Bob Williams
Senior Staff Writer
The petroleum industry is in the midst of a subtle restructuring in response to heightened public concern over environmental, safety, and health issues in the 1990s.
Although not as drastic as the restructuring caused by plunging oil prices in the 1980s, the changes could ultimately be significant.
The public's perception of the oil industry is becoming more negative amid mounting concerns over air and water pollution, toxic substances, waste disposal, oil spills, and process plant disasters. Oil labor shares the general public's safety/environmental concerns, among the top issues in the Oil, Chemical, and Atomic Workers drive for new contracts (OGJ, Jan. 15, p. 14).
What's more, there are growing movements dedicated to weaning the world of reliance on all fossil fuels, deemed the culprit in a number of perceived environmental crises.
Whole markets, perhaps even survival of the industry in the 21st century, could be at stake, some think.
That view spurs industry officials to recognize a growing need for petroleum companies to take the initiative on environmental concerns before decisions on solutions-sometimes the wrong ones-are made for them.
In addition, some companies see new business opportunities in the field of environmental services and are scrambling to pursue them as separate profit centers.
FOCUS ON ISSUES
The petroleum industry has long placed an emphasis on environmental and related issues.
But the explosion of media focus and public concern against the backdrop of 1988's catalog of crises dubbed "the year the earth spoke back," the Exxon Valdez oil spill last year, and a string of upstream and downstream disasters taking hundreds of lives and causing billions of dollars in damage in recent years have caused many companies to stop and take stock of how they approach environmental matters.
A key move among many companies is to upgrade responsibility for the environment within the corporate structure.
Exxon Corp., for example, earlier this month created the post of vice-president, environment and safety.
Exxon appointed one of its top executives, Edwin J. Hess, former senior vice-president of refining/marketing, to the job. He reports directly to the president.
In the weeks preceding the appointment, an explosion at Exxon's Baton Rouge, La., refinery killed two persons, and an Exxon pipeline leaked more than 10,000 bbl of heating oil into New York Harbor.
For a company that had spent more than $1 billion in 1989 to rectify the Exxon Valdez oil spill, the single most galvanizing influence on the new environmental consciousness, Exxon's move is a sign of the times for the 1990s.
NEED FOR CHANGE
Concern for the environment will top the petroleum industry's agenda in this decade and beyond, industry officials agree.
That is reflected in recent committee work at the American Petroleum Institute, said Terry Yosie, API vice-president of health and environmental affairs.
An API task force chaired by Conoco Inc. Pres. C.S. Nicandros looked at the challenges facing the petroleum industry in the 1990s.
The first and dominant issue quickly became apparent: the environment.
"Out of that task force came the conclusion that we needed a kinder, gentler API," Yosie said.
"There is a great difference in the perceptions of what the industry's goals are and the way society is going.
"That is an untenable position. We needed to set a new tone, a new direction."
The problem the Nicandros task force pinpointed is targeted for solution by a new API task force chaired by Phillips Petroleum Co. Chairman Pete Silas.
The goal of the Silas environmental strategy task force is how to input long term planning processes and codify industry thinking on issues such as waste reduction and how to assess the Valdez principles (OGJ, Sept. 18, 1989, p. 30), Yosie said.
Yosie said, "Industry is always going to have certain basic objectives: lands access, a free market, etc. Our challenge will be how to more clearly define those objectives and then aggressively promote them to the public."
An example would be more joint research programs such as the one the oil industry is pursuing with the automobile industry on developing fuels and compatible engines to improve air quality.
"Joint programs like that are going to give us a bigger bang for the buck and have more credibility with the public as well," Yosie said.
In addition, Yosie expects API to spend more time talking with environmental groups and serving more to transfer information for companies on new regulations.
API's new stance is reflected in its spending. Yosie, whose department receives 24% of the API budget, will see his research budget increased 8% this year while most other budgets at the association are being held constant.
BOTTOM LINE
If nothing else, environmental concerns are going to have a direct effect on a company's profits.
"Not long from now, environmental compliance will be the single biggest cost center in exploration and production," said H.B. (Bud) Scoggins Jr., president of the Independent Petroleum Association of America.
New and upcoming major federal legislation and rules affecting the refining industry call for a cost of compliance of $18.8-22.2 billion/year, Crown Central Petroleum Corp.'s Henry Rosenberg testified last month on behalf of U.S. independent refiners at Department of Energy hearings on developing a national energy strategy in Washington, D.C.
That excludes the billions of dollars currently spent each year to comply with existing environmental regulations or new state and local regulations, Rosenberg testified.
Hart Environmental Management Corp., New York, sees surging growth in federal environmental regulation continuing under the Bush administration, pointing to the track record of Bush as vice-president heading the regulatory relief task force under President Reagan.
