Climate Change Exposes Oil and Gas Industry to Risk
Over three quarters of the world’s oil and gas companies surveyed believe inevitable climate change could impact their business: increasing downtime, system failures and safety; but only 19 percent are taking action, says a new Acclimatise report backed by IBM.
Titled “Global Oil & Gas — The Adaptation Challenge,” the report is based on the Carbon Disclosure Project’s annual request for investor information that was sent to the world’s largest 128 oil and gas companies globally (based on market capitalization). Analyzed using the Acclimatisation Index Methodology, the report identified the top five impacts of climate change and the industry implications.
“The Oil and Gas industry is an important contributor to our society and economy. So, if anything impacts the industry, it could well impact people at home, at work, on the move, or even their personal finances,” said Allan Roberts, IBM’s Industrial Strategy & Change Leader, IBM Global Business Services, UK & Ireland. “While oil and gas companies are typically well-run and have systems for monitoring risks, they have been exposed to problems with their major projects and operations in the past. Evidence in the report shows companies may not be fully appreciating the risks posed by climate change or have in place responses which are robust.”
Top Five Climate Change Impacts
Increased pressure on water resources: Concerns were reported over changing rainfall patterns, water shortages, poor water quality, drought and flooding significantly increasing the demand for water. Growing competition for available resources could create operational problems for companies that rely heavily on water for oil and gas production. The demand also may create conflicts with local communities and other water users throughout the world changing the risk landscape for oil and gas companies. Nearly all companies surveyed did not appear to recognize the risk landscape is changing — only six percent reported knowledge of potential civil and geo-political risks and three percent identified adverse risks for local communities.
Physical asset failure: The report revealed that many existing plants and equipment have been designed on the basis of historic climatic conditions and may not withstand changing environmental conditions. Fluctuating temperatures can affect efficiency and performance of physical assets leading to transport disruption, damaged buildings and increased operational delays and costs. Only six percent of respondents indicated they were taking actions to manage disruptions to off-site utilities (energy, communications, water and waste treatment).
Employee health and safety risks: Volatile working conditions in extreme environments and physical assets that are potentially not suitable for the changing climatic conditions have the potential to impact the health and safety of employees. However, only 1.5 percent of respondents reported to incorporate climate change considerations into their health and safety risk assessments. Employer and public liability insurance cover may be compromised if companies fail to take climate change into account during health and safety risk assessments.
Drop in value of financial assets: To meet the growing demand for energy, oil and gas companies need to continue securing investment for new exploration, production and manufacturing. Potential investors and stakeholders are placing greater importance on the business impacts of climate change, as the risks impact cost and revenue drivers. Insurance costs could potentially rise because of greater chances of physical plant damage due to weather events, an issue only recognized by 10 percent of respondents. The current reported value of proved reserves also may be affected by companies failing to take into account the full impact of climate change. This could result in changes to the disclosed value of reserves, which has major financial implications.
Damage to corporate reputation: As knowledge and awareness of climate change grows, any failure to monitor and report the impacts of climate change on social and ecological resources is increasingly likely to harm a company’s reputation. Contractual relationships that do not adequately foresee and manage risks driven by climate change may damage the company’s reputation with stakeholders as the risk of parties turning to litigation increases.
“It is difficult to justify the position taken by any company that fails to assess the vulnerability of existing and future assets to acute and chronic changing climatic risks, given the information we now have,” said John Firth, Chief Executive Officer and Co-Founder, climate change adaptation specialists Acclimatise. “Companies that develop an integrated approach, recognizing that we no longer have a stable climate, will be the winners. This is not merely an environmental issue, it is about bottom-line consequences and the future viability of oil and gas companies.”
Drivers for change
Given the Oil and Gas industry’s ability to innovate, there is no reason why it will not continue to be a major contributor to society and the economy of the future. There are a number of drivers for change that will influence the level and rate of innovation.
Cost/revenue drivers: Operating costs at refineries could increase in response to changes in asset efficiency and resilience with higher ambient air temperatures. Disruptions to transport links due to permafrost thaw already are having significant impacts with companies having to hold and maintain larger on-site spare parts and materials stores. Operational costs could increase in response to changes in design standards for offshore platforms.
Stakeholder pressure: Investors and other stakeholders — including market and financial analysts, governments and regulatory agencies, research institutions, consumers, local communities and NGOs — are already starting to place greater pressure on oil and gas companies to address climate risks and opportunities.
New regulatory landscapes: Although new regulatory policies are being developed in many countries, there remains a great deal of uncertainty regarding the scope, content and format of future legislation on emissions. Greater certainty about the future regulatory landscape is required to encourage companies to invest in alternatives to fossil fuels and develop cleaner and sustainable energy sources.
In the United Kingdom, the Climate Change Act 2008 gives the government an adaptation reporting power that requires oil and gas companies to assess and disclose the impacts climate change might have on their business. The UK Government recently updated the Petroleum Act, tightening the laws on decommissioning, making it compulsory for companies to take the impacts of climate change into account.
The US Securities and Exchange Commission asks publicly-listed companies to disclose climate threats to their bottom lines in annual reporting.
Opportunity to improve
Paul Simpson, Chief Operating Officer, Carbon Disclosure Project, said, “This report shows how important it is for the oil and gas sector to plan for a changing climate. Issues such as water shortages and changing weather patterns and temperatures will impact infrastructure, operations, revenues and costs. As a result, investors want to know how oil and gas companies are dealing with these risks and planning for them in the future. This report helps answer those questions.”
For a full copy of the report: http://www-05.ibm.com/uk/green/cdp2009/oil_and_gas.pdf
Acclimatise and IBM have jointly prepared a set of 10 Prepare-Adapt questions to help oil and gas executives take informed steps towards building corporate resilience to inevitable climate change. To start, a company should undertake a high-level assessment of how climate change could impact their business model. The next step is to analyse the individual areas that could have the greatest material impact on performance — two areas of consideration could be Non-Market Strategy and Asset Lifecycle Management. Finally, companies need to adapt reporting and performance management to incorporate risks arising from climate change.
The analysis was undertaken using Acclimatisation Index methodology. This enables a semi-quantitative analysis of the responses recognizing the scope of the questions. The Index can take into account information from other sources to provide a more comprehensive analysis if needed. The Index also allows a relative score for each company to be calculated, although these scores are not available as part of this project.
The Acclimatisation Index has been used to analyze the resilience of global oil and gas companies to climate change in response to questions contained within sections 1 and 4 of the Carbon Disclosure Project questionnaire. It describes how global oil and gas companies understand the risks and opportunities they face as a result of the changing climate, and how they plan to adapt to them.
Carbon Disclosure Project
The Carbon Disclosure Project (CDP) is an independent not-for-profit organization holding the largest database of corporate climate change information in the world. CDP gathers data through its annual Information Requests on behalf of 475 institutional investors with assets under management of $55 trillion, purchasing organizations and government bodies. Since its formation in 2000, CDP has become the gold standard for carbon disclosure methodology and process, providing primary climate change data to the global market place.