Tag Archives: BP

NY State Pension Sues BP for Stock Price Drop Following Spill

Here is an interesting excerpt from a Reuters piece published yesterday:

New York state’s pension fund plans to sue BP Plc to recover losses from the drop in the company’s stock price following the worst oil spill in U.S. history, state Comptroller Thomas DiNapoli said on Wednesday.

DiNapoli said the fund owned more than 19 million shares when the Deepwater Horizon rig exploded in the Gulf of Mexico in April.

“BP misled investors about its safety procedures and its ability to respond to events like the ongoing oil spill and we’re going to hold it accountable,” said the Democratic comptroller, who will stand for election in November in the race for New York comptroller.

The Pension’s action – and it stated basis for the lawsuit – is dramatic evidence of the risk companies can face from shareholder activism in light of EHS matters.  It further supports what BusinessWeek reported last week about the likely increased in shareholder demands related to EHS management and disclosure.

When It Spills, It Pours

In years past, we have seen a small – but growing – amount of shareholder activism in publicly traded companies concerning sustainability and environmental matters.  Several Fortune 500 companies have faced and defeated these attempts at requiring greater environmental risk assessment and disclosure.

2010 looks to be dramatically different.

Setting the stage in 2008, TVA experiences a catastrophic failure of an ash pond in Tennessee that also prompts EPA to initiate their own risk assessment of similar ash ponds across the country.

Then, SEC published its Interpretive Guidance on climate risk assessment/disclosure that is effective beginning this year.

On the H&S front, Massey Energy faces a mine disaster that claims 29 lives and raises the profile of MSHA enforcement gaps.

Now, BusinessWeek reports that investor groups are gearing up to require far more information and disclosure from the companies they invest in.  Some highlights of the article:

In the past, demands for risk disclosure tended to be viewed as hypothetical. In light of the Gulf disaster, [Robert Graham, founder and head of the environmental law practice at Chicago-based Jenner & Block] predicts that requests for such information will become more mainstream. “These issues are real and this disaster dramatically demonstrates how they impact a company’s balance sheet,” he says.

Companies will be pressed by shareholders to disclose more information about safety practices, the kinds of fail-safe mechanisms they have in place for high-risk operations, and their plans and prospects. Companies will have to reconsider the insurance they’ve arranged to better gauge how much and what kinds of coverage they need to cover potential risks. They’ll also need to figure out how much cash to set aside in reserve to cover unforeseen incidents that may cause environmental damage, he says. Shareholders will also start to insist on viewing companies’ safety records, including any sanctions received from federal or state agencies regarding their operations.

If your company is not already in the process of evaluating how to define and assess environmental matters in the context of “risk” rather than “compliance” or “management systems”, then you are probably behind.

Oil Spill Floats on Water But Sinks BP

Reuters published rather pointed points today related to the Gulf oil spill:

Analysts … cited rising takeover speculation [of BP], although they said reputational damage and the unknown financial cost of the spill would deter suitors for the moment.

BP could now be easy prey having lost over a third of its market value or 46 billion pounds ($67 billion) in six weeks.

“Given the collapse in the share price and the potential for it to fall further we expect that it (BP) could become a takeover target – particularly if its operating position in the U.S. becomes untenable,” said Dougie Youngson, analyst at Arbuthnot Securities….

The cost of protecting the company’s debt against default rose sharply, with five-year BP credit default swap widening by 71 basis points to 173 basis points.

The linkage of environmental risk management and financial impacts doesn’t get much clearer – or bigger – than that.

Elm and Sentiment360 Featured in Leading Insurance/Risk Management Publication

Business Insurance, one of the insurance/risk management industry’s top publications, today published an article highlighting The Elm Consulting Group International, LLC and Sentiment360.

The article, BP spill response tars reputation, features Scott Marticke, COO of Sentiment360 and Lawrence Heim, Director of Elm’s Atlanta, office discussing BP’s environmental and reputational risk assessment in the shadow of the Deepwater Horizon spill in the Gulf of Mexico.

