Archive for the ‘environment’ Category

Renewable Energy: Gradually Coming of Age

The 17th Session of the Conference of Parties (COP 17) to the United Nations Framework Convention on Climate Change (UNFCCC) is currently holding in Durban, South Africa. It aims to agree on a successor to the Kyoto protocol which expires next year. A recent report by the International Energy Agency (IEA) reinforces the urgent need for that agreement. According to the IEA, if the world is to stand a better chance of keeping the rise in global temperature below 2o C — and therefore avoid the deleterious effects of climate change — it must maintain a (universally-accepted) carbon emission ceiling of less than 450 parts per million, ppm; however, many scientists maintain that significantly lower values are more realistic.  With the current, global, carbon-emissions trajectory, that ceiling will be breached by 2017, due principally to fossil fuels. Fossil fuels account for more than 70% of global electricity generation and as a result, electricity accounts for about 40% of energy-related carbon dioxide emissions.

A rapid increase in renewable or “clean” energy’s proportion of the global energy mix therefore becomes imperative. Global investment in clean energy has grown at a compound annual rate of 29% since the year 2004, to more than US$1 trillion, Bloomberg New Energy Finance reports.

China which leads the world, spent US$54.4bn in 2010 according to Pew Charitable Trusts. The country, which currently derives more than 92% of its primary energy consumption from fossil fuels, has set a target of 15% share for clean energy in its energy mix by the year 2020; this is almost quadruple ExxonMobil’s projection of a 4% share for renewable energy in the global energy mix by the year 2040. BusinessGreen, in a recent publication, reports that, “The IEA predicts China’s electricity demand will grow by an average of four per cent per year to reach 9,000 terawatt hours (TWh) by 2035, which represents a tripling of its 2009 demand and equates to 18 times that of France.”

Of the world’s largest wind energy and solar energy companies by capacity, three and seven respectively are Chinese. Chinese entry into the sector has bred steep competition, driving down equipment costs. Bolstered by lower equipment costs as well as vast improvements in technological and operational processes, production economics for some subsectors of the renewable energy industry is already at par with coal, nuclear and natural gas in some locations and will most likely attain global parity in the very near future. According to Bloomberg New Energy Finance for example, wind energy produced by the average wind farm will be at price parity with natural gas by the year 2016, just about five years away.

Growth of the renewable energy industry has not come without challenges which in recent times have stemmed principally from the industry’s own success story: a rapid capacity expansion which, with falling demand — due to the global economic decline — has led to a large supply overhang. The case of Solyndra, a recently-bankrupt manufacturer of solar energy components in the United States is typical. The effects can be collateral. For example, some manufacturers of batteries for electric vehicles also became insolvent when demand for particular vehicle lines slipped due to the global economic decline. There are also concerns that First Solar, one of the world’s largest solar companies may be under viability pressures following the earnings downgrade just a few weeks ago.

Some commentators have derided the state subsidies extended to the renewable energy sector; it is noteworthy however, that in  2007 for example, fossil fuel subsidy in the United States was more than three times that for renewable energy, according to the Energy Information Administration (EIA). Even large corporations such as those in the financial and automotive sectors, have been beneficiaries of massive government financial assistance. In addition, complaints about the whirring of wind turbines in residential areas for example, pale in comparison to outcries over incidents such as the infamous Macondo well explosion or the despicable degradation of the Niger Delta environment, all associated with fossil fuels production.

Growth in renewable energy is expected to be driven by government policies especially among the Organization for Economic Cooperation and Development (OECD) countries. In addition, a global economic rebound is expected to see an uptick in numbers of the more efficient electric and hybrid vehicles at the expense of standard gasoline- or diesel-powered ones.

All said, while fossil fuels will most likely remain the dominant form of energy consumed over the next few years, renewables will take increasing proportions of that consumption.


Rising Crude Oil Prices: Good Time to Buy Oil Stocks?

