August 2010 Vol. 237 No. 8

Features

Global Perspectives on the GOM Crisis

Editor’s Note: Since April, the focus of the energy industry, the business community and the world at large has been the evolving crisis in the Gulf Mexico. With the crisis nearing a critical juncture, it is an opportune time to assess global perspectives on how this disaster will impact the energy industry in the years to come. Pipeline & Gas Journal assembled a panel of experts from Hill & Knowlton, one of the world’s leading public relations and reputation management firms, to provide their thoughts on the fallout.

Participants from Hill & Knowlton represent the major regions around the globe, including:

• Asia Pacific – Glenn Schloss, H&K Hong Kong
• Europe – Jim Donaldson, H&K London
• Latin America – Max Cano, H&K Santiago
• Middle East – Brian Shrowder, H&K Dubai
• North America – Chris Gidez, H&K New York

P&GJ: What do you see as the near- and long-term consequences of this disaster in your region, from a legislative and regulatory standpoint? Do you foresee any scenarios where these consequences could be felt differently by oil and gas (O&G) companies, based on their geographic status (i.e., IOCs vs. NOCs)?

BS: Paradoxically, although the Middle East is the world’s largest oil-producing region, the effect of the spill is likely to be more muted here than in other parts of the world. The onshore oil industry is much bigger than offshore, and offshore drilling in the Arabian Gulf is conducted in fairly shallow waters near thinly populated coastlines. Nevertheless, an impact is inevitable: any tightening of international industry standards will be reflected in national regulations. While NOCs enjoy close relationships with their respective oil ministries, the onus will be on IOCs to prove their ability to meet these requirements.

JD: It has prompted a review of safety and environmental regimes at both the European and national levels. In the United Kingdom, the energy ministry has already announced a doubling of annual environmental inspections on drilling rigs, and further measures are likely. Given that the regime here is already pretty tough following Piper Alpha (the North Sea oil production platform, operated by Occidental Petroleum, which exploded in 1988, killing 167 men), any changes may well be tinkering round the edges rather than substantial.

Similar discussions have been taking place in Brussels, where the European Commission is considering whether to review European Union legislation on safety procedures and environmental protection in the event of an accident. Given the number of drilling rigs in the North Sea, the UK and Norway will be the countries most significantly implicated by any regulatory changes. Given that it is not a member of the EU, Norway will be able to choose what changes it wants to implement, whereas the UK will have little choice. That may give rise to Norway being able to open up a competitive advantage, but reputation-wise, they will probably want to be seen to be adhering to EU standards. Ultimately, any O&G business operating in Europe will have to adhere to any new regulatory standards if they want to be taken seriously, and there is every possibility that new regulations will be brought forward if the current situation is prolonged.

MC: O&G is a key business for the entire Latin American region. There are likely to be for impacts in the midterm:

• It will increase the accountability in projects with environmental impacts, especially in the offshore and deep water business, such as Pre Salt. On this issue, President Lula stated on July 16 that the BP crisis was caused because of the lack of research and development – “the cheap ends (up) to be more expensive” – showing that Petrobras is the right benchmark, having a higher budget for investment of deepwater, making them especially confident that this will allow for success in the pre-salt operation.
• It will increase prices of oil and gas, directly affecting consumers, inflation, etc.
• It might also increase environmental litigation arriving, and deliver stricter environmental legislation. Litigation is complicated in the region because there are few tribunal experts and regulation of the environment is quite new (only two decades).
• Environment is a chief of state (presidential) issue, not a more specific ministry topic. It has been leveraged in all the countries’ administrations.

Of course, in the short term, any new project investments are likely to be put on hold until the crisis is resolved, or at least on a clear track to resolution.

CG: In the United States, the near-term consequences are already clear; most notably with the six-month moratorium on drilling in the Gulf. On a longer-term basis, there most likely will be more onerous and costly regulations imposed on drilling activities. More broadly, we can expect resurgence in the assorted debates over the issues of energy security and independence, offshore drilling bans, changes in liability rules, and conversion to renewables. Any company wishing to do business in the U.S. will face the same issues regardless of ownership.

GS: The ramifications are playing out in different ways across the region, perhaps best illustrated by the varied responses in two of the largest Asia-Pacific markets providing large opportunities for upstream explorers and operators, China and Australia. The responses indicate some of the world’s most energy-hungry nations remain undeterred from venturing into deeper and riskier waters. However, the incident is being viewed as a challenge to improve safety and provoking heightened scrutiny.

