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August 06, 2010
Investment in Deepwater Drilling Requires Robust Disclosure by Oil Companies
    by Robert Kropp

In letters to oil and gas and insurance companies, a coalition of investors led by Ceres asks for improved risk management and disclosure in aftermath of BP disaster.

An estimated five billion barrels of oil, or more than 200 million gallons, leaked into the Gulf of Mexico until this week, when BP announced that its static kill of the well at the Deepwater Horizon oil rig was successful. As President Obama concurred, saying on Wednesday, "The long battle to stop the leak and contain the oil is finally close to coming to an end," full appreciation of the consequences of the disaster, both environmental and financial, remain to be seen.

This week, the US House of Representatives passed by a vote of 209-193 a bill that would remove liability limits, currently set at $75 million, faced by oil companies for economic damages resulting from spills. Considering the scope of the Gulf disaster—BP announced a loss of $17 billion in the second quarter, and has lost more than one-third of its market value—it seems almost unbelievable that passage of the bill in the Senate is uncertain.

BP's reputation as a top sustainable company—until recently, it was listed in the Dow Jones Sustainability Indexes (DJSI), and remains a constituent of the FTSE4Good Index Series—is effectively destroyed, and questions have been asked as to whether the company ever deserved such a reputation, given its history of severe safety violations.

Given the growing reliance of oil companies on deepwater drilling, sustainable investors have rightly begun to ask if companies engaged in such unconventional means of extraction as deepwater drilling and oil sands extraction are effectively managing the considerable risks inherent in such operations.

Led by Ceres, a group of 58 global investors with collective assets of more than $2.5 trillion has sent letters to CEOs at 27 oil and gas companies, and 26 insurance companies that provide insurance for offshore drilling activity. Calling the Gulf disaster "one of the greatest environmentally-related destructions of shareholder value in history," the letters to oil company executives request information on how companies address risks associated with their offshore oil and gas operations, and whether the disaster has led to changes in their risk management frameworks.

The letters to the oil companies ask for information on spill prevention and response, contingency plans in the event of deepwater blowouts, contractor selection and oversight, and governance and management systems.

The letters from the investors to insurance companies ask if they are adjusting their exposure to offshore oil and gas operations in the wake of the Gulf disaster, whether reinsurance provision are being re-evaluated, if underwriting criteria include evaluations of contingency plans and the environmental, health and safety (EHS) policies of contractors, and if they support "legislative or regulatory public policy revisions (that) may be needed to minimize the potential for similar future losses."

According to Ceres, "Swiss Re has estimated that total insured losses for all affected parties from the BP rig explosion and spill could top $3.5 billion."

At a
press conference yesterday, several of the signatories to the investor letters spoke about the issues that have emerged for investors and shareowners in the aftermath of the Gulf disaster.

Andrew Logan, oil and gas industry program director at Ceres, said, "The shift to deeper waters comes with a significantly increased risk profile. Yet there has been poor disclosure by oil companies on how they manage risk. While the technology has advanced, the ability to respond to spills, clearly, has not."

"It's no longer enough for investors to simply pick the good operators," Logan continued. "We need to push the industry as a whole to improve its practices."

Thomas DiNapoli, New York State Comptroller and the sole fiduciary of the
New York State Common Retirement Fund, said, "Investors are by definition risk-takers, but our risk needs to be calculated and measured. One of the protections we as investors seek is the avoidance of excessive or poorly managed risk, but over the past few years we've had too many examples of the failures of risk-taking in the pursuit of short-term profits."

Bill Lockyer, California State Treasurer and trustee on the boards of the
California Public Employees' Retirement System (CalPERS) and California State Teachers' Retirement System(CalSTRS), said, "In California, we've seen the value of our BP holdings plummet by $349 million. Our message is simple. Investors have the right to full disclosure of oil companies' offshore operations, and we need to understand the prevention, response, and governance measures the have in place to minimize risk."

Rob McCord, Pennsylvania State Treasurer, said, "The Deepwater Horizon disaster was a game-changer for shareholders. It demonstrated the catastrophic consequences that can result when firms fail to provide essential risk assessment. Investors cannot make good decisions without better information that is delivered early and systematically."

McCord continued, "Would I invest in an offshore drilling company if its disclosure statement revealed that its rapid response to a catastrophic oil spill involved the unproven technique of stuffing golf balls, hair clippings, and shredded tires down the blown well? Probably not."

The investors have asked the 53 recipients of their letters to respond to their questions by November 1.


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