Royal Dutch/Shell Group topped the new rankings for 2000 in Innovest Strategic Value Advisors' global analysis of oil and gas company environmental conscientiousness, followed closely by BP. Occidental Petroleum Corp. and Canada's Imperial Oil Ltd. bring up the rear in Innovest's most recent ranking, called EcoValue 21.
The report's central findings, unveiled earlier this summer by the New York-based investment firm at the World Petroleum Congress in Calgary, once again illustrate that "the environment does matter" in terms of strong shareholder value, said Martin Whittaker, senior analyst at Innovest.
In its 2000 survey, Innovest studied 17 of the world's largest integrated petroleum companies from Europe and North America, analyzing the companies' performance in a range of areas including climate change, renewables, fuel cells, natural gas, energy convergence, fuel product quality, localized emissions, and social management in international settings. The results are shown in the ranking at the end of this story.
Innovest examines 40-50 companies altogether in the exploration and production, refining and marketing, and drilling and service sectors.
"We try to hone in on key environmental issues facing the industry's sectors, analyze internal management dynamics, and look and see the upside potential for companies proactive in terms of environmentally friendly fuels and business practices," said Whittaker.
Innovest says the report corroborates the positive link between environmental performance and sustainable shareholder value. Companies receiving above-average environmental ratings have financially outperformed companies with below-average ratings by 10%, on average, over the past 2 years, he says.
Companies broaden their horizons
More energy companies are broadening their scope of business and view of the environment from traditional exploration and production to developing clean-fuel technology. Texaco Inc. is one example, said Whittaker. Texaco has become involved in fuel cell research and other environment-focused projects.
"We plan to apply our expertise in fuels and processing to develop fuel cell technology solutions that advance the commercial viability of this new source of energy and build Texaco's technology-based businesses," said Texaco Senior Vice-Pres. William M. Wicker early this year when the company announced the formation of Texaco Energy Systems Inc.
Whittaker says he expects more companies to follow suit. Companies want to be viewed as diversified to give their stock prices more stability, he says, given that the stock values of traditional oil and gas companies tend to fluctuate greatly.
Wall Street's appetite for growth opportunities�particularly for a high-risk business�can boost shareholder value for companies investing in fuel cell and other technological research and development, says Whittaker: "The street recognizes that fuel cells will be important, and the internet economy has made them less averse to risk, which gives a chance for traditional E&P companies to get notice by positioning themselves in a new technology play."
Whittaker said he's also seen more emphasis among energy companies on communicating what they're doing in terms of environmental compliance.
Over the past 3 years, companies have realized how important communications are, not dealing just with regulators but also with investors and local communities, he says. "We're seeing firms go to great lengths" to adopt this model.
Cost of environmental compliance
Innovest found that environmental compliance expenditures are growing in the petroleum industry. As a whole, the industry spent $8.5 billion in 1998, more than double the net income of the top 200 oil and gas companies combined.
The largest increase in spending occurred in the refining and marketing sector, says Innovest, as US companies spent to upgrade refineries and facilities to process gasoline with lower emissions levels and pay other environmental expenses, such as fines.
The continuation of reformulated gasoline programs in the US and Europe and new required specifications coming out of the US Clear Air Act mean that oil and gas companies are spending even more, says the analyst. Companies also are spending on environmental compliance to open up new areas to exploration, such as the Arctic National Wildlife Refuge in Alaska.
The phasing out of methyl tertiary butyl ether in the US also means refiners are spending to upgrade their facilities. That will mean a tremendous cost to refiners in California if lawsuits are filed against them for MTBE contaminating water supplies in that state.
"A fundamental and irreversible restructuring of the energy value chain is under way, changing the way energy is used, transformed, regulated, distributed, and managed," said Innovest.
Concerns over long-term environmental sustainability�particularly climate change�and resource use efficiency are presenting compelling new growth opportunities for clean energy technologies, fuel cells, low-impact power generation, emissions trading, e-commerce-based energy solutions and other new energy services.
"Developing the strategic vision to adjust a company's portfolio of products and services to take advantage of these opportunities is a key characteristic of future energy industry leaders," said Innovest.
Regarding climate change, Whittaker said it won't be clear until the follow-up meeting in November to the Kyoto summit of 1997 what crucial types of projects will qualify for emissions credits. But the two firms topping Innovest's 2000 EcoValue 21 rating--Shell and BP--are already trading carbon credits internally to prepare for the upcoming carbon-trading market, which Whittaker says will be a "huge area" in 5 years' time.
Innovest's new report on integrated petroleum companies is one of four reports on the sector. The others cover the exploration and production, refining and marketing, and drilling and services businesses.
Innovest EcoValue 21 Ratings
(Companies are ranked in descending order, with their ratings shown in parentheses.)
1. Royal Dutch/Shell (AAA)
2. BP (AAA)
3. NorskHydro AS (AA)
4. Suncor Energy Inc. (A)
5. Texaco (BBB)
6. ExxonMobil Corp. (BBB)
7. Conoco Inc. (BBB)
8. TotalFinaElf SA (BBB)
9. Chevron Corp. (BBB)
10. Phillips Petroleum Co. (BB)
11. ENI SPA (BB)
12. Amerada Hess Corp. (BB)
13. Repsol-YPF SA (BB)
14. USX-Marathon (B)
15. PetroCanada (B)
16. Occidental Petroleum (CCC)
17. Imperial Oil (CCC)