BP has borne the costs of the Macondo deepwater drilling accident, but it is not the only firm exposed to risk. Institutional investors are using multiple strategies to find how companies involved in offshore drilling are assessing and managing the risks from deepwater drilling operations to ensure that such a disaster is not repeated. They are working to improve risk management practices by engaging directly with companies, analyzing corporate practices, and analyzing the quality of reporting in US Securities and Exchange Commission (SEC) filings and other sources.
Investor Requests for Information
In August 2010, 58 global investors representing more than USD 2.5 trillion in assets—including the New York State Comptroller, California State Treasurer, Florida State Board of Administration, and the UK-based Local Authority Pension Fund Authority Forum—wrote to 27 oil and gas and 26 insurance companies asking for information on how they manage risks related to offshore operations.
The letters asked oil and gas companies about investments in spill prevention and response systems, contingency plans for managing blowouts, specific lessons learned from the BP spill, contractor oversight and selection information, and governance systems. Letters sent to insurers asked how exposure to the oil and gas industry and overall underwriting criteria might be adjusted in light of risks exposed by the spill.
Investors have also engaged companies directly to ensure that management is improving drilling risk management and communicating those changes to shareowners. In 2012, investors filed resolutions related to drilling or refinery risk management with Chevron, Marathon, Cabot, ConocoPhillips, Tesoro, and Valero. The Chevron resolution is typical, asking the board to prepare a report “on the steps the company has taken to reduce the risk of accidents. The report should describe the board’s oversight of process safety management, staffing levels, inspection and maintenance of refineries, oil drilling rigs, and other equipment.” A resolution requesting a report on accident risk-mitigation strategies filed with Valero was backed by 44% of shareholders.
In 2010 and 2011, the SEC sent dozens of comment letters to oil and gas companies requesting additional information related to offshore spill risks. The letters asked for expanded disclosure on four topics:
- Regulatory risks, such as “pending environmental legislation that would affect exploration”
- Potential liability for explosions or blowouts, such as limits of insurance coverage and remediation plans “to deal with the environmental impact that would occur in the event of any oil spill or leak from offshore operations”
- The amount of insurance maintained for pollution and environmental risks
- Monetary limitation on obligations to indemnify business partners in connection with spills or other environmental events.
This is a start but not sufficient. More comprehensive reporting on risk management in SEC filings would allow investors to determine whether companies are adequately managing deepwater drilling risk, and it also may encourage companies to re-evaluate their risk management and transparency practices by comparing them with their peers.
Analysis of Deepwater Drilling Risk Disclosure
A recent Ceres report titled “Sustainable Extraction?”1 analyzed the management of deepwater drilling risks by examining 2010 SEC 10-K filings by 10 of the largest oil and gas companies in the world. The report is useful to all companies involved in deepwater drilling because it identifies what safety risk management factors are most relevant for investors, and it can be used as a guide for companies considering how to improve their risk management. Below is an analysis of three key issues in the report that are essential to managing the risks of deepwater drilling: safety and environmental statistics, deepwater drilling risk management, and spill response.
Safety and environmental statistics. Investors wish to better understand companies’ safety and environmental performance and culture to evaluate risks from smaller deepwater drilling incidents as well as the risk of catastrophic accidents. Reporting of safety and environmental performance statistics provides investors with insights into these material issues. To effectively evaluate these risks, companies need process and personal safety statistics for particular divisions of the company, as well as key performance indicators that explain performance variation over time. Specifically, investors have asked for “improved disclosure of personal safety statistics (e.g., worker injuries and deaths), process safety statistics (e.g., loss of primary containment) and environmental statistics (e.g., spills).”
The US Chemical Safety and Hazard Investigation Board agreed with investors in its July 24, 2012, preliminary findings from its analysis of the Macondo spill. It strongly recommended that companies compile statistics that provide a comprehensive picture of the safety of their operations, noting that some companies “largely judged the safety of offshore facilities by focusing on personal injury and fatality data … that overshadowed the use of leading indicators more focused on managing the potential for catastrophic accidents.” In addition, “The emphasis on personal injury and lost work-time data obscures the bigger picture: that companies need to develop indicators that give them realistic information about their potential for catastrophic accidents. … If companies are not measuring safety performance effectively and using those data to continuously improve, they will likely be left in the dark about their safety risks.”
