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BP's Competitors Face Risk of Catastrophic Accident, Too, Financial Analysts Say

Chevron, Occidental, Exxon Mobil, Petrochina and Murphy Oil all score poorly in industry risk ranking

Sep 16, 2010

Within the first two weeks of April’s Deepwater Horizon oil disaster, $36 billion of BP's market capitalization evaporated when its stock took a plunge into the deep. Investors were jolted by the unfolding catastrophe, uncertain about when and how the oil, and the financial damage, could be capped.

The same kind of catastrophic failure is a risk for a number of BP’s competitors, an industry research firm said this week, as it unveiled assessments of the world’s oil and gas companies and their exposure to risks that are only now becoming part of prudent investment decisions.

“We think BP is not an outlier—it’s a systemic issue,” said Yulia Reuter, the head of oil and gas research at MSCI. “All of these companies are taking on more risk to recover oil from the frontier and delivering it to market. What it comes down to is who are the best companies who can mitigate that risk.”

The firm found that many of the traditional international players fell to the bottom of their ratings list. Chevron, BP, Occidental, Exxon Mobil, Petrochina and Murphy Oil all scored poorly in the analysis.

MSCI, a financial analysis firm with special expertise in assessing the value of intangibles like carbon risk, investigated the petroleum industry’s performance in five key categories: operations, health and safety; ability to access resources in emerging markets; carbon emissions; investment in alternative energy; and investment in unconventional fossil fuels like oil sands and oil shale, coal bed methane and coal seam gas, and both gas-to-liquid and coal-to-liquid fuels.

Australia’s Origin Energy, Norway’s Statoil, Austria’s OMV and Brazil’s Petrobras occupied the top of MSCI’s overall ranking.

“These are businesses taking on more risk—in emerging markets, alternative energy and in other places—that are positioned to withstand regulatory pressures and have put the commensurate risk management structures in place,” Reuter said.

Reuter, who presented her analysis via a public webinar, said there is a consensus growing in financial markets that many difficult-to-quantify issues oil and gas companies face need to be understood for their potential impact on investment decisions.

Long-term, the response to these issues may well determine whether today’s oil and gas businesses can become the world’s future energy companies. Among the high profile issues Reuter mentioned were response to political instability, human rights violations, environment and worker health and safety and the need for the companies to become providers of alternative energy, power generation and smart infrastructure.

Cannot Rely on Ever-Increasing Prices

MSCI also noted in its report that oil and gas companies could not rely upon ever-increasing prices for petroleum products from reserves that are costlier and ever more technically challenging to recover.

“As economies were stretched thin by the escalating cost of energy, high oil prices have triggered three of the last four global recessions, which consecutively led to the collapse in demand,” analysts concluded. “Hence, we do not assume that high oil prices will persist indefinitely to sustain producers’ profitability, given increasing costs of unconventional supplies.”

Reuter said the Deepwater Horizon incident is a warning sign to prudent investors, who must realize that companies will continue to take on more risks to bring energy supplies to market. Those companies that invest in practices and systems that mitigate those risks will be less likely to suffer a major catastrophe.

“BP highlighted the increased risk profile of the petroleum industry and the problem didn’t remain confined to it. A lot of funds got burned on BP,” Reuter said. “These risks can be very expensive for the company and the society.”

During the early days of the Horizon disaster, financial markets were filled with speculation about the fate of BP, whether it could survive intact, or even be taken over. British government officials voiced fears for pensioners whose income relied on funds with large holdings of plummeting BP stock.

I would be very careful if I

I would be very careful if I was a competitor of BP. A lot of the reason they lost so much money is because people just went to the competition (everyone needs oil). So if this were to happen to them, BP could slowly gain market share.

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