June 4, 2010 / 9:27 PM / 9 years ago

Analysis: Investors to turn up scrutiny of oil firms

LONDON (Reuters) - BP’s (BP.L) Gulf oil spill has damaged investor trust and paved the way for a more critical view of the activities of oil companies as risks grow in a hunt for new reserves.

BP Plc Chief Executive Tony Hayward takes a first hand look at the recovery operations aboard the Discover Enterprise drill ship in the Gulf of Mexico, 55 miles (89 km) south of Venice, Louisiana, May 28, 2010.REUTERS/Sean Gardner

Easy oil is over for international firms without access to nationalized reserves in the Middle East, Russia and Latin America, driving a search for more costly supplies deep under the sea or trapped in shale and sand.

The deep water BP oil spill has caused an unfolding ecological and economic disaster along the U.S. Gulf Coast. Canadian tar sands are in a continuing investor spotlight over pollution and longer term climate change.

“This incident is a reminder that this is a high-risk sector where the risk profile has grown because oil is running out and companies are entering riskier areas of operation to keep up production,” said Vicki Bakhshi at F&C Investments, which has just over 100 billion pounds ($147.4 billion) in assets.

“Generally there’s been a perception in the investment community that the oil and gas majors are reliable, blue chip investments delivering a steady stream of dividends.”

Fund managers have seen billions of dollars wiped off the value of BP and some U.S. lawmakers want the company to suspend shareholder dividends.

“Investors will undoubtedly be keen to ensure they understand all the issues surrounding deep-water drilling thoroughly,” said Rob Lake, head of sustainability at APG Asset Management, a Dutch pension asset manager with about 206 billion euros ($251.1 billion) under management.

“This will mean asking companies some probing questions about risk management, approaches to regulatory compliance.”

Investors were less likely to accept assurances at face value, said F&C’s Bakhshi, who covers the oil sector for a team which engages companies the fund invests in on environmental, social and governance issues.

BAN

A U.S. regulatory response honing in on risk may aid investors. A six-month offshore drilling ban, for example, may allow exemptions where companies demonstrate preparedness for losing control of a well.

“The moratorium on offshore drilling was expected,” said David Russell, co-head of responsible investment at the British universities pension fund, the Universities Superannuation Scheme (USS), which has some 28 billion pounds under management.

“I think what it will mean for the future is there will be a lot tighter regulation and oversight of these operations.”

Investors’ own scrutiny could spread beyond offshore drilling to tar sands, meaning these may not benefit from the expected higher, future costs of rival offshore fields.

“In both cases we have companies telling us that certain technologies will be capable of addressing the risks involved. We’ve already been asking about that, but that will only be intensified now as trust has been damaged,” said Bakhshi.

The Norwegian central bank, which manages a $415 billion fund amassed from oil wealth, declined to say how it would be affected by the BP spill, but it has sometimes voted against the advice of oil company boards in the past.

In 2009 for instance it went along with shareholder proposals demanding ConocoPhillips (COP.N) account for the environmental impacts of its tar sand operations.

An extreme response to the spill may be for funds to exit oil companies altogether, for example into low-carbon energy. U.S. President Barack Obama has linked the spill to a renewed push for climate and clean energy legislation.

Clean energy is often more expensive than fossil fuels, and investors dislike uncertainty over subsidies, pointing to a pull back in solar support in Europe.

And many pension funds don’t invest directly in individual stocks making it difficult to avoid these if there are problems. USS, for example, invests some of its assets in a passive fund which tracks baskets of equities — the UK FTSE All Share — where oil companies are prominent because of their size.

“BP is a big part of the UK index and given the nature of index investing we can’t sell our positions,” said Russell.

Additional reporting by Alister Doyle in Oslo; editing by James Jukwey

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