Why BP's Dumb Investors Need to Stop Crying
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Call me a hard-hearted bastard, but I’m finding it difficult to summon up the sympathy demanded by the institutional investors now threatening to sue BP. They claim that the company inflated its share price by misrepresenting its safety record. I don’t know whether this is true, but I do know that the investors did all they could not to find out. They have just been presented with the bill for the years they spent shouting down anyone who questioned the company.
They might not have been warned by BP, but they were warned repeatedly by environmental groups and ethical investment funds. Every year, at BP’s annual general meetings, they were invited to ask the firm to provide more information about the environmental and social risks it was taking. Every year they voted instead for BP to keep them in the dark. While relying on this company for a disproportionate share of their income (BP pays 12% of all UK firms’ dividends), they refused to hold it to account.
It’s not as if the warning signs were hard to spot. One of them is splashed across the front page of BP’s 2009 annual review: the title is “Operating at the Energy Frontiers." Like all multinational oil companies, BP has been shut out of the easy fields by the decline of its old reserves and the rising power of state-owned companies. So, to keep the money flowing, BP takes risks that other companies won’t contemplate. “Risk”, the review states, “remains a key issue for every business, but at BP it is fundamental to what we do. We operate at the frontiers of the energy industry, in an environment where attitude to risk is key … We continue to show our ability to take on and manage risk, doing the difficult things that others either can’t do or choose not to do.”
Among the risky situations that BP claimed to have mastered was deepwater drilling: “we are exceptionally well placed to sustain our success in the deepwater Gulf of Mexico over the long term.” But the risk here was scarcely higher than on the other frontiers. It is now producing oil from the Rumaila field in Iraq, as a result of a contract agreed in controversial circumstances. It has recently started shipping liquefied natural gas out of the Tangguh project in West Papua. The licence was provided by the Indonesian government, which brutally annexed the country to which the gas belongs, and committed genocide there. If West Papua achieves independence, BP will have a lot of explaining to do.
It is pouring money into deepwater oil off the coast of Brazil, and ultra-deepwater drilling off the coast of Angola. Having previously refused to invest in Canadian tar sands on the grounds of ecological risk, in 2007 it reversed this position, plunging into the world’s biggest environmental battleground. Its pipeline across Alaska keeps leaking oil into sensitive habitats. Its pipeline between Azerbaijan and Turkey was built with the help of land seizures and a contract which effectively grants BP executive power over the Turkish government. For how long will that be allowed to stand?
According to a response it sent to a group of ethical shareholders earlier this year, BP appears to have based its expectations of future earnings on unconstrained energy demand. The figures for world energy growth it cited come from the International Energy Agency’s reference scenario, which the agency defines as “a baseline picture of how global energy markets would evolve if governments make no changes to their existing policies and measures." The IEA predicts that this unconstrained demand would lead to six degrees of global warming. If governments do decide to take climate change seriously (and the Deepwater Horizon spill gives Barack Obama leverage on this issue that he didn’t possess before), BP’s expectations become as realistic as Gordon Brown’s prediction of uninterrupted economic growth.