The current wave of unrest blowing across the Middle East , North Africa (MENA) region and the associated uptick in crude oil prices have raised concerns about another (and possibly sustained) global crude oil price shock — the region currently holds about 60% and 45% of global crude oil and natural gas reserves respectively and accounted for about 45% of global oil exports in 2009.  Current estimates of potential peak oil prices for the year range from US$130 per barrel to US$300 per barrel; recent investment considerations have therefore dwelt on the merits (or otherwise) of buying oil stocks at such times. Three points are noteworthy:

1. Oil Prices and Corporate Earnings

This may sound counterintuitive but rising crude oil prices do not always translate to higher corporate earnings for oil and gas operators and oversupply does not always bring about falling prices. In 2009 for example, crude oil prices doubled between early Q1 and end Q4 but major oil and gas companies recorded steep decline in earnings (for some, as much as 70%); this doubling of prices was in spite of massive, global crude oil inventories —  even floating and other storages were fully oil-laden.

According to a recent report by the energy research firm Evaluate Energy, the six largest IOCs by market capitalization to wit, BP, Chevron, ConocoPhillips, ExxonMobil, Royal Dutch Shell and Total, have, in spite of massive capital expenditure “failed to materially expand either their production or their proved reserve base over the past decade”; acquisitions alone accounted for 28% of their ten-year reserves replacement. The implication then, if these conditions persist, is that rising discovery costs per barrel of oil — which would probably become even steeper given the increasing geological complexities of available acreages — may test the profitability of these companies in due course, even in spite of rising oil prices.

2. Policies of State – royalties and windfall profits taxes

Among major petroleum exporting countries, the steep royalty and tax rates on oil proceeds have been more than an emperor’s ransom to the operating IOCs. In addition to reserves constraints, these have brought them under comparative disadvantages with their state-controlled counterparts, National Oil Companies or NOCs, especially those that have re-organized and have become partially-listed (see Figure 1 below for example).

That said, for some of these countries, these rates are tenured — and therefore stable even if unpalatable — and that significantly reduces investors’ worries about uncertainty. In Nigeria, Africa’s largest crude oil producer, IOCs have decried an “asphyxiating” government take on oil proceeds and some have even threatened to quit the country altogether. The country’s enabling Petroleum Industry Bill however, has been languishing, trophied in the legislature’s dust even as accusations of bribery have been rife.

Surprising and destabilizing however, was the announcement last week by the British Chancellor of the Exchequer in his new budget reading, of a substantial tax hike for oil companies operating in the North Sea; surprising, not just because it was unforeseen, but also because it was made by a Conservative (and presumably more business-friendly) government. The announcement saw dips in the shares of some mid-cap companies. While many companies are currently re-evaluating their North Sea operations, some mature field operators have warned that the hike would amount to an effective tax rate of as much as 81%, possibly a death knell. The government’s response was that higher oil prices would still make them profitable. A windfall profits tax by any other name…?

While there may be strident opposition to high taxes in some political quarters of the United States, one can never discount the degree of shrewd bargaining in those political back rooms. For example, though they may not want to admit it publicly, some oil and gas operators would not mind a little hike in tax if that would mean less restrictive regulatory regimes (such as much faster and more flexible permitting for drilling and exploitation) than are currently in place.

Oil and gas majors  such as Royal Dutch Shell and BP have been divesting North Sea assets for some time but this tax hike may dilute the value of both divested and retained assets, making such assets unattractive and even reconfiguring planned capital expenditure by reducing estimated divestment proceeds. Financial Times reports that companies with the biggest exposure in North Sea include BG Group, Premier Oil and Enquest.

NOCs in comparison, when operating in their domestic acreages are not subject to such asphyxiating operational regimes as IOCs and some have put such advantage to good use. Brazil’s Petrobras for example, has made what is arguably one of the largest ultra deepwater oil discoveries in recent times. Its market capitalization, grew by a 27% compound annual rate between 1999 and 2010 according to PFC Energy, the energy research group and its public offering in 2010 returned a record US$70 billion; also, Columbia’s Ecopetrol which had impressive 2010 results has attracted the investment attention of billionaire investor Carlos Slim.

