25 Years On From Exxon Valdez: What We've Learned, What We've Ignored

Today, we mark a grim anniversary indeed. It has been exactly 25 years since the Exxon Valdez ran aground, spewing 11 million gallons of crude oil all over the fragile ecosystems of the Prince William Sound in one of the worst oil spills in American history. It took four years to clean up the tragic mess, and it cost around $4 billion. In the ensuing years, the oil and gas industry has learned some lessons, but still risks creating more such disasters in its relentless pursuit of increasingly elusive hydrocarbon assets.

Source: National Oceanic and Atmospheric Administration.

Exxon Valdez, BP's Macondo gusher
Of course, we all know that the Exxon Valdez spill was hardly the last. BP's (NYSE: BP  ) 2010 catastrophe in the Gulf of Mexico in many ways made ExxonMobil's (NYSE: XOM  ) gusher look like a babbling brook. The Deepwater Horizon explosion dumped an estimated 172 million gallons of crude into the ocean before the leak was finally contained.

While BP's spill was worse at a purely volumetric level, there are other factors that are amplifying the risks associated with the oil and gas industry's resource extraction practices:

1. In our hyperconnected modern world, these types of incidents pack a much bigger punch to brand reputation and thus to near-term stock price.

2. As cheap oil fades into memory, fossil-fuel companies are taking ever greater risks to get at remote hydrocarbon reserves, with serious potential implications for long-term stock price.

Source: Fibonacci Blue, Flickr.

People are watching, and selling
In this era of Twitter, Instagram, and the 24-hour news cycle, dramatic disasters take on a life of their own. There's a multiplier effect as images and headlines splash across the Internet at lightning speed, instantly converted into memes and reductionist status updates. This is arguably why BP suffered a much harsher share-price drop after Macondo than ExxonMobil did after Valdez, even though BP ultimately handled the aftermath of its spill much better.

Pavel Molchanov, an energy analyst at Raymond James, explained this in an April 2010 research note:

The Valdez crashed on March 24, 1989. In the first two weeks after the crash, shares of Exxon lost 3.9% (vs. S&P up 2.8%), and after four weeks, they recouped all their losses (vs. S&P 500 up 7.1%). By contrast, the market reaction in BP shares has been far more swift and severe. In the seven trading sessions since the explosion of Transocean's Deepwater Horizon, BP shares have lost 13.1%. One of the intangible factors that may explain the disparity in market reactions is the fact that there is simply more day-to-day "headline risk" than 20 years ago, a function of the dramatically accelerated flow of information in the market.

Carbon is about to get expensive

Source: NOAA.

We live in a brave new world of carbon asset risk. Carbon and other greenhouse gases are cooking this planet, and we're going to have to do something about it soon. World governments consistently express their agreement at such gatherings as Davos and UN climate change summits that if we want to avoid catastrophic global warming above 2°C, no more than one-third of current proven carbon reserves can be burned. Carbon Tracker derived this number from the International Energy Agency's calculation that to achieve the 2-degree scenario, no more than 1,440 gigatons of carbon can be emitted globally by 2050. These remaining reserves -- currently on the balance sheets of the 200 largest coal, oil, and gas companies -- are valued at $20 trillion.

Nevertheless, a recent Unburnable Carbon report calculates that in 2012 alone, the 200 largest publicly traded fossil fuel companies collectively spent about $674 billion on finding and developing new reserves. These reserves couldn't be burned without busting the world's carbon budget, thus rendering them stranded assets. Many are calling this the "carbon bubble."

This is starting, finally, to affect even the lofty oil majors, as analysts and investors are questioning wild capital expenditures with no clear pathway to an ultimate payoff. Indeed, the top companies, including ExxonMobil, returned quite disappointing results this year. Mainstream analysts and investors are starting to clamor for more capital discipline. ExxonMobil and BP may have to come up with a very different business strategy if they wish to survive under all these new constraints.

Risk assessment, courtesy of activist shareholders
ExxonMobil took a promising step on Thursday when it agreed to shareholders' proposal that the company publish a carbon asset risk report on its website describing how ExxonMobil assesses the risk of stranded assets from climate change. Specifically, ExxonMobil will furnish shareholders with information on the risks that stranded assets pose to the company's business model, how ExxonMobil is planning for a carbon-constrained world, how climate risks affect capital expenditure plans, and other related issues. While ExxonMobil continues to downplay the carbon bubble scenario, this is still progress.