The Ceres report concluded that disclosure of safety and environmental statistics in SEC filings was poor, with eight of 10 companies providing poor or no disclosure. Only one company had good disclosure that included some discussion of process safety issues, in Ceres’ opinion.
Of these companies, BP provided the best information in 2012 annual filings, reporting statistics on personal safety (recordable injury frequency for both contractors and for employees, day away from work case frequency), process safety (loss of primary containment incidents), and the environment (hydrocarbon spills greater than or equal to one barrel, volume of oil spilled, and volume unrecovered). The company provided details on how process safety is measured and differentiated so that statistics can most appropriately inform decision making:
We monitor the number of process safety events … using the American Petroleum Institute RP-754 standard. Introduced in 2010, it sets out process safety indicators, organized into different tiers, and is used as the basis for our internal process safety-related reporting. API tier 1 process safety events are the losses of primary containment of greatest consequence–causing harm to a member of the workforce or costly damage to equipment, or exceeding defined quantities.2
Deepwater drilling risk management. While disclosure of safety and environmental statistics are valuable to investors, qualitative reporting of deepwater drilling risk management issues is equally important. Investors have said that this type of disclosure should contain information on contractor oversight; policies, practices, and management systems for spill prevention; and environmental, health, and safety performance and safeguards.3 The Ceres report found that companies provided slightly better disclosure on risk management than on safety and environmental statistics. One company—BP—provided good disclosure, three had fair disclosure, and half had poor disclosure, in Ceres’ estimate.
BP’s disclosure in its 2012 annual filings explained how a groupwide framework on safety, risk management, and operational integrity provides “an expert view on safety and operational risks that is independent of the business that remains responsible for management of the risks … we place strong emphasis on checks and balances, including both enhanced self-verification by individual BP operations—such as drilling rigs or refineries—and independent assurances by the [safety and operational risk] function.”4
Spill response. Considering the high stakes of rapid and effective spill response systems, investors are looking for companies to describe specifically how they have prepared for a spill, both on their own and through industry collaborations. The Ceres report states that good disclosure will provide “a detailed narrative of policies or practices that enables investor to understand: the company’s preparedness and ability to respond to spills in a manner that will limit loss of life and material financial harm to the company, the nature and magnitude of spills the company is prepared to manage, the basis for the company’s conclusions, and relevant key performance indicators used to manage spill response preparedness.”5
The report found that the quality of disclosure on spill response was similar to that for deepwater drilling risk management disclosure. No company provided good disclosure, four had fair reporting, three were rated poor, and two provided no disclosure.
The report’s analysis did not find any examples of good disclosure on spill response. Given the emergence of new technologies and solutions, companies may still be identifying what information is most relevant for investors. But it is essential that more detailed accounts of spill response plans be reported and that companies draw the link between their response plan’s capacity (in terms of water depth, pressure, geographic location, etc.) and their deepwater operations.
1 Jim Coburn, Ryan Salmon and Dave Grossman, Sustainable Extraction? An Analysis of SEC Disclosure by Major Oil & Gas Companies on Climate Risk & Deepwater Drilling Risk (Ceres: August 2012) at 17, available at http://www.ceres.org/press/press-releases/big-oil-and-gas-companies-failing-to-inform-investors-of-deepwater-drilling-and-climate-change-risks.
2 U.S. Chemical Safety Board news release, CSB Investigation: At the Time of 2010 Gulf Blowout, Transocean, BP, Industry Associations, and Government Offshore Regulators Had Not Effectively Learned Critical Lessons from 2005 BP Refinery Explosion in Implementing Safety Performance Indicators (July 24, 2012).
3 BP Annual Report and Form 20-F 2012 at 50. Filed: March 6, 2013.
4 Sustainable Extraction at 18.
5 BP Annual Report and Form 20-F 2012 at 46. Filed: March 6, 2013.
Jim Coburn directs Ceres’ work to improve mandatory disclosure of sustainability risks and opportunities by corporations. He has collaborated with investors since 2003 to improve climate change disclosure in financial filings, leading to SEC interpretive guidance on the subject in February 2010. He has also developed reports evaluating companies’ governance, performance, and reporting related to sustainability issues. Coburn earned his law degree from Boston College Law School and a BA degree in government from Cornell University. Sean Pears provided research assistance with this article.