Barack Obama is seeking to use the environmental crisis wreaked by the BP oil spill as an opportunity to push through environmental legislation, writes Henderson's Seb Beloe
In 1959 John F Kennedy explained that when written in Chinese the word crisis is composed of two characters: one represents danger and the other represents opportunity. Half a century later and President Barack Obama is seeking to use the environmental crisis wreaked by the BP oil spill in the Gulf of Mexico as an opportunity to push through increased environmental legislation.
Economic discontent
He has form in turning a crisis to political advantage. Both the passage of healthcare reform and financial legislation have been greased by economic discontent stemming from the credit crisis.
An oil spill on the scale of Deepwater Horizon – the rig leased by BP that failed in the Gulf of Mexico – has all the ingredients to pull at emotional heart strings: environmental uproar at the sight of birds looking more tarred than feathered; workers bemoaning the loss of their livelihoods; tourists repulsed by ruined beaches and sadly the loss of lives on the ill-fated rig.
Consequently, Obama has stepped up the rhetoric with his criticism of Tony Hayward, BP’s embattled chief executive. This tactic is useful in maligning ‘Big Oil’ and it helps that his adversary is British: while the special relationship runs deep, the emotion attached to US victory over Britain in the war of independence runs deeper. It is no coincidence that US politicians have frequently referred to BP as British Petroleum – a name it ditched in 1998.
Already, Obama has put a six-month moratorium on further deepwater drilling in the US and insisted on using the investigation into the Deepwater Horizon spill as a precursor to a more comprehensive reassessment of oil industry regulations. We can expect some significant tightening and with public mood against big oil, the industry will struggle to argue against it.
Coincidentally, the saga is playing out just as the Kerry-Lieberman American Power Act is seeking passage. The main thrust of this act is on reducing carbon emissions through targets and a cap-and-trade scheme similar to that which operates in Europe. The anti-oil sentiment means the electorate and politicians are likely to be far more amenable to renewable power initiatives than they would have been some months ago.
Refocusing of safety
The plight of the Gulf has re-focused safety on this side of the Atlantic too. In the UK, Chris Huhne, the environmental secretary, announced the doubling of drill inspections on rigs operating in British waters and claimed the events in the Gulf of Mexico would “transform the regulation of deep water drilling worldwide.” Similarly, in Norway, deepwater drilling has been put on hold until the results of the Deepwater Horizon investigation are known.
Amid all the frenzy, one stakeholder is feeling the heat more than most: the BP shareholders. Early estimations put the ultimate cost of the spill at £13bn and the damage to BP’s reputation could last for years to come. The repercussions have been swift. First, the BP share price has dropped from 655p in April ahead of the spill to well below 400p in mid-June, a decline of more than 40%. Second, there is growing unease that the dividend may be cut. This could have far-reaching consequences given that BP is responsible for one in every seven pounds worth of dividends paid in the UK. Pensioners, alarmed at the loss of income, and members of the UK Government, alarmed at the loss of tax, have already voiced their concern about such a proposal. What the episode highlights, however, is that environmental and health and safety issues are about more than ticking boxes; they have direct consequences on the profitability and market value of a company.
EHS management
For many years the sustainable and responsible investment (SRI) team at Henderson have been unconvinced as to BP’s ability to manage environmental, health and safety (EHS) issues effectively. Henderson’s SRI funds sold out of BP shares in 2003 on the basis of our views about the company’s ability to deliver on the EHS front. We were concerned about performance in some of the company’s businesses. For example, in January 2002 the company was fined £1m following a prosecution by the Health and Safety Executive at its Grangemouth refinery in the UK. In Alaska, a 2001 review found a serious backlog of safety-critical maintenance, followed by an outbreak of ‘whistleblowing’ by concerned employees, including testimony to Congress in March 2002.
These events, while remarkable (the Grangemouth fine was one of the largest safety fines at the time), were not so significant to raise concerns across the broader market. However, as SRI investors, we did take notice, seeing them as symptomatic of underinvestment more broadly in the company’s aging assets.
In retrospect, these events presaged the calamitous events at Texas City in 2005 when 15 people lost their lives, and possibly the events that are now unfolding in the Gulf of Mexico. The US Government is to investigate alleged infringements of EHS regulations at the Deepwater Horizon oil rig.
Perhaps a more direct indicator of the likelihood of an accident was the fact the company has for some time been increasingly focused on operations in highly complex and difficult environments including deep-water, such as in the Gulf of Mexico, the Arctic and of course unconventional resources such as the Canadian oil sands. The ‘easy’ oil is now more or less the exclusive domain of national oil companies such as Saudi Aramco, with international oil companies like BP relegated to extreme environments where they operate at the limit of their technical capacities.
The specific events in the Gulf of Mexico were clearly unpredictable, but perhaps it was inevitable that an accident like this was going to happen as international oil companies are forced to exploit difficult-to-access resources in frontier environments. If good can come of this catastrophe, however, it is that it has acted as a catalyst in placing a critical eye on the oil industry, reawakening the importance of health and safety legislation and re-energising the debate about the move away from fossil fuels.
**Please note opinion above relates solely to the SRI team at Henderson
Seb Beloe is head of SRI research at Henderson Global Investors
