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April 21, 2011
Even After Gulf Disaster, Engagement on Deepwater Drilling Frustrates Investors
    by Robert Kropp

While shareowner activists consider next steps in engagement with BP, industry responses to a letter from Ceres indicates resistance to an independent safety organization. Second of a two-part series.

BP was once considered a top sustainable company, and many sustainable investors considered the accessibility of top management to be a factor in the company's ranking as a top performer in the oil and gas industry.

Even after the 2005 explosion at BP's Texas City Refinery, which killed 15 workers and injured more than 170, some sustainable investors stayed with the company; as Mark Regier, director of stewardship investing for at Everence, told after last year's Gulf oil spill, "What we appreciated at the time was BP's philosophy of openness, of responsive engagement with shareholders. I think we were able to highlight for the company some key concerns regarding environmental and health and safety issues."

However, Regier told this week, "The process of engagement with BP hasn't been as satisfying as we might have liked. A month or so after the spill, we reached out to our contacts at BP, and what we met with was the result of three years of decline in the relationships between the SRI community and BP. The decline began after BP dissolved its New York office and moved to Washington and Houston."

"Half of BP's equity is held in North America, but we became frustrated with the lack of access here," he said.

"One of the things we asked for after the spill was an update conference call, and they were firmly against that. They preferred to spend time on one-on-one communications," Regier continued. "We had a meeting in December, which fell short of meeting the standards we had. It was heavy on presentation and short on materials. We got a lot of data, but there was a shortage of contextualized data, without clear objectives or relevant measurement metrics."

Also in December, a coalition of investors led by
Christian Brothers Investment Services (CBIS) prepared a shareowner resolution with BP, directing the board to conduct a review of the company's current risk assessments and risk management plans for its North American operations.

The coalition, which included UK- and Swiss-based institutional investors as well, decided not to file the resolution in January, following an agreement between BP and the UK-based
Church Investors Group (CIG). In the UK and elsewhere in Europe, it has been customary to emphasize engagement over the more confrontational shareowner action increasingly common in the US.

Unfortunately, the decision not to file left the coalition with relatively little ammunition when BP's annual report was published and investors found it to be unacceptably short on actual substance. A movement by the coalition calling for votes against the annual report resulted in a total of 15% of shareholder votes either abstaining or voting against the company's accounts and reports.

Forty-three percent of shareowner votes either abstained or voted against the reelection of Sir William Castell as Chair of BP's Safety, Ethics, and Environment Assurance Committee (SEEAC), however, indicating a widespread dissatisfaction among shareowners with the company's environmental and safety record.

Regarding the shareowner resolution that had not been filed, Regier said, "The religious investors in the UK favored setting aside the resolution for a year in return for increased communication. You don't take a resolution in the UK lightly. In the UK a lot of the investors are connected to major financial institutions, so their level of access is much different from the US, where it's grown out of a system that uses the positive aspects of confrontation."

"In the fall we'll begin to look at whether a resolution is necessary in 2012," Regier continued. "We have an agreement with the groups in the UK that if the company has not moved forward in resolving some of these issues, they are willing to join with us in filing a resolution. It would be a great bi-national statement if a resolution turns out to be required."

"Corporate engagement is not only part of our fiduciary duty with investments but also an articulation of our commitment to the people on this planet," he said.

In January of this year, the
National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling issued its report on the Gulf disaster, stating that the mistakes that led to the explosion of the Deepwater Horizon oil rig "reveal such systematic failures in risk management that they place in doubt the safety culture of the entire industry."

As William Reilly, co-chair of the Commission, said at the time, "In order to believe that this is not a systemic problem, one has to believe also that Halliburton would only have supplied faulty cement to BP, or that Transocean, on any other rig but a BP rig, would have detected gas rising in the drill pipe."

And as Andrew Logan, Oil and Gas Program Director at
Ceres, told, "You can count on one hand the number of contractors that drill in ten thousand feet of water. Everybody works with Halliburton and Transocean, so to say they only make these mistakes when they're working with BP seems unlikely."

"The argument that the spill was caused by a rogue operator is not the conclusion that the Commission came to, and if you look at safety over the last decade worldwide, the trend has been that we're seeing worse safety records," Logan continued, "There are underlying systemic problems that the industry doesn't seem to want to acknowledge."

Last August, a group of 58 global investors led by Ceres, with collective assets of more than $2.5 trillion, sent letters to CEOs at 27 oil and gas companies, requesting information on how companies address risks associated with their offshore oil and gas operations, and whether the Gulf disaster has led to changes in their risk management frameworks.

Ceres will soon publish a white paper summarizing the industry's responses, but Logan spoke with about the process of engagement with the oil and gas companies.

"What the BP spill makes clear is that the industry suffers for the mistakes of the weaker operators," Logan said. "The entire industry is impacted by the moratorium on deepwater drilling and additional regulation. There's a strong business case for companies to look beyond their corporate boundaries and take steps to raise the bar for their peers."

One recommendation of the Commission was that a self-policing safety organization for the oil and gas industry be formed that is credible; the "industry cannot persuade the American public that it is changing business-as usual practices if it attempts to fend off more effective public oversight by chartering a self-policing function under the control of an advocacy organization" such as the American Petroleum Institute (API), the report stated.

However, Logan told, "The Oil Spill Commission suggested an industry safety institute, which would be independent and rank companies on offshore safety performance in an independent and credible way. The industry has somewhat embraced this idea, but they seem intent upon doing it under the auspices of the American Petroleum Institute (API). But an organization that spends much of its time lobbying and advocating for the industry is not going to be credible on something like this."

Logan said, "What we're worried about is process safety, but we don't have the right metrics to understand which companies are doing well with safety and which aren't. The data has been focused on personnel safety, like slips and falls. It's like judging how safe an airline is by how often a mechanic slips and falls on the tarmac."

Regarding the responses received by Ceres, Logan mentioned oversight of contractors and the liability of non-operating partners in joint ventures as important areas for consideration.

Noting that Ceres received a wide range of responses, Logan said, "The unhelpful responses have been short on detail and basically ask investors to trust that these companies have these issues under control."

"We will continue to follow up with companies that we think are our main concerns, and there will also be a broader effort around metrics and key performance indicators (KPIs)," he concluded.


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