During the Reagan years, the number of pages of regulations issued by the Environmental Protection Agency jumped by about half to more than 10,000, Hart said.
INDEPENDENTS' PROBLEMS
There are not many options available to cash strapped smaller independent companies in restructuring their organizations to heighten the focus on environmental awareness, said IPAA's Scoggins.
"There is a lot of high priced talent out there, and it's not easy finding generic help," he said.
"No one really knows how all of this is going to shake out, but a lot of guys have to make a choice on whether to stick with it. They just don't have the resources to hire someone full time on environmental studies to keep up, much less stay ahead of the curve."
An environmental investment tax credit might help independents, and IPAA has included one as part of a package of tax credits for E&P in its latest wish list in Washington.
"But an independent still will have to deal with the problem of cash flow in order to make that investment in the first place," Scoggins said. "One of the biggest problems is just knowing what he's going to have to do. He can't just chase after it with a butterfly net.
"We have to get EPA and Congress to recognize that a lot of this additional legislation and regulation is like going after a mosquito with a shotgun. It's just not necessary."
Scoggins expects to see more examples of independent operators pooling resources on environmental costs, particularly in dealing with emergencies such as spill prevention and cleanup, and possibly with produced wastes and waste water.
"We definitely need a different approach," he said. "Independents can't just keep rolling their eyes and hope it goes away. It's not going to go away.
"Independents have to become assertive, aggressive, and attack the problem ... find a solution before one gets imposed for them."
ENVIRONMENTAL AUDITS
One area of mounting concern for oil companies, environmental audits, is proving to be a boom for environmental consulting firms.
Widespread consolidation is continuing in the industry, especially as many companies dispose of nonessential leases or facilities.
But with increasing concerns over liability for environmental/safety/health hazards, it is getting increasingly difficult to obtain financing for property transactions without environmental audits, said Hart Pres. Fred C. Hart.
"Anytime you go to financial institutions for financing these transactions now, they are asking about the environmental condition of the property.
"The banks are seeking extraordinary measures to determine environmental condition of even casinos and restaurants. You can imagine what it would be like for the petroleum industry."
DIFFERENT APPROACHES
Companies' attitudes toward environmental restructuring cover a wide spectrum.
Some changes have been forced by circumstance, such as Alyeska Pipeline Service Co.'s accelerated oil spill prevention and cleanup program after the Exxon Valdez spill last year.
Others have a more symbolic-but perhaps no less urgent-value, such as Exxon's appointment of a leading environmentalist to its board last year.
Some companies balked at the term restructuring with regard to environmental concerns while noting the issue's importance in the 1990s.
Mobil Corp., whose environmental affairs/safety department reports to Mobil Research & Development Corp., reports nothing new in its structure in response to environmental concerns, an official said, adding, "I don't see how the organization can change."
Walter Quanstrom, Amoco Production Co. vice-president for environmental affairs and safety, sees change in the department as part of a long, continuously evolving process.
Quanstrom reports directly to an Amoco board member, with six managers in environment/safety/health areas reporting to him. Of those six, four represent the principal operating companies and two are corporate staff specializing in industrial hygiene/safety/compliance review and environmental conservation/product safety/toxicology.
Amoco's recent changes entail arranging for Amoco Oil Co.'s manager of environmental affairs and safety (EAS) to report directly to Quanstrom, developing the EAS structure at Amoco Production Co., and setting up an EAS managerial structure at Amoco Chemical Co.
Although environmental, safety, and health specialists report into the plant structure, above that level Amoco consolidates its EAS groups into one department.
"We're trying to develop a critical mass of professionally trained environmental experts," Quanstrom said. "They all get better if they're in a group. We have professionals in toxicology, pharmacology, chemical engineering, and operations safety. We have an inherent bias toward a large mix of individuals. It helps in cross-discipline training as well."
PHILLIPS REALIGNMENT
Phillips named John Scott to the new post of vice-president of quality, environment, and safety, at the same time realigning the organization.
Also under his aegis are medical, corporate management services, reviews and assessments, participative action teams, and the company suggestion plan.
Reflecting the heightened emphasis, Scott reports directly to the president.
Scott hones in on safety and the environment not just because of public relations and employee morale value, but also because they are so critical to profits as well.
"Safety has improved the bottom line by keeping our employees free from harm and by substantially reducing losses of material assets," Scott said.
"When you consider our record before we placed such a big emphasis on safety, the reduction in losses and insurance costs are very impressive.
"You really have to look into the future to see the cost benefits of environmental activities. We have invested substantial amounts of money and considerable effort in complying with environmental regulations, which, incidentally, continue to change. Things that were acceptable 20 years ago won't pass the test today.
More than likely, we'll be saying the same thing 20 years from now.
"It is important that our actions today do not create expensive problems for the company in the future. Preventive measures usually are more economical than remedial actions."