This comes just as China has been looking to step up deepwater exploration activities, particularly in the South China Sea, following significant finds over the past four years. While it won’t deter the Chinese NOCs from expanding beyond shallow water oil and gas deposits to satiate the country’s apparently insatiable energy appetite, there has been a noticeable sharp intake of breath as regulators and the industry take stock of the situation. Safety procedures for offshore drilling rigs are being reviewed and the legislature is considering tougher standards for offshore pipelines.

The regulatory and stakeholder environment is much more complex and demanding in Australia where opposition to deepwater drilling has been growing since another leak – the Montara rig blowout in the Timor Sea, late last year, which took two months to cap. There have been some stakeholder and local community demands to suspend deepwater exploration at several pristine oceanfront locations following the BP incident.

However, faced with growing energy demand and deficits in local oil production, the government appears intent on opening up new frontiers in water far deeper than Deepwater Horizon. Accordingly, it is seeking to get a better handle on risk with the establishment of a new national regulator to replace the ad hoc system of state-level regulation. Australia will be looking closely at the perceived failures of the U.S. regulator in developing its own regulatory framework and requirements.

P&GJ: How will this affect the way energy companies in your region communicate moving forward, particularly with regard to environmental matters and issues of corporate social responsibility?

GS: The stakes have been raised significantly over the environment and in stakeholder relations. Every incident, and there has been one just recently in northern China, is now subject to greater media scrutiny and commentary in the social media. Stakeholders, and particularly local communities in more open political systems such as Australia, are raising the specter of “another Deepwater Horizon.”

For example, the report of an Australian inquiry into the Montara leak has not yet been released but is under intense scrutiny amid the heightened anxiety. Take a look at the Australian media’s coverage of the release of a site for exploration off the Margaret River coast, famed for its vineyards and rolling surf. Professional surfers, winemakers and conservationists are already raising the prospect of an oil spill.

BP’s environmental and CSR credentials were already being subject to serious challenge, with accusations of “greenwashing”, even before the incident. Companies from this sector are going to have work harder and more sincerely to address a wide spectrum of green issues while communicating more effectively to retain a reasonable modicum of credibility. While companies in Asia are generally in the early phases of implementing CSR and sustainability, they should step up quickly and place these at the heart of operations and governance as part of efforts to enhance risk management. The importance of audits undertaken by independent third parties and partnerships with government to improve safety, including more rigorous inspections as well as stakeholder dialogue, will be vital. More will need to be done to support renewable energy and alternative sources, particularly in places such as China.

CG: Safety and environmental stewardship will now become strategic messages, and companies will endeavor to differentiate themselves based on their performance and commitment to these issues. As companies promote their deepwater exploration and production capabilities, they will be met with greater skepticism, and will now have to demonstrate what was previously taken for granted…namely, that they can operate safely.

JD: I expect there will be two types of response. One will be a cautious approach of saying less – including mitigating risk by placing operators and suppliers in the “front line” for communications on any future disasters in the same way that the Exxon Valdez made everyone change the names of shipping fleets. This will not serve the best interests of the companies moving forward.

The other approach will be – and should be – an honest reappraisal of what a major energy business should and should not be communicating in these areas and some forthright public announcements and publications on key policy commitments. It is clear that companies will need to be more transparent, particularly with regard to the risks inherent in the industry. They will also want to be seen to be sticking to any new regulatory standards, and even going beyond them, if they want to position themselves as leaders.

BS: Given the region’s economic dependence on the energy industry, O&G producers are subject to a relatively low level of scrutiny from external parties such as the media, communities and NGOs. That situation is likely to continue. However, there will be changes to the methods and techniques used by energy companies to communicate their positions. The Gulf of Mexico spill is the first big disaster of the social media age and companies in the Middle East are already examining how to incorporate digital platforms in their communications and crisis response strategies.

MC: This will become a key differentiator for energy companies in LatAm. Companies and corporate leaders who seek to maintain good reputations will have to focus on stability plus prevention vs. unknown risk. In such cases, the environmental care and sustainability policies, and companies’ investments in the same, will be communicated as a part of the business risk analysis. It will also be reflected in companies’ leadership ratings.

