Investors in energy stocks should pay greater attention to the potential impact of environmental issues on the bottom lines of publicly traded oil and gas companies, according to a report released Wednesday by the Washington D.C.-based World Resources Institute (WRI).

Between growing international efforts to curb greenhouse gas emissions, and rising public concern about the industry's encroachment on unique ecosystems in remote areas of the world, shareholders could see declines in their investment in major oil and gas companies of six percent or more, according to the report.

The report, 'Changing Oil: Emerging Environmental Risks and Shareholder Value in the Oil and Gas Industry,' also calls for companies to disclose their own internal calculations on the potential financial impact of changes in environmental policies so that investors are better informed.

"SEC (Security and Exchange Commission) rules require management discussion and analysis of future business risks and uncertainties that are known to it and could fundamentally affect its performance," said Duncan Austin, the study's co-author. "It strikes us that these [environmental] issues are financially significant enough that companies should disclose them."

Currently, only three major companies--BP, Conoco, and Phillips--identify climate change in their annual reports as a prospective influence on their financial performance, but none has tried to quantify how much of an impact it could have. Neither have any assessed the impact of growing controversy over their operations in ecologically sensitive production sites from the Amazon Basin to the Siberian tundra.

The WRI report amounts to a first attempt to provide such an accounting for 16 of the world's leading oil and gas companies with a combined market capitalization of nearly US$1 trillion, based on a methodology that, according to Austin, "mimics the way analysts look at more-conventional business issues." In conducting the analysis, Austin and co-author Amanda Sauer were aided by a leading British assets manager, Friends Ivory & Sime.

The authors set out a range of possible scenarios that the industry may face in two key areas - climate change and constrained access to oil and gas reserves in environmentally unique areas, many of which are also home to indigenous minority groups.

For climate change, scenarios ranged from one in which the Kyoto Protocol to reduce "greenhouse gas" emissions was observed by all industrialized countries, including the United States, to one where no action was taken by any country to comply with the treaty.

The authors then applied three main variables to each scenario for each of the oil and gas companies. They included each company's reliance on oil versus gas; its mix between downstream operations, such as exploration and production, and upstream operations, such as refineries; and the geographic distribution of its operations.

To the extent that Kyoto is widely observed, the study found companies such as Apache and Burlington Resources, which favored natural gas, could see their shareholder value increase, but only slightly if the U.S. stayed out of the Protocol. When burned, natural gas emits much less carbon dioxide than oil.

By contrast, those which depended more on oil, such as Occidental, Enterprise Oil, and Spain's Repsol, could lose an estimated four percent of shareholder value under the "most likely" scenario considered by the authors after consultations with industry experts. That scenario was consistent with the current position: the vast majority of industrialized countries would adhere to Kyoto, while the U.S. would stay out but still take some modest steps domestically to restrain greenhouse gas emissions.

The report did not use as a variable how much companies had invested in renewable energy resources, a major demand of environmental groups which gained the support of shareholders who control more than 20 percent of ExxonMobil's stock at the oil giant's annual meeting in May. Proponents of renewables argued precisely that ExxonMobil's failure to develop in that area would diminish the value of the stock.

"BP and Shell are world leaders in renewables," said Austin, "but if you look at the value of what they are putting into renewables against the bulk of their assets, it's almost negligible from the perspective of an investor."

With respect to access to oil and gas reserves, the study found that Apache, ChevronTexaco, ConocoPhillips, TotalFinaElf, Repsol, Occidental, and Unocal have a larger than average share of their holdings in ecologically sensitive areas that could make them difficult to exploit. By contrast, ExxonMobil, Royal Dutch Shell, Burlington, and Eni were found to have relatively few reserves in environmental hotspots.

Copyright 2002 OneWorld.net

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