BP RESTRUCTURING
The most significant change regarding environmental restructuring at British Petroleum Co. plc was the formation last month of a four member environmental audit committee on the board of directors consisting of outside board members only.
That committee's function is to look at the company and see how it is restructuring to deal with environmental issues, a BP official said.
Meantime, BP is reviewing all of its health, safety, and environmental quality policies and has beefed up its staff in all those areas.
The company has created a new position of manager of crisis management while upgrading its emergency response capability to a higher corporate level and increasing the number of response drills.
The company's annual winter meeting of senior management next month will deal specifically with environmental issues.
BP also started a company-wide waste minimization program covering everything from chemical plants and refineries to offices.
In addition, BP the past 2 years has formed an environmental research department at its research and development facility in Cleveland by consolidating about 30 scientists in one area to deal with environmental research needs and problems.
Out of that department has come BP's best demonstrated available technology for cleaning oily wastes to comply with EPA requirements.
CONOCO'S CHANGES
Conoco's environmental functions have been undergoing changes since the late 1960s, with a manager heading an environmental affairs department for most of that time, said Barry Kumins, Conoco manager of safety, health, and environmental affairs.
The company's most recent change, in fall 1989, was one more step in that process.
Conoco, a unit of Du Pont Co., took the existing environmental affairs and occupational health department and combined it with a reformulated safety department.
"We had a corporate safety department under a decentralization experiment a few years ago," Kumins said. "We saw no change in the safety record, then decided to reconstitute safety, environment, and occupational health under one manager."
No change in the safety record is not bad news for Conoco. The company has placed at the top of the list of oil companies with good safety records in 9 of the past years.
By placing that responsibility in one person, Conoco could put that one manager on the Conoco Coordinating Council consisting of 30-40 senior managers. Kumins reports directly to the senior vice-president of administration, who sits on the Committee of Six-key company decision makers.
"We can already see the internal benefits. We are now in a better position to communicate with other areas of Du Pont," Kumins said.
The move also heightened the emphasis on occupational health, which Kumins said had been buried in the environmental department.
Conoco also began developing other environment/safety/health programs, including one to treat waste company-wide.
Another effort involved improving its "significant incident," similar to a crisis management plan. Conoco's approach is not so much a plan to deal with a specific crisis but to support line managers during a crisis with environmental, safety, medical, legal, public relations, government affairs, and other specialists working together out of a significant incident room in Houston.
DU PONT INITIATIVES
Du Pont, long a leader on promoting environmental awareness, last month unveiled another set of environmental initiatives guiding its agricultural products business into the 1990s and beyond.
Du Pont will:
- Evaluate new products on the basis of safety and environmental compatibility.
- Continually review products for environmental acceptability, phasing out some in favor of better alternatives.
- Cut waste in manufacturing by 50% the next 5 years.
- Seek positive regulatory changes in the way crop protection products are evaluated, registered, used, and monitored.
- Strengthen training/education programs to ensure its products are applied safely.
- Press biotechnology research for a more environmentally benign approach to crop protection.
ARCO'S NEW ATTITUDE
ARCO Senior Vice Pres. Ken Dickerson presided the past 2 years over realignment and consolidation of all of his company's departments involving external affairs-government, public relations, tax, environment, safety, and health-under government affairs.
"All of our external concerns seem to keep coming back to what the government is doing, usually reflected in new laws," he said.
"it all comes back to the public's attitude toward a corporation. It's never just a single issue but usually spans the breadth of these areas. Thus far, it has worked well."
Within the safety/environment department, there has been no need to change structurally, said Bill Leake, ARCO vice-president of safety and environment.
"The company's basic safety/environment policy has not really changed in the past 20 years, but it was reissued in early 1988 at the request of the new chairman," Leake said.
If anything, ARCO has undergone a structural change in attitude, Dickerson said.
"There was the recognition of external factors, especially in regard to California. There were some things on the horizon that just could not be changed or prevented, particularly on air issues.
"Then along came the Exxon Valdez, and we came to the conclusion that the environment will dominate our industry in the decade and beyond."
ARCO's change of attitude most notably involved the issues of oil spills and air quality.
Regarding oil spill policy, ARCO came to the conclusion that the U.S. petroleum industry is no longer able to respond adequately to spills.
The company advocates creation of a national spill response and cleanup capability covering all parts of the U.S. with the U.S. Coast Guard maintaining the responsibility for cleaning up all spills.
ARCO wants industry to set up a fund of at least $1 billion to provide the Coast Guard with that capability. It would involve a $100 million start-up fund and provide $35-40 million/year in operating costs.
This approach would clear up misunderstanding over who would be responsible for spill response and cleanup and eliminate any perceived conflict of interest on the part of companies in cleaning up spills, Dickerson said.