Elm and Sentiment360 announced earlier this year the formation of a cooperative relationship to identify, track and assess reputational risk related to environmental, health, safety and sustainability matters.

Oil Spill Preparedness on Mars

Okay, maybe not Mars.  But the New York Times reported that governmental officials in New Jersey are putting together a plan to respond to oil migrating from the Deepwater Horizon spill site in the Gulf of Mexico to the Jersey shores, over 1,000 miles away.

Some may think this is ridiculous.  Others will view this as smart low-cost risk management and emergency preparedness.

Incubating Environmental “Black Swans” In the Nest

Our last entry discussed the concept of “Black Swan” events, a term created by noted author Nassim Nicholas Taleb to describe an event that is (a) so low in probablility that it is unforeseeable and (b) so catastrophic in impact that it changes history.

Certainly, risk assessments are predictive in nature and no one can predict the future with complete certainty.  But in our view, one of the best tools available for risk assessments is an open mind.    This can be a challenge in the EHSS world as we generally have engineering and other technical backgrounds.  We have been trained to seek absolutes and eliminate uncertainties.  At Elm, we believe that involving external support helps to identify and explore events (and their related exposures) that are relevant but get “technically rationalized” by internal staff.

With the BP oil spill and the December 2008 Kingston, Tennessee coal ash pond failure, we began thinking about some of the Black Swan events discussed with clients in the past.  Below are a handful of EHSS Black Swan risk events that we have discussed with clients over the past years – and some that are currently on our mind.

  • Radical change in EPA’s regulation of coal ash management (discussed several years before the Kingston event, and vehemently opposed by the client)
  • Catastrophic failure of GHG emissions trading market
  • Dramatic failures/errors in GHG footprint calculation methodology
  • Nationalization of privately-owned CO2 emissions assets
  • Regulation and class-action level public concerns over chemical content of consumer goods
  • Waste disposal liability for and public pressures about exporting electronic wastes
  • Dramatic increase in OSHA/EPA enforcement – frequency, severity and targeted industries/sites
  • Major expansion of pollution exclusions/limitations in insurance policies
  • Increased success of US-based NGOs in successfully obtaining US venue for lawsuits concerning EHSS allegations for non-US sites/projects/activities
  • Unprecedented shareholder and SEC pressure on public companies related to EHSS matters
  • Increased importance of EHSS in supply chains and procurement decisions

Perhaps these seem far-fetched to you or your company.  But if that is the case, the egg of that – or another – Black Swan is quietly incubating somewhere in your organization.

BP’s Oil Spill and The Black Swan

This past week saw two unfortunately intertwined events unfold: the BP Deepwater Horizon well blowout/oil spill and the 2010 Annual Conference of the Risk and Insurance Management Society (RIMS).  For those unfamiliar with RIMS, it is a global association with a membership of approximately 10,000 of risk management professionals.

Among the myriad of presentations, Nassim Nicholas Taleb was the luncheon keynote speaker one day of the week-long conference.  Taleb is the author of the book The Black Swan: The Impact of the Highly Improbable.    In Taleb’s context, a Black Swan is an event that is (a) so low in probablility that it is unforeseeable and (b) so catastrophic in impact that it changes history.  In covering RIMS 2010, Risk Management Monitor blogged on Taleb and his presentation.

Which brings us to the Deepwater Horizon well blowout.  An article in USA Today stated that in assessing the environmental risk of the well, BP assumed:

an accident leading to a giant crude oil spill and serious damage to beaches, fish and mammals was unlikely, or virtually impossible.

The sort of occurrence that we’ve seen on the Deepwater Horizon is clearly unprecedented,” BP spokesman David Nicholas told the Associated Press on Friday. “It’s something that we have not experienced before … a blowout at this depth.”

The [plan] conceded a spill would impact beaches, wildlife refuges and wilderness areas, but argued that “due to the distance to shore (48 miles) and the response capabilities that would be implemented, no significant adverse impacts are expected.”

