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Wednesday 25 April 2012

Environmental Liability Risk Conference

On 24th April 2012, the Research Centre for Energy Management (RCEM) ESCP Europe Business School hosted a conference on the topic of 'Environmental Liability Risk: a Pressing Issue for Energy Companies'. The event was held in London at the Institute of Directors and was sponsored by the research topic funders, KPMG.

The conference was attended by some 60 professionals (including 10 alumni), academics and students from the Executive Master in Energy Management (EMEM). Shireen Fraser (Alumni International Development Manager; MBA 2000) made a brief announcement on the launch of the new Energy and the Environment Club, and to introduce the two delegates, Lucie Roux (EMEM 2012) and Clara Wahnich (2004), who have been placed in charge of the development of this club.

Notes From the Conference

The conference was introduced by Prof. Gougeon, who took the opportunity to present the RCEM and EMEM programme, both of which are based at the London campus of ESCP Europe. He discussed the rationale for the campus to centre its activities on the energy field, citing the UK as a dynamic, open and competitive environment for energy companies. London also represents easy access for other ESCP Europe campuses and a central location for experts from all over the world to meet.

1. Shortfalls in Environmental Risk Management

Energy companies have worked hard to put risk management organisations in place; as such, safety records have improved. Despite this, the facts often remain disappointing and show frequent transgressions of safety rules and procedures, excessive risk taking, or improper management of downgraded situations. Looking at the many ambitious – some would say hazardous - energy projects under consideration, one would expect further efforts. Are the current best practices of risk management good enough? What more needs to be done?

Prof. Gougeon talked more specifically about the reasons why companies are often poor at managing environmental risks, using the case of BP's Deepwater Horizon oil leak as a prime example and discussing how it had exposed the end of the 'easy oil' era and the consequences of the new technology 'frontier'.

2. Development of Disclosure of Risk Factors for Public Energy Companies

Antonios Backos presented the results of his analysis of the compulsory 'Risk Factors' section in company annual reports filed in the US. He studied those of Exxon, DTE, Conoco Phillips, Chevron, Shell and BP, comparing reports from 2009 (published in 2010, therefore preceding the Deep Water Horizon disaster) to 2011.

His conclusion is that:

  • Companies have become more sensitive (from a disclosure perspective) to environmental risk than ever before.
  • Companies fully admit that environmental regulation may adversely impact their bottom lines.
  • Historically, companies often stated that future regulatory requirements were unknown. Now these generic statements are being revised to provide readers with more specific examples, indicating that companies may now appreciate the impact of regulations more than in the past.

He acknowledged the lack of adequate insurance coverage, now becoming a risk factor.

The case of BP was again mentioned. In fact, its annual reports showed the most dramatic change from barely more than a heading in 2009 to quite some detail with a long list of risks, including that oil spills might affect its value, reputation, long-term ratings and consume management time. In 2011 it added some refinements – gross negligence in addition to negligence settlements, license to operate and the limited capacity of insurance markets.

3. Environmental Liability: Legal Risks

Offshore oil and gas are especially risky. In the last 30 years, there have been 10 major offshore disasters plus many lesser ones and near misses for the environment, all caused by inadequate safety measures and maintenance. In Europe the costs of accidents are estimated between €205m and €915m a year.

Damages claims prove particularly complex. European law and other sources can require the payment of money for pollution, the constituent elements being about fault vs. no fault, proving causation, the types of loss (including the 'new' loss of environment), individual vs. collective liability, evidence gathering and whether it is a civil or public procedure.

Duncan Fairgrieve highlighted the need for cross-border solutions and identified several macro-level risks:

  • Contractual exposure
  • Corporate risk issues
  • Regulatory and legislative environment
  • Criminal proceedings
  • Extra-contractual (damages) claims
  • Discipline from financial markets (cf. pharma), insurance issues, the accounts perspective and the cultural context of claims (individual member states)

The current regime is inadequate and fragmented, he added: there is a high risk of a major accident in European waters.

4. Carbon Pricing: Regulation, Reputation and Risks to Long-term Supply

'You have the right to pollute, but only to this extent' - Zubair Zakir began his presentation by showing the fragmentation of environmental regulations in the energy sector:

  • US ideas on energy regulation have not materialised beyond California's 'cap and trade' system
  • There is some progress in Australia and New Zealand
  • Some regional regulation is being considered in Switzerland and Brazil
  • Global European regulations do exist, but they are weakened by domestic national concerns. In the long term, the inefficiencies of national-level regulations may lead to a push for a multi-lateral approach.
  • There is much more transparency in the UK than in the rest of the world regarding corporate footprints. Voluntary trading amounts to some $400-500m globally, leading to increasing opportunities and synergies.

The market view would be a global scheme, fully functioning, with a global price. Progress towards this is slow, although companies could enhance their reputation by moving towards becoming 'carbon neutral'. For instance, in the case of BP, what if there had been a federal-level cap and trade scheme in existence, with a value placed on the carbon in ecosystems? The restoration project to absorb the carbon in the Mississippi wetlands could lead to a Californian company buying carbon credits.

About RCEM

Bringing together the expertise of its faculty and its many external international associates, the objective of the RCEM at ESCP Europe Business School is to cooperate with, and possibly assist, key industry players to facilitate the integration of managerial and technological skills within the energy industry.

RCEM's Mission is to build a strong proactive partnership between energy corporations, government agencies and the academic community, in preparation for a new energy era. The results of RCEM's research will become available to the public through publications, workshops and conferences, educational programmes and other public outreach activities. Research at RCEM will be enhanced through direct cooperation with government agencies, and academic and industry associates from across the globe.

Find out more at the RCEM website.

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