3. Alternatives

When rising crude oil prices are sustained, investment windows inevitably open for alternative energy or oil sources such as oil sands. Early investors in Canada’s oil sands for example were on better footing than much later ones which had to grapple with spiraling project costs requiring crude oil prices of between US85 per barrel and US$95 per barrel for breakeven. Many of the latter projects were subsequently suspended after oil prices plummeted. Following project reconfigurations however, this breakeven point is now estimated at between US$60 per barrel and US$70 per barrel; and with current crude oil prices at about US$30 above the top of that  range, there is a seemingly comfortable operational window.

Cenovus, Enbridge and Total SA have all signed exploitation agreements with Canada’s First Nations to scale the second oil sands operational hurdle; now, just environmental considerations remain, which in the light of Japan’s recent nuclear reactor problems, may seem middling. Suncor and Husky Energy also have joint venture projects coming on-stream.

According to IHS Cera, three quarters of the projects which were previously set to bring about 2 million barrels of oil per day on-stream have already been restarted. Some may even start coming on-stream by next year.

The impact of technological breakthrough on resource production can be enormous. Hydraulic fracturing and horizontal drilling for example were crucial to the shale gas explosion in the United States and which explosion may be replicated in parts of Europe and Africa. While research into production of renewable petroleum fuels (such as diesel, gasoline and jet fuel among others) from bacteria is not new, a recent process — for which patents are being filed — celebrated a further step towards its actualization. Such a breakthrough if commercialized, could dramatically alter not just the global energy mix, but also the fortunes and even the very structure of oil companies involved in mostly conventional plays.

All said, while buying oil stocks in times of rising oil prices may not be ill-advised, it makes a difference however, what type of oil stocks one buys.


Japan’s Earthquake, MENA Unrest and the Global Energy Market

Japan which imported about 80% of its primary energy requirement in 2008, is the world’s largest importer of both coal and liquefied natural gas (LNG) as well as the third-largest net importer of crude oil. The shallow-focus earthquake (which registered 9.0 on the Moment Magnitude Scale) off the country’s coast last week, generated three-meter high tsunami waves, rendering about 25% of the country’s nuclear power generating capacity offline. Market response ranged from initial stock-selling frenzies through re-evaluation of the nuclear power option but oil and gas supply-demand re-balancing, even if on a regional basis is also expected. While long-term outcomes may be currently unclear, certain trends are indicated:

Oil and Gas

Japan has an interesting energy mix: about 30% of its power needs are met by nuclear capacity, but it also has gas-fired, coal-fired as well as oil-fired power generating installations and is only one of a few countries with the oil-fired variety. With a significant proportion of its nuclear as well as some gas-fired installations offline, it is expected that fuel oil and crude oil will be in greater demand for the short- to medium-term. Increase in LNG demand is also anticipated. Outages at three of the country’s major refineries would mean that an immediate drop in crude oil demand for refining throughput would be offset by an uptick in its demand for power generation. Preliminary estimates of the increase in demand range from 200,000 barrels per day (bpd) to 340,000 bpd, which figures are not likely to strain global supply. According to the Center for Global Energy Studies, CGES, Japan’s dependence on oil as a primary energy source has decreased from 78% in 1973 to its current value of 43%. The country has seen increasing productivity with relatively less use of energy. Figure 1 below for example shows that while Japan’s GDP grew by about 15% between 1999 and 2007, its Energy Use per unit of GDP decreased by about 12%.

The challenge however may be in securing adequate grade fuel oil, specifically, Low Sulfur Fuel Oil (LSFO) which is more suited to its boiler configurations; and prices have already seen anticipatory upticks. Heavy, low-sulfur crude oil grades may therefore be in higher demand.

