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.
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.
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
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.
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.