API: Petroleum execs face non-market hurdles

John L. Kennedy
Editor

Weak oil prices are an immediate concern of oil and gas company executives, but most have adapted to the volatility that marks modern energy markets. Using innovative technology to reduce costs has helped them cope.

What may be an even more formidable challenge than markets, according to speakers at last week's annual meeting of the American Petroleum Institute in San Francisco, is a range of long-term pressures that are not directly related to current oil prices or technological challenges.

According to Daniel Yergin, chairman, Cambridge Energy Research Associates, those growing pressures come from three directions: the investment community, environmental initiatives, and a growing emphasis on human rights and ethics.

Focus on such issues at this year's annual meeting reflects a shift in API's objectives and organization that is part of API's restructuring (OGJ, Nov. 9,1998, p. 34). According to H. Laurance Fuller, outgoing API chairman, the San Francisco meeting "is not to focus on the details of issues, but to dig deeper into influences" that will affect member companies well into the next century.

Get involved

Introducing a panel that discussed these influences, Yergin said the involvement of companies in human rights and ethics issues will accelerate. The long-held policy of "thou shalt not intervene" in local politics is no longer appropriate, he said. In the future, the questions will not be if companies get involved locally, but how.

That means, said Yergin, that the important questions facing international oil companies are: What are the responsibilities of companies to governments where they work; and who determines those responsibilities?

The difficulty in predicting political events and other changes makes involvement in host country issues difficult and risky. In some cases, it is hard to be engaged in local politics without endangering the long-term ability to stay in a country.

But, increasingly, it is necessary.

Unilateral sanctions are another complication for U.S. companies. The industry has opposed sanctions, but panel member Michael Novak of the American Enterprise Institute said, "There are times when (sanctions have) worked." To be most effective, the specific consequences of each sanction must be evaluated. Then companies have a responsibility to "show countries the cost of a sanction and help develop plans that will change the cause of the sanction."

By getting involved locally, companies can help raise human rights and ethics standards, Novak told API members.

Oil and gas companies "need to gear up for the battle of ideas," he said, "not to justify your existence, but to help give the rest of the world a chance to prosper."

Find solutions

"Environmentalists are never going to like you," Gregg Easterbrook told API members. "But the important question is: Will the public like you?"

Easterbrook, Senior Editor of the New Republic and a member of the API panel, cited the conflict between the public's impression that environmental quality is declining and the reality that it is actually dramatically improving. That is evidence, he said, that "it takes 25 years of continuing good performance to get the message to the public."

He said, however, that regulation also "gets a lot of credit" for dramatic improvements in air and water quality in developed countries over the past 25 years, and society "will need more regulation in the future."

Companies can expect continued pressures to reduce greenhouse gase emissions, said Easterbrook, but the "next major environmental issue is species preservation and habitat conservation."

To emphasize the role of regulation, Easterbrook asked the audience this question: If they could rewrite history, how many would allow or prevent the establishment of the U.S. Environmental Protection Agency and the passage of the Clean Air Act. A majority said that, knowing what they now know, they would allow these events.

However, when asked whether they would allow or prevent the implementation of the Kyoto treaty, most said they would prevent it.

The proper response to the Kyoto treaty, said Easterbrook, is to object to parts of the treaty (see related stories on p. 42). But the industry should "put its arms around" the basic concept of CO₂ emissions reduction.

Just saying "no" all the time makes industry vulnerable. "Go along with a solution, but fight the details," he advised.

"It's fair to ask the developed countries to take the first step," said Easterbrook, "but developing nations shouldn't be exempt from reduction efforts indefinitely."

One solution is emissions trading.

A "second phase" of environmental regulation beginning now will make increasing use of market-based solutions such as emissions trading, said Easterbrook. This second generation of environmental solutions is a reality, not just a wish, he said, despite the fact that some environmental groups are opposed to market-based solutions.

Industry needs to find an interest group that wants to "see things succeed," said Easterbrook. Such a group needs to be independent of environmentalists, regulators, and single-industry organizations.

Political and economic changes-also tied to environmental concerns-in Europe will also affect energy markets in the longer term. According to panel member Ian Hargreaves, Chairman of Demos and the New Statesman, 13 of 15 European Union governments are now part of a new "center-left" in Europe. "It is a real shift," he said, "and it is starting to worry business leaders." Proposals for higher energy taxes have been made in Germany and Britain. Hargreaves said the environmental movement in Europe is not likely to be derailed, because "voters want government to help." If Vice President Al Gore becomes the next U.S. president, said Hargreaves, look for a much stronger link between the U.S. and Europe on environmental issues.

What investors want

Wall Street won't change its "quarterly focus," but investors will still be attracted to companies with long-term, predictable, above-average growth. In a commodity business such as oil and gas, it is very hard to increase the "top line" of the balance sheet, "so the low-cost producer will win," in the market, said panel member William D. Cvengros, CEO, Pimco Advisors LP In judging the financial performance of companies, "we don't put extra value on environmental activities or citizenship. But we usually find that those companies that are good corporate citizens and have a sound environmental program are also the best investment value," said Cvengros.

In a natural resource business, environmental performance has an effect on financial performance, as well as on image, he said.

Leadership change

Mike R. Bowlin, chairman and CEO of ARCO, was elected chairman of the board of API during the San Francisco meeting, effective Jan. 1, 1999.

He succeeds Fuller, chairman and CEO of Amoco Corp., who did not seek a second 1-year term because of time commitments related to the merger of BP and Amoco. Fuller will be co-chairman of BP Amoco plc.

In other API business, Richard J. Stegemeier, chairman emeritus of Unocal Corp. received the API Gold Medal for Distinguished Achievement.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.