In 2009, almost 80% of Japan’s 4.4 Mbpd crude oil consumption came from the Middle East while about two thirds of its LNG came from Asian suppliers in 2010. Some European LNG cargoes are set to be diverted to Japan and this has seen higher European LNG prices. Middle East crude oil supplies however, remain a source of global concern especially with regard to the Saudi spare production capacity. The recent arrival of Saudi troops in Bahrain along with brutal crackdown on dissent, ostensibly to protect state installations raised the stakes in the current MENA unrest; for example there are media reports that Saudi Arabia’s main export crude oil facilities may come under intense terrorist retaliatory attacks, a situation — depending of course, on the magnitude — that is certain to put severe, sustained upward pressures on global crude oil prices if not outright shocks.

One of the consequences of the current Libyan unrest has been the disruption of crude oil supplies to Europe. The onset of the Libyan unrest which coincided with a six-year low in European crude oil inventories for that period, exerted upward pressures on the European benchmark Brent. Libya’s light, sweet (low sulfur) crude oil grade is better suited to European refining preferences than the heavy, sour grades produced in many other parts of the world. There are reports which are still unconfirmed, that the exploding civil war in Libya has caused substantial damage to oil and gas installations there. If confirmed, Libya’s production could see protracted outage, further straining the global spare production capacity.

Crude oil grades such as Nigeria’s Bonny Light and Forcados Light among others from the prolific Atlantic petroleum provinces of Africa are expected to bridge that supply gap. Contrary to some media reports however, Nigeria’s crude oil production and not Libya’s, is the largest in Africa. Algeria and Angola also produce more oil than Libya (See Figure 2 below).

Angola, which became a member country of the oil group Organization of the Petroleum Exporting Countries, OPEC, in 2007 has since ramped up its production above Libya’s.

The year 2011 is an election year in Nigeria with increased threats of sabotage attacks on the country’s main oil and gas production facilities in the Niger Delta region; these had led to force majeure declarations on oil cargo deliveries in previous years. There is already a report of explosions at a flow-station operated by a major Integrated International Oil Company, IOC. Production outages in the Niger Delta have correlated with spikes in global crude oil prices; with the Libyan production outage, supply disruptions in the Niger Delta could further tighten Europe’s light crude supply, putting even stronger upward pressures on prices.

Nuclear Energy Swap

A cloud of nuclear uncertainty is gradually swirling around the globe, in the wake of Japan’s nuclear mishaps. In Germany for example, a moratorium on nuclear energy has been quickly emplaced, while many European nations have called for a radical re-evaluation of the nuclear power option. China however, with the highest number (27) of nuclear plants under construction, has vowed to press on, even if with an evaluative pause. Stocks in some major nuclear energy companies such as Areva were down in intra-day trading on Thursday. But if the truth must be told, Japanese nuclear power installations in the main, withstood the Sendai quake. The associated tsunami was the major culprit, knocking off auxiliary generators used for pumping reactor cooling fluids, in the absence of which radiation would spread. In addition, the magnitude of a given earthquake is not the sole determinant of the degree of structural damage; it is possible for lower magnitude quakes to produce higher peak ground acceleration (necessary for structural damage) than higher magnitude quakes. According to records for example, Chile’s 2010 was a magnitude 8.8 and had a peak ground acceleration of 0.78g; the Christchurch (New Zealand) quake earlier this year on the other hand, had a magnitude of just 6.3 but a peak ground acceleration of 2.2g.

Following these global concerns about the safety of nuclear power installations, global demand for natural gas as alternative power generation fuel would likely increase as would pressures for an end to oil-indexation of natural gas prices. This could be added incentive for mega gas projects such as Chevron’s Gorgon works in Australia. Royal Dutch Shell also has significant liquefied gas capability. Japan which holds extensive methane hydrate reserves in its exclusive but undisputed offshore zones may then need to commence exploitation. Strident objections (which cite energy independence issues) to the export-licensing of the increasing U.S natural gas production, would in the short- to medium-term likely see no substantial increase in prices there.