Source: NOAA.

It may sound far-fetched for companies to do anything serious about the carbon bubble, but here again, we have only to turn to history. Joan Bavaria founded Ceres, a non-profit sustainability group, after the Exxon Valdez ran aground and she perceived a need to re-evaluate the role and responsibility of companies as stewards of the global environment. Ceres' current president, Mindy Lubber, asks us to consider that in the wake of the Exxon Valdez spill, people initially thought there was no way the industry would introduce double-hull design for tanker ships, which now is standard practice and has contributed to a drop in spills.

How can we keep making progress?
Lubber published an excellent piece today in which she echoed a long-standing message that we advance here at The Motley Fool:

Companies and capital markets continue to be hampered by short-term thinking, which drives far too many CEOs and investors to focus on quarterly earnings performance. This comes at the expense of the long-term value creation and profitability that would result from sustainability-oriented business strategies. A sobering statistic in this regard: 63 percent of the 1,000-plus corporate board members and executives surveyed by McKinsey last year said pressures to generate strong short-term results had increased over the past five years.

As investors, we can and should do better. We need to demand more significant investment in the cleaner energy sources that will be essential to our well-being in the next 50 years. We need to challenge energy companies' grand capital expenditure plans, and not simply accept the shiny-eyed promise of a huge payoff. What is BP's strategy around the 24 Gulf of Mexico leases the company just won, barely two weeks after reaching an agreement with the EPA to lift a ban on BP's bidding for government contracts in that region? Will this old dog ever learn new tricks? 

The stakes are getting too high for extractive companies to go on with business as usual. We investors demand more. On this sad anniversary, let's make the horrible Exxon Valdez spill count for something.

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Read/Post Comments (4) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 24, 2014, at 11:19 PM, brucer51 wrote:

    Nice bit of illumination of the risks around carbon related energy. Folks at the Post Carbon Institute have challenged oil reserve numbers for the last 15 years and if we encounter price intolerance in demand these issues become further exacerbated.

    Truly we need to remind reluctant fossil fuel companies that they need participate in energy transition and that they can lead it if they use their extensive resources and revenues to invest in alternative energy sources.

  • Report this Comment On March 25, 2014, at 5:34 PM, JadedFoolalex wrote:

    Except that the world's energy demand is increasing, not decreasing!! To replace today's demand with cleaner fuels would require a quadrupling of the clean energy sources we have and know of today. I don't see that happening anytime soon.

    Also, Climate-change is a non-starter. Our climate is always changing. We are starting a cold period due to the sun becoming quiet. This is part of the normal 200 year cycle that has gone on for eons. So do we hobble our economies and bankrupt ourselves for a theory? Give your heads a shake.

  • Report this Comment On March 25, 2014, at 7:23 PM, cmalek wrote:

    "To replace today's demand with cleaner fuels would require a quadrupling of the clean energy sources we have and know of today"

    I think you need to add a zero or two at the end of that number. The world's annual demand for electric energy is in the terawatt range. The annual output of all the world's wind turbines is only about 18 gigawatts. The output of solar is around the same number. The rest of the clean energy methods are merely boutique applications, not amounting to anything serious. The only other two methods of generating large amounts of energy without using fossil fuel, hydro and nuclear, are being opposed by larger and larger numbers of people. So, it's dead dinosaurs or live in the dark and cold.

  • Report this Comment On March 26, 2014, at 12:12 PM, observerbob2013 wrote:

    The sad reality of life so far is that most innovation is driven by disaster in the form of the sort of accidents mentioned above or in the form of war.

    Today innovation is slowly starting to come from consumer demand.

    In this case while there is conflicting evidence on the reasons for the present warming and whether it will continue there is no conflict in the fact that consumer demand continues to drive carbon use.

    Until such time as alternatives drop in cost or carbon increases in cost price conscious consumer demand will pick the most economic source of energy not the most environmental.

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Sara Murphy

Sara has been writing about and analyzing companies from a sustainable investment perspective for the last 15 years. An ardent optimist, she believes that it is entirely possible for all stakeholders to benefit and profit from companies' ingenuity and innovation.

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