Regarding air issues, "It became apparent that first California and then the rest of the U.S. would arrive at a solution to the air quality problem," Dickerson said.
"The direction things seem to be heading is a push toward alternate fuels such as methanol or electric cars without any real research behind it.
"it also became apparent that it didn't make a difference to the public whether or not there was research behind it. The public wanted a solution even if it was the wrong solution.
"We could just oppose what the state was proposing as a solution or propose our own solution. That drove us to the determination to reformulate gasoline. The public wanted something better. EC-1 (ARCO's reformulated gasoline) provided the least costly solution."
CHEVRON'S REORGANIZATION
Lyn Arscott, Chevron Corp.'s director of health, environment, and loss prevention, who just finished a year as president of the Society of Petroleum Engineers, continues to stump for increased environmental awareness within the industry through his chairmanship of an SPE committee on environment and safety.
"We have raised the number of meetings and papers on environmental issues, which should have been done years ago," he said. "The professional societies could still do a lot more."
In 1989, Chevron reorganized its environmental and related functions at the corporate level, creating four major groups:
- Regulatory oversight, which works through API and governments.
- Loss prevention, with specialists in industrial hygiene, safety, fire, emergency response, and spills, among other areas.
- Toxicology, involving a large toxics testing laboratory.
- Superfund and waste management.
One of Arscott's biggest worries is day to day compliance in light of the explosion of regulations.
"How do you keep up with training when the goalposts keep moving?" he asked.
Property transfer is also a problem, calling for thorough testing and careful wording in contracts when a company takes over or sells a property, which Chevron has done extensively lately.
Arscott also stresses public affairs beyond the corporate staff level on environmental issues.
"The line operator or plant manager can't isolate himself from the community's concerns," he said. "A lot of engineers have had to be retrained in this regard."
Chevron's emphasis is "managing for assurance," essentially moving beyond compliance.
"Compliance is a given. There are risks, and you may still be within legal bounds, but you still have to head off accidents. You've got to learn to manage risk with training and procedures."
Chevron has created a process hazards management group that is trying to manage risk by conducting hazard/operability studies, very detailed analyses of procedures and processes that entail speculation over various risks.
Chevron sets priorities among those risks, then changes the process to cut the risk.
That's not always easy, says Arscott, who contends industry is still at the frontier of the science of reducing process risks.
Chevron's efforts have produced an extra benefit when it reduces risks.
"Reducing process risk often increases productivity, and that in turn reduces costs," Arscott said.
Another way of reducing process risk is to put more effort into ensuring adequate training of contractor employees, Arscott said.
"The bigger ones like Halliburton and Schlumberger do excellent jobs," he said. "It's some of the smaller contractors that cause some concern."
Compliance with regulations and protection of the environment are not just priorities for corporate staff, Arscott said.
"You have to get the line manager involved. You cannot run a program from headquarters.
"You have to get risk awareness all the way down the line to the wellhead."
PERSONNEL CONCERNS
The most critical concern in changing management structure to accommodate growing environmental concerns, said Hart, is that the person responsible for the environmental sector has to be fully empowered.
"Otherwise, with the increasing likelihood of criminal penalties for violations, it becomes too dangerous for operations people," Hart said.
The other critical personnel problem is a severe shortfall of qualified persons to fill environmental/safety/health functions.
Government redundancy on environmental studies makes the problem worse, Hart said.
"The problem is a bleedoff of talent into employment for government and government contractors.
"We need to lessen reliance on the government for studies.
"There's already too much redundancy, inefficiency, and waste.
"We can do remedial investigations for about one-third the cost of one by the government or a government contractor. That's because we have better qualified people and we're not required to get as much data, so it doesn't take as much time."
ARCO is not interested in retraining engineers to be safety specialists.
"We recruit skilled professionals," Dickerson said. "There's a lot of competition, but we still look for licensed, certified professionals.
"We want a safety engineer who has experience in that specific field vs. retraining an engineer in another field. We don't want to retread someone. We want a solution to today's problem today."
At the same time, said ARCO's Leake, the company wants to use the corporate resources it has.
He said, "We have a close working relationship with our geologists and petroleum engineers in the Dallas research and development unit. That helps because we have a lot of waste site cleanup problems."
Arscott sees a great need for trained safety specialists in the industry.
"You have two options," he said. "There is the default option, in which you take a good, productive person who perhaps is not doing too well in his current job and retrain him.
"Or you take one of the best people, someone with high potential.
"if you see him or her as a possible future leader in the industry, that employee should have some experience in the environmental/safety/health field."
Many of the industry's current top managers who presided over the massive restructuring because of economic concerns last decade came from the financial side of the business. So it follows that many of industry's future leaders will come from the environmental side of the business in the 1990s.
It all adds up to a very real "greening" of the petroleum industry in order to survive and thrive in the Decade of the Environment.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.