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March 12, 2010

Shareowner Activists Request Better Disclosure of Strategic Risks by Oil Sands Developers
    by Robert Kropp

Investor group led by Boston Common Asset Management in the US and FairPensions in the UK joins forces to engage with BP and Shell on disclosure of strategic risk mitigation in Canadian oil sands developments. -- Many of the nearly 100 shareowner resolutions relating to climate change that have been filed this year involve the energy-intensive practice of oil sands development. According to at FairPensions, the practice requires the consumption of three barrels of natural gas to create one barrel of oil, leaks approximately three million gallons of contaminated water into surrounding rivers and groundwater each day, and emits unusually high levels of greenhouse gases (GHG).

A report published last year by Northwest & Ethical Investments of Canada found that "Engagement by responsible investors is…necessary and timely," and that oil sands companies should "Include in public disclosure material information on environmental, social, and governance (ESG) strategy, performance and risk mitigation systems."

Resolutions have been filed this year with ConocoPhillips and ExxonMobil, regarding the companies' oil sands operations in Alberta, Canada. A multinational investor group led by FairPensions and Boston Common Asset Management has also focused its resolutions, filed with BP and Shell, on the companies' oil sands operations in Alberta, where 87,000 square miles are affected. Oil sands exploitation has led to widespread deforestation and loss of wildlife, and First Nations communities in the affected area have initiated legal proceedings against those involved in the practice.

The investor support letters drafted by Boston Common and its co-filers stated, "We are concerned about the potential for future carbon regulation, oil price volatility, water scarcity, as well as the legal and reputational risks arising from local environmental damage and impairment of traditional livelihoods to impact the long-term economics of this project and the value of our company."

Lauren Compere, Senior Vice President and Director of Shareholder Advocacy at Boston Common, told, "There's been a changing dynamic in the energy paradigm. Oil sands looked good a couple of years ago, when oil was at $100 a barrel, but obviously things have changed."

"The underlying issue that investors are focusing on with the resolutions at BP and Shell is the need to clarify the underpinnings of their decisions to continue to invest in oil sands," Compere continued. "We feel that the basis of their decision, based on what they have already disclosed, is not sufficient."

If the cost of carbon emissions increases to $50 per ton by 2020, as has been estimated, the cost of producing a barrel of oil sands will increase by five dollars. BP’s Sunrise project in Alberta is at the higher end of the carbon intensity scale, and the cost is likely to be even higher than the average.

"They're relying on break-even assessments based on a limited number of reports," Compere said. "They are not properly accounting for the externalities, particularly BP."

Louise Rouse, Director of Investor Engagement at FairPensions, told, "We believe that BP should disclose to investors that they are making correct assumptions about future oil demands and carbon intensity. These are key factors, and we don't feel that BP has done that to date. BP has made certain disclosures since the filing of the resolution."

One of the externalities described by Compere is the controversial practice of carbon capture and storage (CCS), which aims to capture carbon dioxide (CO2) and dispose of it underground. CCS has been championed by the oil industry as a solution to the financial and environmental problems of oil sands. However, CCS has been described by Greenpeace as one of the "unproven, band-aid technologies," which "will not reduce emissions from the tar sands on any significant scale in the near future."

"BP is talking about the additional costs if carbon capture happens," Compere said. "Its estimates for that have been one or two dollars per barrel extra, when in fact the type of oil sands extraction that BP is looking at is a different process and an unknown quantity."

"The investment risks around oil sands have been the subject of international scrutiny," Rouse said. "FairPensions campaigns for responsible investment generally, and oil sands clearly is a concern of those engaged in responsible investment. Ultimately, the objective of the process is to provide greater disclosure to investors to allow them to assess the risks in their portfolios of companies engaged in oil sands."

BP has not yet begun its oil sands operations in Alberta. According to Rouse, BP expects its joint venture with Husky Energy to become operational in 2014.

"Investors have asked BP if it is comfortable with having Husky as a partner," Rouse said. In fact, the investor support letter for the BP resolution observed that the Northwest & Ethical Investments report "rated Husky, our company’s joint venture partner in Sunrise, as having the highest risk exposure of any oil sands operators in each of the categories analyzed: disclosure, First Nations, air, water, land and strategy."

Compere said, "In 2007, we called on BP not to enter into a strategic relationship with Husky."

Asked about the involvement of investor groups with the indigenous peoples whose homelands are most acutely affected by oil sands development, Rouse said, "The Co-operative Asset Management is our largest institutional co-filer, and is has a related institution called the Co-operative Group which is involved with some of those issues."

In February 2009, the Co-operative Group announced its support for the Beaver Lake Cree Nation's legal challenge seeking to enforce recognition of its constitutionally protected treaty rights, and to protect the ecological integrity of the ancestral lands affected by oil sands development.

"Disclosures have been requested as to how the companies are mitigating the investment risk that could arise from lawsuits brought by those communities," she continued.

FairPensions has also provided individual investors with an opportunity to voice their preference for how their pension funds vote on the shareowner proposals relating to climate change. Pension fund members can email their pension funds directly here.

"We think it is important that the beneficiaries of pension fund investments be aware of how their money is invested, and express their preference for the responsible investment of their money," Rouse said.

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