The events may give fillip to renewable energy roles in the global energy mix, as calls grow for more environment-friendly energy.  Renewable energy companies also stand to benefit from some energy re-balancing. For example, due to plant outages in Japan, Asian demand for PVC has turned to the United States where export prices are expected to increase substantially.

Japanese Reconstruction

Japan is not new to reconstruction. The aftermath of Kobe’s massive 1995 earthquake (then listed as “the costliest natural disaster to befall any one country”) is testimony to that. But the current reconstruction efforts may hold added problems. For example, if there is substantial pollution from radiation — and authorities are seemingly at their wits’ end as to management of the nuclear risk — not only would costs escalate steeply, but swathes of the productive eastern part of the country could be shut in for some time. This may translate to lower productivity as well as lower energy demand. Some companies such as General Motors in the U.S. have according to media reports, announced temporary production delays due to unavailability of automotive parts from Japan.

In terms of funding, a massive influx of insurance payouts is expected; in addition, there is reportedly an estimated US$2trln in external holdings which may be repatriated. This pullout could potentially impact some countries. The rapidly-strengthening yen, which recently reached a post world war II high against the U.S. dollar however, may be a disincentive to domestic manufacturers; though the G7 countries have just announced intervention plans, the nature of that planned intervention is still unclear.


Energy Subsidies and the Global Economy

The government of Bolivia last week issued a decree revoking consumption subsidies on some petroleum products. The action sparked a wave of strikes by trade unions as well as civil groups. Prices of diesel in the country increased by 83% while those of low- and high-octane gasolines increased by 73% and 57% respectively. Following meetings with various union and civil society groups, Eva Morales, the country’s president reportedly reversed that enabling decree .

The International Energy Agency, IEA, in a recent report estimated the total fossil-fuel subsidy for the year 2009 at US$312 billion compared with US$57 billion for renewable energy. It also estimated that eliminating fossil fuel subsidies by the year 2020 would reduce carbon emissions by almost 6% while reducing energy demand by about 5% at that time.

Many countries – developed and developing – retain subsidies for various products in sectors such as energy and agriculture. According to the Energy Information Administration, EIA, for example, total fuel-specific energy subsidies in the United States for financial year 2007 was US$7.435 billion; and fossil-fuels accounted for most of that.  For many of these countries then, the issue of eliminating both production and consumption subsidies constitutes a political minefield. Lobbyists and interests groups wield formidable influence in developed countries while for developing countries, the prospects of a “Bolivia” response are daunting; in Pakistan, a vote of confidence in parliament looms large as an ally in a tenuous coalition bolted citing the 9% increase in gasoline price just a few days ago.

That said, there are in the main, three energy subsidy issues that impact the global economy:

First, international crude oil prices. Energy demand by developing countries has been on the increase; for many of the oil-exporting countries among them, the hike in demand has been boosted by significant levels of consumption subsidy, according to the Center for Global Energy Studies, CGES in London. The CGES reports that during the period 1998-2010, while global crude oil demand grew by 1.2% per year, the demand growth for members of the Organization of the Petroleum Exporting Countries, OPEC, was 3% per year. The import then is that the increasing domestic demand would place constraints on export quotas, a possible driver for higher international crude oil prices. The head of Saudi Arabia’s Saudi Aramco, last year warned that domestic energy demand could rise from 2009’s 3.4 million barrels per day of oil equivalent to 8.3 million barrels per day of oil equivalent by 2028, citing inefficiencies; oil and natural gas are used for generation of heavily-subsidized electricity in Saudi Arabia.

Many of these producer-nations have also embarked on very capital-intensive, medium-term national development programs which require crude oil prices of between US$59 and US$76 per barrel for break-even. It is therefore unlikely that they would be averse to higher, international crude oil prices.  One frightful aspect of resource-driven boom is that for unprepared countries, price-collapse is usually devastating.

