Winners & Losers 2010: The pariahs – Big Oil

Energy giants lose last shreds of green cred.

See also, ‘ Spillover effect,’ for how other oil companies and sectors fared in BP’s wake.

&#9660 Big Oil has been seen as a corporate bad boy ever since the U.S. Supreme Court broke up John D. Rockefeller’s Standard Oil in 1911, but its reputation would hit a new low 99 years later. BP PLC, the world’s third-biggest publicly traded energy company — and fourth-biggest public company of any kind — flirted with annihilation this year after a deadly explosion aboard the Deepwater Horizon drilling rig on April 20 and the environmental disaster that spread across the Gulf of Mexico in the four months that followed.

Based on an estimated spill rate of between 53,000 and 62,000 barrels per day, nearly five million barrels of crude oil escaped into the Gulf, contaminating beaches, wetlands and the sea floor itself. Fisheries remain closed over a wide area, and tourism is down. As of Sept. 29, BP had spent US$11 billion in spill-related costs. It has sold off another US$11 billion in assets, and plans to sell more as a way to finance a US$20-billion trust to compensate claimants for damages. The company’s market capitalization is down 33% since April 20. The market cap of Anadarko Petroleum, BP’s minority partner on the well, is off by US$9.5 billion, and rig operator Transocean’s has declined US$7.8 billion. Plus, BP chief executive Tony Hayward — who infamously complained in the midst of the crisis that he’d “like his life back” — lost his job, replaced by his American deputy, Bob Dudley.

Ask any American, and they’ll tell you none of these players has suffered enough. The accident and its aftermath didn’t just expose BP’s duplicity in its earlier green-tinged promises to move “Beyond Petroleum.” (Few fell for that anyway.) It also undermined whatever faith the public still had in oil companies’ competence to manage the risks inherent in their business. And when corporate accountability is found catastrophically lacking, regulation and political expediency rush in.

The Gulf oil spill resulted in an outright ban on the drilling of exploratory wells that was only recently lifted. The National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling is expected to recommend extensive changes to industry practices and regulation before year-end. Deep-water drilling licences will likely become much harder to come by, not only in the U.S. but in most developed countries, including Canada. That’s bad news for an industry that’s seen its access to the world’s 1.34 trillion barrels of recoverable oil reserves shrink to about 20% as governments from Russia to Venezuela progressively nationalize their oil industries. The multinationals are similarly shut out of China, which this year surpassed the United States as the world’s largest consumer of energy.

Though extracting, transporting and refining a liquid natural resource is a difficult, messy business, this latest stream of mishaps began to look like a pattern. A court ruling this year against Syncrude Canada in the 2008 death of 1,600 waterfowl threw the existence of tailings ponds into a legal grey area that could expose mine operators to future lawsuits. Two separate leaks on Enbridge Inc.’s pipeline network in the U.S. Midwest refuelled efforts to block the transshipment of oilsands-derived bitumen to the American refining heartland. Even China National Petroleum Corp. faced a PR debacle with a spill resulting from a pipeline explosion in the port of Dalian last July.

The costs to come for Big Energy are as yet incalculable. Public revulsion against the oil and gas industry increases the likelihood that contentious expansions — such as new oilsands mines in Alberta, shale gas extraction in Quebec and the northeastern U.S., oil pipelines and tanker terminals in British Columbia, and TransCanada Corp.’s Keystone XL bitumen pipeline direct from Alberta to the Gulf Coast — will not go ahead, or at least be burdened by onerous new regulations and trade-offs with regional stakeholders. Insurance rates have gone up for all producers, and millions more will likely be spent on image-burnishing initiatives.

Oil, of course, is a globally traded commodity, and those new costs of doing business will in time be passed on to consumers. If the industry’s market value has been hit as a result of its bad image — in fact, North American energy indexes are down only slightly since April — its profitability will soon revert to the mean. The addict seldom has a kind word for his dealer, but he keeps coming back for more.

There are compelling signs, however, that oil demand in the developed world has peaked and is now in a secular decline. While many market watchers expected American consumption to rebound after the recession, it has continued to hover well below the 20 million barrels a day it averaged over the past decade. On a per capita basis, the drop is more dramatic. Between 1982 to 2007, consumption averaged 2.6 gallons per person per day. Today, it is below 2.3 gallons, an 11% decline.

Hatred of Big Oil may hasten that slide. Though Democrats and Republicans see different ways to do it, there is today a bipartisan resolve to wean America off imported oil. “History shows that by far the most influential force in shaking up the energy business is government intervention,” Canadian energy economist Peter Tertzakian wrote recently in his blog, The End of Energy Obesity. “Over the coming years, energy producers must recognize that demand-side management policies in developed countries like the United States are going to be an influential trend acting on their businesses.”

Demand management is more easily applied to home electricity and natural gas consumption than the gas pump, where decisions are largely left up to the consumer. But for consumers, too, the BP spill may have finally helped connect the dots between spoiled beaches and blithely driving to the gym — only to run on a treadmill.

Spillover effect

&#9650 Oilsands
Though Canada’s oil-from-tarsand sector still has its challenges, 2010 may go down as a turning point. The Gulf of Mexico oil spill helped put environmental concerns with the oilsands into the context of alternatives for satisfying the world’s energy needs. As Hillary Clinton told a California audience recently, by way of explaining why the State Department was leaning toward approving TransCanada Corp.’s giant Keystone XL pipeline: “We’re either going to be dependent on dirty oil from the Gulf or dirty oil from Canada.” Canadians, meantime, were put off by the increasingly shrill tone of anti-oilsands campaigns such as “Rethink Alberta.” These arrived just as governments and industry belatedly came to grips with their PR challenges and responded with improved environmental practices, particularly in the area of tailings ponds. All the while, the industry thrived financially under a combination of high oil prices, low natural gas prices (a major input cost), recession-induced relief from cost inflation and a reduced cost of capital as majors and foreign national oil companies gobbled up wobbly juniors. Canada’s oilsands represent nearly two-thirds of the world’s oil reserves available for private-sector investment. When capital gets redeployed from deep-water drilling, where do you think it’s going to go?

&#9660 Enbridge
Canada’s largest oil pipeline company sailed through the recession like a lifeboat for scared investors as it kept hiking its profits and dividends. But it suddenly took on water in July, when first its line 6B ruptured in Michigan, spilling 19,500 barrels of crude into the Kalamazoo River, then line 6A sprang a 6,100-barrel leak in Illinois two months later. It couldn’t have come at a worse time, as Enbridge was applying to enlarge its Alberta Clipper system to the U.S. and build its contentious Northern Gateway pipeline to Kitimat, B.C., meant to open up new markets for oilsands producers in Asia.

&#9650 ExxonMobil
Every time the laundry list of operational lapses at BP got trotted out this year, the obvious point of contrast was rival ExxonMobil, the biggest of Big Oil companies. Since the Exxon Valdez spill in 1989, the giant has set the standard for safety performance and regulatory compliance in its industry. Exxon never talked the green talk the way BP did, but its track record has earned it a grudging respect.