal sustainability, gas to liquids, and green banking. Start-ups looking for funding have several options at their disposal. They can look harder for interested investors in the U.S., seek help from quasi-public organizations, including Massachusetts Clean Energy Center, search for investors in countries like China, or form strategic partnerships with large domestic Corporates.
Many in the U.S. took sides on whether U.S. President should approve a 3,400-mile pipeline that will bring crude oil extracted from the Canadian tar sands to the Gulf of Mexico refineries. Last week, it seemed that the proposed project came closer to approval, after the U.S. State Department came out with a detailed 2,000 page analysis that found that the construction of Keystone XL is unlikely to have a significant environmental impact. The report's findings re-focused public attention on the issue.
Those who oppose the approval of the pipeline have many arguments at their disposal. The pipeline, which will pass through several American states, is believed by many to result in environmental degradation while also causing the release of tons of carbon into the air. Besides the environmental risks, they point at the findings that this project will not result in significant job creation. Despite TransCanada's study commissioned in 2010 illustrating that Keystone XL will help create hundreds of thousands of jobs, the recent Department of State's findings show that about 4,000 temporary construction jobs and only 35 permanent jobs will be created. The energy security argument has been weakened by the steadily increasing oil production in the country and lower oil prices. The focus is now on the current administration's commitment to the clean energy future and to combating climate change. Domestically and abroad, many believe that the rejection of Keystone XL is important because it will send a clear message that the United States is serious about climate change.
Whether or not the pipeline project is approved in the U.S., the Canadian tar sands industry will continue to expand its operations and export opportunities. Canadian energy companies are already looking for ways to diversity and have proposed pipelines to other markets. For instance, Chinese companies have invested billions of dollars in the Canadian tar sands industry with exports to Asia in mind. At the same time, Canada has been working on improving its energy industry's image and demonstrating its commitment to environmental responsibility. From 1990 to 2010, Canadian energy industry's greenhouse gas emissions per barrel of oil sands crude decreased by 26%. The industry has also improved its clean up and water use methods.
Tar sands will continue to be developed. If not to the U.S., crude from tar sands will be exported elsewhere around the world. The current debate over the project can be seen as a matter of balancing environmental and economic concerns in the United States. Whether the final decision will be based on practical or more symbolic reasons remains to be seen.