P&GJ: What will energy companies in your region need to do in the future to be seen as credible when talking about the commitment to safety and the environment?

JD: Energy companies in the EMEA region will face even greater scrutiny than they have to date. They will have to ensure that they are seen to be acting in the interests of the environment and the local populations wherever they are working. Companies will have to show that they are willing to make strong commitments to the long-term economic, social and environmental sustainability of a region. Greater emphasis will have to be placed on transparency in all aspects of the respective company’s work. Moreover, companies will perhaps be forced to discuss their crisis management safeguards and systems in the public domain, explaining to local populations the measures they have taken to ensure their operations are successful and safe.

BS: Other than the 1991 Kuwait oil fires, an act of sabotage by the retreating Iraqi army, the Middle East has not seen a big oil-related environmental disaster. The O&G industry in the region needs to continue to maintain what is perceived as a good track record, and will have to adapt to any new international standards and practices that result from the Gulf of Mexico spill.

GS: Major NOCs in China and Thailand particularly have been drawing operational and safety lessons from the Macondo explosion. A taste of what is going to be needed in terms of future communications is provided by one publicly listed, state-owned Chinese company which has told media it is upgrading preventative measures in the future by installing two sets of blowout preventers rather than just one. This sharing of operational detail by a state-owned company in China is rather unusual, but demonstrates the type of transparency and communications which will be required to enhance credibility. Expect to see these types of statements reinforced in time with more site visits for stakeholders and deeper dialogue.

MC: They will have to have solid prevention plans in place that are seen as credible by key stakeholders and upon which they can act effectively in the event of a crisis. Further, key leaders at each company will have to understand they have to be seen as personally credible, so that they can communicate effectively in the event of a crisis.

CG: Companies will need to throttle back on their aspirational messages, and focus more on their performance. In this environment, stakeholders (consumers, policy makers, investors, etc.) will be more skeptical of a company’s aspirational statements.

P&GJ: What are the potential political ramifications in your region?

JD: The most obvious ramification has been a public cooling in UK-U.S. relations. With midterm elections on the horizon, President Obama needed to be seen to be tough on BP, and in the course of this, he has overplayed the British part of BP. The rhetoric seems to have cooled a little since Obama and Prime Minister Cameron spoke to each other, but it may resurface. There remain major political concerns about the future of BP in the UK in particular.

Against the backdrop of the regulatory developments mentioned above, the UK government is trying to encourage more exploration in the North Sea. In the most recent budget, there was an announcement that the government would be looking into the fiscal regime for the O&G industry, with the aim of making it more attractive for those looking to develop the remaining reserves of oil and gas. It’s not hard to foresee a clash in these ambitions, upon which opposition parties may seize.

Devolved government in Scotland brings in another dimension – the Scottish Parliament will be keen for the benefits of new finds (employment, fiscal gains, etc) to remain in Scotland as much as possible, leading to tension with Westminster.

Within wider European political circles, this disaster will no doubt continue to be raised at both a regional level and a local one as the debates around energy security, the environment and alternative energy, relationships with Russia and other energy supply countries, and broader energy supply routes continue. The resurgence of gas as a future fuel will no doubt receive more political support in the wake of this disaster.

CG: In addition to the moratorium issue, the oil and gas sector may find it more difficult to advance their policy positions with lawmakers, who will be wary of any perception they are advocating for the interests of the oil industry. Critics of the industry will find themselves on a stronger footing as they advance their own agenda.

BS: In view of the government structures in the region, we don’t see the same potential for political ramifications as do other parts of the world.

MC: Political activities by green groups are not just on the radical fringe anymore; they are increasingly part of the mainstream. This might lead to stricter regulations being a part of any new bills on energy and environmental matters. While an understanding of environmental issues already exists, this situation has led many to the belief that corporate conduct (and policies related to the same) does not reflect that understanding.

GS: Over the longer term, the regional group Asia Pacific Economic Cooperation (APEC) will place greater emphasis on improving coordination and support for energy security among member economies. Unfortunately, its efforts will be constrained by the lack of a genuine community of nations in the region for the time being. IOCs from the West seeking partnerships to pursue deepwater opportunities in places such as the South China Sea should focus on demonstrating credibility on safety issues, a factor which once would have been taken for granted. They could also be subject to greater competitive pressures from emerging market NOCs that are seeking new opportunities in locations outside their home country.