Robert Wiygul, an Ocean Springs, Mississippi-based environmental lawyer and board member for the Gulf Restoration Network, said he doesn’t see anything in the document suggesting BP addressed the kind of technology needed to control a spill at that depth of water.

Even if a massive spill had been assessed, the question remains whether the risk assessment/spill response plan would assume that weather conditions would possibly hinder spill response effectiveness, and how quickly/effectively the underwater well would be sealed.

It appears that BP has found their Black Swan.  And Black Pelicans, Black Seagulls, etc.

Largest Fine in the History of OSHA Announced Today

The U.S. Department of Labor’s Occupational Safety and Health Administration (OSHA) today announced it is issuing $87,430,000 in proposed penalties to BP Products North America Inc. for the company’s failure to correct potential hazards faced by employees. The fine is the largest in OSHA’s history. The prior largest total penalty, $21 million, was issued in 2005, also against BP.

BP entered into a settlement agreement with OSHA in September 2005, under which the company agreed to corrective actions to eliminate potential hazards similar to those that caused the 2005 tragedy. Today’s announcement comes at the conclusion of a six-month inspection by OSHA, designed to evaluate the extent to which BP has complied with its obligations under the 2005 agreement and OSHA standards.

For noncompliance with the terms of the settlement agreement, the BP Texas City Refinery has been issued 270 “notifications of failure to abate” with fines totaling $56.7 million. Each notification represents a penalty of $7,000 times 30 days, the period that the conditions have remained unabated. OSHA also identified 439 new willful violations for failures to follow industry-accepted controls on the pressure relief safety systems and other process safety management violations with penalties totaling $30.7 million.

Debate Over Bolivia Carbon Project Spotlights Risks

The New York Times published an article highlighting questions surrounding a major forest preservation project in Bolivia sponsored by American Electric Power, BP and PacifiCorp, known the Noel Kempff Climate Action Project.

Greenpeace claims it found that from 1997 to 2009, the estimated reductions from the program had plummeted by 90 percent, to 5.8 million metric tons of carbon dioxide, down from 55 million tons. It also questioned the “additionality” of the program, which says that a specific forest area would not have been preserved without the program.

What is striking about this matter is not the debate of the project’s effectiveness (given the on-going controversy surrounding the use of forestry in climate risk management).  The surprise was a comment made by Glenn Hurowitz, a director of Avoided Deforestation Partners, a small nonprofit organization that claims to “advance the adoption of U.S. and international climate policies that include effective, transparent, and equitable market and non-market incentives to reduce tropical deforestation”:

In the proposed climate legislation, you can’t get credit for conservation or any other type of offsets until you’ve delivered the offsets. So inaccurate projections would not affect the issuance of credits.

This statement clearly demonstrates a critical business risk in using forestry for carbon management.

While “inaccurate projections” may not impact the issuance of credits, the sequestration calculations/projects have a significant impact on the upfront project support and financing.

It is reasonable to foresee that a failure of forestry to deliver on its projections will have a severely negative impact on the perception of forestry projects as a financially successful and viable carbon risk management tool.

As with any business investment, financial analyses are based on projections about what an investment will deliver in terms relevant to the investment.  In the case of forestry projects, calculations are completed to determine the amount of carbon that is projected to be absorbed and therefore generate the amount of credits/offsets.  These offsets create a financial return in terms of both cost avoidance and potentially revenue.  Financial analyses may be completed for different carbon management options and an investment is made in accordance with the option judged to be the “best” as defined by the criteria applied by the investor.

So what happens if the projections are inaccurate?  Sure, some offsets will likely be delivered by the project.  But will the investment deliver the anticipated return?  Will a shortfall trigger the need for pollution control investments and/or non-compliance penalties?

There continues to be a critical need to reduce risk in forestry-based carbon management investment.  As we have discussed before, it is advisable to take a deep dive into to uptake calculation methodologies, delivery milestones and scenario planning in advance of such investments.