Corporate social responsibility in the oil and gas industry

Two interesting articles that appeared last week highlighted for me a project that ADI Analytics recently completed on benchmarking corporate social responsibility (CSR) in oil and gas companies.  The first was in the Economist and talked about how CSR is now more constructive and better ingrained with core business operations and goals.  The second is a long piece in the New York Times describing Shell’s efforts — not just within CSR but across a host of related corporate functions, including government relations — to begin drilling in the Arctic.

North American resources such as shale gas, unconventional oil, and the Arctic present to oil and gas companies a huge economic opportunity without the political and security risks that are often present in pursuing resources overseas.  However, the industry will have to assure communities, environmentalists, and other stakeholders of their commitment to responsible development.  Such efforts will need CSR and other functional capabilities that are best in class, driven by expertise and analytics, and both robust and flexible.

Shell may sell its refineries to Essar

Shell is discussing the sale of its three European refineries to Essar, as discussed in a previous post, at $4,000 to $5,000 per barrel of capacity.  While valuation will depend on the three refineries’ individual configurations and complexity, the transaction is at a significant discount from the industry’s Golden Age.

The three refineries with more than 500,000 bpd of capacity amount to about 15% of the company’s refining capacity.  Essar currently operates a 280,000 bpd refinery in India with plans to expand it to 700,000 bpd in 2011, and half of a 80,000 bpd refinery in Kenya.

Strategically, the Shell refineries will allow Essar to build inroads into the diesel-intensive European market.  Such networks will help Essar place diesel volumes out of its expanding Indian refinery, which will likely be oriented to maximize diesel.  Of course, short-term results will likely be lackluster but long-term, demand will grow and, in general, refining capacity globally will become constrained.

Continued growth for U.S. onshore wind energy projects

Executing on a strategic decision to focus on the U.S. onshore wind energy market, BP has exiting from other countries.  It has just sold 100 MW of wind energy capacity in India to Green Infra Limited, an independent power producer backed by India’s infrastructure-focused private equity group, IDFC.

BP’s decision mirrors those of Shell and other investors who have exited from Asia and Europe to focus on the U.S. onshore wind energy market.  Most European markets are saturated or lack competitive incentives.  In comparison, the U.S. has vast tracts of unexploited wind energy potential with excellent Renewable Portfolio Standard-driven incentives.  As a result, one can expect continued growth of the U.S. onshore wind energy market and slower development of global offshore wind energy projects.

Offshore wind will, in principle, leverage the project engineering and execution talents of the oil majors but is fraught with high cost, regulatory uncertainty, and technological complexity.  Offshore wind costs anywhere from two to three times the cost of onshore wind.  Regulatory and renewable certification policies for offshore wind are currently undefined.  Finally, no single technology platform has evolved as an industry leader for massive adoption — a strategy oil majors have found successful in their wind investments.

Sensing a long-term opportunity in this flux, GE has purchased ScanWind, a Norwegian wind turbine company.