BP's travails in the Gulf are a sign of things to comeJuly 2010
Oil firms are beginning to fall foul of working in increasingly hostile environments, says Seb Beloe
Who would have thought when the original accident happened on BP's Deepwater Horizon oil rig that the spill would still be in full spate so much later? At Henderson Global Investors' Sustainable and Responsible Investment (SRI) team we wouldn't have counted ourselves in that group, but nonetheless we have for many years been unconvinced as to BP's ability to manage environmental, health and safety issues effectively.
Henderson is a mainstream investment house, and some of our funds still have shareholdings in BP. But our SRI team in fact sold out of the stock in 2003, on the basis of the team's views about the company's ability to deliver strong environmental, health and safety performance across the business. We were concerned about performance in some of its businesses - for example in January 2002 the company was fined £1million following a prosecution by the Health and Safety Executive at its Grangemouth refinery in the UK. In Alaska, too, 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 as to raise concerns across the market more broadly. However, as socially responsible investors we did take notice - seeing them as symptomatic of under-investment more broadly in ageing assets.
Of course in retrospect these events presaged the calamitous events at Texas City in 2005 when 15 people lost their lives, and perhaps the events that have now unfolded in the Gulf of Mexico. But a more direct indicator of the likelihood of an accident was the fact that 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 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 such as BP relegated to increasingly 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. What is more, underlying demand for oil is not likely to weaken in the short to medium term, and so we can expect international oil companies to continue to exploit difficult-to-access resources in frontier environments with the inevitable challenges that this will continue to pose. This, therefore, may only be the beginning of a sustained period of troubles for the world's major oil companies, difficulties that could be increasingly reflected in pressure on their share prices and dividends - and something that UK investors need to be particularly concerned about. BP famously represented around 11 per cent of dividends from the FTSE to UK investors. Shell represents the same again.
Seb Beloe is head of research in Henderson Global Investors' SRI team
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