Secondly, the issue of inadequate energy prices among many oil and gas producer-nations, has stifled capital investment and therefore supply. In resource provinces where natural gas is associated with oil, operators elect to flare the gas and exploit the oil rather than invest in gas infrastructure which would not provide adequate returns. For mostly natural gas provinces, investment is almost non-existent for the same reason. According to Oil and Gas Journal, Nigeria for example held 185 trillion cubic feet, Tcf, of natural gas as at January 2010, giving her the world’s eighth-largest natural gas reserves. The country, however flares a significant proportion of her natural gas production. The amount of natural gas flared in one year could easily meet some countries’ total energy needs for the same period. According to EIA, the country flared 532 billion cubic feet, Bcf, of natural gas in 2008. The country herself consumed only a total of 430 Bcf of natural gas (about 65% of which was used for electricity generation) in the same year. Of the country’s gross natural gas production in 2008, only about 50% was marketed.

The result is that in Nigeria, only about 47% of the people have access to electricity; those manufacturing companies that are still standing – many have fallen away – have had to invest in private power generation and that has increased operation costs by as much as 20% to 40%. However, the current president, Goodluck Jonathan, has instituted a complete overhaul of the country’s power sector with a new investor-friendly gas roadmap; but the country’s poorly regulated oil and gas sector has also led to an acutely  notorious lack of transparency as well as gas flare problems and oil spills more severe than the April 20, 2010 Gulf of Mexico disaster.

Finally, the sustainability of excessive energy subsidies. The steeply rising proportion of energy subsidies in national expenditure for highly subsidized economies has challenged their economic viability. In Iran, for example, inherent energy problems associated with high subsidies – until just December last year, gasoline prices were only ten cents a liter – have been accentuated by the recent series of asphyxiating economic sanctions spearheaded by the United States. According to TheNational, energy subsidies cost the country a third of her GDP. The degree of infrastructural decay is such that the country, which has the second-largest natural gas reserves is a net importer and the third-largest consumer behind United States and Russia despite having a smaller population. The situation with her crude oil is not much better. The lack of capital investment means that the country with one of the highest reserves could soon become a net importer. Even with the new US$0.40/liter price, the allowable monthly gasoline ration for each motorist would be meaningless in many countries.

Venezuela, with the world’s sixth-largest crude oil reserves is also an unenviable paradigm. A grossly mismanaged energy sector which has witnessed nationalization of assets and gasoline prices as low as US$0.07/liter has left little revenue for President Hugo Chávez to finance his ambitious 21st Century Socialism program. The result has been spates of food and power rationing and an inflation rate which the country’s own central bank put at 26.9% for 2010. The devaluation last week, of the country’s currency – one of several in the past and the second in the last twelve months – would probably add to her woes.

In Nigeria (the fifth-highest foreign supplier of crude oil to the U.S in 2009), the Petroleum Product Pricing Regulatory Agency, PPPRA, has reported that in the period between January 2006 and June 2010, about US$13 billion was expended to subsidize petroleum products. In comparison, provisions for total capital expenditure in the country’s 2011 budget amount to about US$6.4 billion. In that 2011 budget, recurrent expenditure takes about 59% of total outlay, boosted by politicians’ salaries and expenses. As reported, each Senator in the country’s legislature takes home about US$1.34 million per annum while a Representative takes home about US$848,000 per annum (not so sure how that stacks up with the U.S. Congress); and that in a country where about 7 in 10 people live on less than US$2 per day. The country’s central bank governor has at different fora inveighed against such massive fraud associated with her petroleum product subsidies and which make the exercise both meaningless and unsustainable. A Petroleum Industry Bill which was supposed to sanitize the country’s oil and gas sector has been languishing in the legislature; the Freedom of Information Bill, FOI, which is needed to enshrine transparency and good governance is also buried there in ten years of the chamber’s dust. One of the sponsors of that FOI bill has pointed out that the books of the country’s National Oil Company, are not subject to any legislative audit.

In countries such as India, China and even Pakistan, subsidy withdrawal processes have gained currency in bids to ease the rising burden on public purses.


