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February 07, 2002
Alaskan Wilderness Oil Drilling Risky to Shareowner Value
    by William Baue

A shareowner resolution asks BP to assess the damage to its reputation that would result from oil drilling in the Alaskan wilderness, and a new study highlights the economic risks of drilling.

As the U.S. Senate considers whether to allow oil drilling in Alaska's Arctic National Wildlife Refuge (ANWR), new arguments against the drilling have surfaced. In addition to the potential negative environmental impact, drilling in ANWR also threatens to reduce shareowner value in the companies doing the drilling.

A shareowner resolution filed with BP Amoco (ticker: BP) contends that the company would suffer reputational damage if it were to drill, thus decreasing shareowner value. Additionally, the U.S. Public Interest Research Group (U.S. PIRG) released a study yesterday that uses the oil industry's own standard projections to illustrate the questionable profitability of drilling.

"The Refuge is an expensive and risky gamble for the oil companies and their shareholders," said U.S. PIRG Arctic Fellow Andrew Logan, the author of False Profits: The Business Case Against Drilling in the Arctic National Wildlife Refuge. "The evidence suggests that oil companies have little to gain from the Refuge, but lots to lose--including their reputations, their ability to recruit employees, and potentially billions of wasted investment dollars. Arctic drilling is a losing proposition on financial, as well as environmental, grounds."

U.S. PIRG also co-sponsored the shareowner resolution at BP, the world's third-largest oil company, along with Walden Asset Management, Trillium Asset Management, Green Century Balanced Fund (GCBLX), and the World Wildlife Fund. The resolution asks BP to analyze risks to shareowner value from operating in environmentally or culturally sensitive areas such as the ANWR. The resolution further calls on BP to apply Association of British Insurers risk assessment criteria to projects that may compromise environmental health.

"We think there could be enormous reputational risks with significant consequences for shareholder value, particularly for a company like BP that wants to be seen as a leader in the energy sector," said Brooks Yeager, vice president of global threats for World Wildlife Fund.

Similar resolutions have been filed with ChevronTexaco (CVX) and ExxonMobil (XOM). However, ExxonMobil's denial of global warming has earned it a dismal reputation in terms of environmental protections, thus it has much less to lose than BP, which has earned a positive reputation for injecting environmental consciousness into the oil industry. Ironically, the resolutions' focus on reputational risk shines the spotlight more on positive environmental performers such as BP than on environmental rogues such as ExxonMobil.

ANWR oil drilling threatens not only the environment and companies' reputations, but also their bottom lines, according to the U.S. PIRG study. The study analyzes the potential profitability of ANWR drilling using oil companies' own assessment criteria, which require at least a 15 percent return on capital investment. However, oil from the Refuge is particularly difficult to locate, drill, and transport to market, raising the per-barrel price to a level where profitability would be much lower of other projects.

"I suspect Wall Street investors will read [this study] with great interest," said Richard Fineberg, an independent oil consultant from Fairbanks, Alaska. "PIRG's pessimistic conclusions concerning Arctic Refuge production economics may explain why the State of Alaska, not the industry, is paying so much of the tab for the misguided, pro-drilling campaign."

The study points out that the oil industry has been diversifying away from projects on the Alaskan North Slope in favor of simpler, less risky, more profitable areas such as the Gulf of Mexico.

"The oil companies should realize that the Refuge is a high-cost, high-risk project. That's not an attractive combination for investors," said Mr. Logan. "In the wake of the Enron scandal--where undisclosed financial risks cost shareholders billions of dollars--these risks deserve the fullest scrutiny. By disavowing plans to drill, a company would sharply differentiate its brand in the public eye, and reap substantial economic benefits at the pump."


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