P&GJ: How do you see this disaster affecting the role of the chairman, CEO and other senior executives at O&G companies in your region?

BS: As Middle East energy exporters take on an increasingly visible profile in the U.S. and other markets, CEOs in the region are acutely aware of the cultural hazards which have been exposed by this crisis. If a British CEO is met with such hostility in the U.S., how much harder might it be for an Arab chief executive in the same situation? Real attention is being paid to the selection of company spokespeople and protocols for media communication in export markets.

CG: The take-away is that it is not enough to simply be the CEO and the voice for the company. The CEO must have first-class communications skills. Going forward, CEOs will need to take a larger role in addressing their companies’ commitment to safety and the environment, and not leave this message delivery to the operational executives.

JD: Good point; I imagine that media and message training will see an uplift around the world. The disaster has been a real reminder of how CEOs and senior executives face more scrutiny than ever, coupled with a need to have better cultural awareness. Without doubt, there will be more pressure on CEOs and senior executives to meet with local people to explain their operations; to be the public faces of an organization; and ultimately, to have the ability to communicate both directly and via the media with real credibility across cultures. Some of the less well-known NOCs in particular may look more closely at the communications skills of their senior spokespeople as they seek to expand outside their home markets.

MC: CEOs will need to understand that, moving forward, their leadership and their success is likely to be less based on revenues and more on sustainability issues.

GS: From a communications perspective, senior executives and their communications advisers are now thinking very carefully about how to balance the need for the likes of the CEO and chairman to be seen as taking ownership of a difficult situation vs. becoming overexposed and the subject of vilification and thus detracting from efforts to resolve the crisis. More strategic, well-timed and periodic media speaking opportunities will be vital in striking the right balance. This is particularly the case in markets such as China, where social media can provide an outlet for popular frustrations.

Brian’s comments about executives from the Middle East being in the public eye in the U.S. are also very valid for (APAC) counterparts, particularly from China, given tensions in the two nations’ relations and the history of U.S. political opposition to Chinese investment in strategic sectors. The barriers for entry to Chinese players in the U.S. energy industry following CNOOC’s blocked bid for UNOCAL are higher, with safety and environmental grounds now a major concern.

P&GJ: The focus to date on this disaster has understandably focused on the negatives involved. However, what opportunities (if any) does this disaster present for the energy sector?
 
BS: Any curb on offshore drilling in the U.S. (or indeed, of deepwater drilling in other locations) is likely to mean more export opportunities for Middle East producers. Also, as we have already seen hinted at, Middle East investors will be looking for opportunities to acquire strategic interests in BP or any other energy companies whose stock prices have fallen to attractive levels.

JD: There are always opportunities for the energy sector to learn from past mistakes – and to better prepare itself moving forwards. This has been a communications-centered crisis more than anything else, and that is a key lesson for the sector. Communications will be a key management issue for all energy businesses, not a “nice to have” function. More generally, the energy sector now has the opportunity to underline exactly why energy matters to each and every one of us – and to ensure it leads the debate around what we need to do to ensure our future energy needs are met.

MC: I see at least two basic aspects.

1. Energy companies’ environmental codes of conduct and policies are now scrutinized by non-specialist audiences. This forces them to deliver strategies to prevent and deal with incidents that are more sophisticated, not only because of the technology used but because they need to be understood by non-specialists.
2. Energy companies and their leaders will need to, at a minimum, conduct a communication impact analysis on every project. This will be a “must do” moving forward. Any incident will affect the reputation, with a huge impact on ongoing relationships with shareholders and stakeholders.

CG: It is too soon to determine whether any good comes out of this. This is an incident in which 11 people lost their lives and others were injured. We are looking at the specter of unprecedented environmental impact; tens of billions of dollars of costs and liabilities for BP and possibly other companies; new, expensive and potentially onerous regulations; and regional economic impacts of a massive scale. It is hard to imagine much lemonade will come out of this lemon.

GS: In Asia, from India to Australia and Thailand to China, a very serious re-examination of safety procedures and safeguards, particularly for deepwater facilities, is being undertaken by companies and the industry. The significant loss of life is remembered as is the environmental damage. From the disaster, there’s commitment to moving forward in deeper waters in a safer way which reassures stakeholders and seeks to protect the environment. It’s being viewed as an opportunity to take stock in Asia and move the industry and deepwater exploration/operations to a new level.