The Gulf of Mexico Oil Spill: Lessons in Due Process

The oil major BP is currently preparing for a “total kill” (an industry expression meaning a permanent plug) of the disaster-stricken Macondo oil well in the Gulf of Mexico. Attention is now shifting to determination of liabilities, an exercise for which legal gladiators have since been readying their swords and shields. Preliminary estimates of total liability to BP have been put at between US$30 billion and US$70 billion and its impact on the oil major as well as some niche industries may be severe.

Some industries as well as their regulatory bodies have seemingly failed to learn from previous disasters, a situation that has often compounded the severity of subsequent incidents. Recent accounts show the Macondo well disaster to have been “all too foreseeable”.

While many lessons from that Gulf of Mexico disaster abound, four, with regard to due process, stand out:

First, a weak, regulatory regime conduces inevitably to poor service delivery. Many industries have proved incapable of self-regulation and the recent global financial crises constitute a painful testament to that. According to U.S. Department of Interior documents, federal officials with oversight duties for Gulf of Mexico drilling, used illegal drugs, watched pornography at work and accepted gifts from oil companies (which they were supposed to supervise). The Mineral Management Service MMS, as it was then called, reportedly rubberstamped BP’s drilling plans and exempted the oil major from oil-spill response and prevention plans. One of the worst mine disasters in the United States during the last four decades resulted in the main, from weak regulatory oversight as did the current salmonella outbreak which has seen the recall of over 500 million eggs.

Presentations at a committee of the National Academies of Science currently studying the April 20 explosion at the Macondo well in the Gulf of Mexico, have indicated gaping regulatory and operational loopholes that need to be properly addressed by proper regulations if such accidents must be prevented in the future. However, much more important than such regulations, is the will to enforce them and to make regulatory officers accountable for their assessments (or lack thereof). Unenforced regulations or opaque regulatory processes are as good as no regulations and often breed a culture of graft.

Secondly, for operators, the gains from skimping on due processes are often ephemeral and do not justify the much larger, associated losses of the medium and longer term. The oil major BP, racked up quite a disproportionately (if not notoriously) large number of safety violations; and while a final report of findings on the Macondo well disaster is yet to be issued, there are clear indications that due processes were not employed in some critical operational functions. For example, as reported, certain critical integrity tests were omitted while the design of some crucial systems was woefully flawed;  even supervisors aboard the ill-fated rig were reportedly aware one year earlier, of its disabled alarm systems, a situation that could prove crucial in liability considerations. The potential liability of that disaster would certainly be unsavory to BP and investors who saw shares slide by as much as 45% at one point.

Third, many oil producing companies, especially at their top management levels need to upgrade their public communication skills. They quite often bear such cavalier attitudes (even if unintended) that are inimical to the very corporate brands they represent. The verbal gaffes of Tony Hayward – CEO of BP – in the aftermath of the Macondo well explosion, made him a proverbial “stench in the nostrils” of Americans, compounding the woes of the BP brand in their country; and when an incensed president Barack Obama joined the fray, the fate of Mr. Hayward was sealed.

At a U.S. congressional hearing on the Macondo well disaster, Tony Hayward, when grilled by impassioned lawmakers who were driven perhaps by public umbrage in an election year, was rather subdued and seemingly out of sorts. Oil executives are often more at ease among political claqueurs; but for a rather ill-advised congressman who apologized to BP for a US$20 billion “shakedown” (his interpretation of the company’s initial outlay to cover liabilities in the Macondo oil well disaster), the sudden volte-face was not unexpected.

Finally, the woeful lack of a proper, disaster or crises mitigation template was all too evident in that Gulf of Mexico incident; as it was in that of Hurricane Katrina and even arguably, in the last U.S. financial crises. The need for adequate contingency procedures is often lost in massive political dunghills, especially when interest groups hold substantial financial or other influence. For many industries, advances in operational technologies have over the years outpaced regulatory capabilities – or perhaps more appropriately, regulatory functions have been mindlessly relegated for ease of progress in operational processes. The result is that when such disasters occur, functionaries are hopelessly unprepared and this adds to the severity of the incident.

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