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After the Macondo oil spill in 2010, we started engaging with ten companies in the deepwater drilling industry. Objective was to gain insight into the risks and investment opportunities, and encourage best practices. We were impressed with the improvements and the sense of urgency we observed.
In April 2010, the BP-operated Gulf of Mexico deepwater drilling platform Deepwater Horizon caught fire as a result of the Macondo well blowout, killing 11 employees and causing an estimated 4.9 million barrels of oil to spill into the sea. Since this major incident, investors in companies holding deepwater assets need to know whether these companies are doing the best they can to manage the financial, environmental and social risks linked to deepwater hydrocarbon extraction.
Within Robeco we took a closer look at the risks and manageability of deepwater exploration and development. Our aim was to determine the risks and investment opportunities associated with deepwater drilling. One of the identified steps was to start an engagement process with targeted companies to monitor the improvements (if any) in deepwater drilling risk control.
Our goal was to be able to identify the companies that were most advanced in deepwater operations management and risk control, as well as the companies that were clearly lagging behind. For this reason we visited BP’s Monitoring Center in Houston in 2013 to witness the way BP manages the well risks, how BP trains its people and the response efforts that were being prepared in case of disasters. By taking BP as an industry example, a company that had learned its lessons the most, we were better able to ask the right questions to other deepwater drilling companies.
It became clear that incident prevention, intervention and response were crucial. We identified the four most relevant engagement objectives:
The companies we engaged with were PTT EP, Statoil, Total, Tullow, Chevron, Petrobras, ConocoPhillips, Repsol, Anadarko, and CNOOC.
In 2015 we presented the interim results of our engagements with these companies. We were able to see which companies were showing excellent progress, which companies were big improvers, which ones showed good progress and which companies were slow improvers. Most importantly we knew which company was showing a red flag for not showing any improvements at all. We regarded this as a clear warning signal for investing in this company.
The interim results were included in a Best Practice Report which we used to drive change at the lagging companies (ConocoPhillips, Repsol, Anadarko and CNOOC) for the remaining engagement period.
Engagement with lagging companies very successful
At the end of the full engagement period we were able to present the final results. All ten engagements were closed successfully. Our engagement with the lagging companies proved particularly successful.
‘The Macondo incident provided the sector with a sense of urgency’
An example is our engagement with CNOOC on practices to maintain well control. These are measures to avoid incidents. CNOOC was a laggard and we informed them that in order to close our engagement they would need to be more responsive to the challenges they were facing. The company then announced that it had put in place a comprehensive Equipment and Facility Integration Management system. This system performed risk assessments for 34 subsea pipelines, 11 platforms, and 40 wells. Following the effective implementation of this management system, the company saw a record low rate of equipment and facilities failures. We believe this highlighted an improved safety level of their well control practices and closed our engagement successfully.
Just as oil companies cannot rule out the risk of a well accident altogether, we as investors cannot fully protect our portfolios from such an incident if we choose to invest in the energy sector. What is in our power is assessing whether individual companies have proper safety standards.
We are happy to see that the companies now disclose a lot of information. For example, many companies now publish a clear list of where the deepwater assets are located, at what depth companies are drilling for oil, as well as the challenges at each site and how these are being addressed. Companies also disclose the most important information on the safety systems, an explanation of the use of cutting-edge technologies. This way we can better assess the deepwater risks per company.
In the Gulf of Mexico operators have joined forces in two groups, the Marine Well Containment Company and the Helix Well Containment Group. These groups have mutual aid contracts to share people, knowledge and equipment when spills or accidents occur. In other areas in the world companies show a clear trend towards globally accepted recommendations for emergency response and good operating practices.
In our engagement, we found that spending time discussing these issues with management and operational officers has been of great value in understanding a company’s exposure to the risks involved in deepwater operations. And vice-versa: by asking the right questions we have encouraged the companies to become most advanced in the field of deepwater operations management and risk control.
In general, we are positively surprised by the substantial improvements the deepwater drilling sector has made in a relatively short period of time. There has been a clear shift away from the traditional method of merely keeping oil away from the coastline and scraping it off the sea surface towards the adoption of tools, techniques and plans to control the subsea source of oil, for example by capping the well. Apparently the Macondo incident provided the sector with a sense of urgency.