Ten miles outside New Orleans stands a two-million-barrel per day oil refinery, surrounded by the Meraux, Louisiana community. On low-lying ground along the Gulf coast, an elaborate network of pipes and smoke stacks looms beyond double-wide trailers, rows of single-family homes, and a playground. By 2050, the refinery and surrounding areas could be underwater, given intermediate sea level rise estimates. But this won’t be the first time the refinery has seen high water levels.
When Hurricane Katrina made landfall, the Meraux refinery flooded. Damaged tanks spilled 25,000 barrels of oil, covering over a square mile of neighborhood and contaminating 1,700 homes. Then-refinery owner Murphy Oil paid $330 million to settle 6,200 claims, buy contaminated property and perform cleanups.
Companies’ undisclosed climate risks
Following the incident, Murphy Oil disclosed to its investors that the refinery faced climate-related risks: “The physical impacts of climate change present potential risks for severe weather (floods, hurricanes, tornadoes, etc.) at our Meraux…refinery,” the company wrote to the SEC. But Valero Energy Corporation acquired the refinery from Murphy Oil in 2011, and Valero has yet to disclose any risks from the physical impacts of climate change to the Meraux facility. Why not?
Valero is not alone. A recent Union of Concerned Scientists report, Stormy Seas, Rising Risks: What Investors Should Know About Climate Change Impacts at Oil Refineries, models sea level rise and storm surge and finds climate-related risks at five refineries on the Gulf and East coasts. The five top U.S. refining companies that own these facilities — Chevron, Exxon Mobil, Marathon Petroleum, Phillips 66 and Valero — have not fully disclosed these risks to their shareholders.
So what is the big deal about disclosure?
The physical impacts of climate change will cost companies
Climate projections show that rising seas and strengthening coastal storms, including hurricanes, will be a hallmark of our warming world. And there are plenty of past events that show significant costs associated extreme events, like Katrina’s damage to the Meraux facility.
Evidence suggests that climate change will lead to an increase in Atlantic hurricane intensities over the next century. Atlantic hurricanes that do form could be more damaging. Sea levels are expected to rise faster in the next century, with some parts of the world, including the U.S. Gulf and East Coasts, expected to see even higher rates than the global average. In the Gulf, the combination of sea level rise, subsidence, and low-lying topography make the region especially vulnerable to storm impacts. At the same time, the Gulf coast hosts much of the nation’s energy infrastructure, including refineries and rigs.
These are the changing conditions in which business must operate. The better companies can consider and prepare for these risks, the better off they’ll be and the better they’ll perform in the long term.
Investors want to know
The call for disclosure is nothing new. Demands from shareholders for companies to fully consider and report physical risks from climate change have been growing for more than two decades. Shareholder resolutions on corporate climate change strategies first appeared as early as 1989 and investors urged the SEC specifically to help improve corporate climate risk disclosure in their financial filings starting in 2004. Since the SEC issued guidance in 2010 asking companies to consider and disclose climate-related risks that are material, the drumbeat has continued for companies to take this disclosure seriously. Just this year, Calvert Investment Management led a shareholder resolution filed with Phillips 66 seeking greater disclosure of physical risks. Stakeholders are putting increasing value on corporate performance in environmental, social and governance issues and there is evidence to suggest that companies who lead in these areas, and disclose their actions, can improve their value and business performance.
If companies are thinking about it, why aren’t they talking about it?
As part of our research, we sent letters to the five companies asking about this lack of transparency. Exxon Mobil wrote us back, citing its (very limited) discussion of physical climate risk in its Corporate Citizenship report and its contribution to an industry climate risk adaptation report. If the company is thinking about and preparing for climate-related risks in these venues, why not share it with their shareholders through the SEC reporting? When it comes to discussing climate change in SEC filings, Exxon Mobil — likely many companies — only discloses risks they believe they face related to carbon regulation, with no reference to the physical impacts that climate change is likely to have on their business.
The way forward
While the overall disclosure landscape leaves a lot to be desired, there are companies in the oil and gas industry that are leading the way on disclosure, learning from experience, and taking the predictions of the scientific community to heart. As mentioned above, Murphy Oil realized its vulnerability after Hurricane Katrina and disclosed this information to the SEC. Additionally the Hess Corporation, an oil and gas company with refining operations, stated in its voluntary climate reporting to CDP (formerly the Carbon Disclosure Project): “Increased storm severity could materially affect our operations in the Gulf of Mexico. The financial impact of recent storms is an indicator of potential future implications. In 2013 Tropical Storm Karen hit the Gulf of Mexico, requiring Hess to shut-in its Baldpate Production Platform. Total gross lost production was approximately 130 thousand barrels of oil equivalent, with a market value of about $9 million.”
Such specificity demonstrates that companies are carefully considering the risks that climate change poses to all of their assets, and helps investors make informed decisions about the risks companies face. In a nutshell, transparency provides incentives for companies to improve performance and reduce risks while helping investors and the public hold companies accountable. Climate change will affect how businesses operate; we just need to make sure we’re prepared.