BiodiversityEconomicsGlobal Warming/Climate ChangePeak OilWater Contaminaton & Loss

The Money Gusher

The oil industry’s decommissioning costs will dwarf those of nuclear power. The money being made now should be put aside to meet them.

First published in November 2007, by George Monbiot: journalist, author, academic and environmental and political activist, United Kingdom

Has BP ever made a profit? The question looks daft. The oil company posted profits of $26bn last year(1). There’s no doubt that BP has been pumping money into the pockets of its shareholders. The question is whether this money is what the company says it is. BP calls it profit. I call it the provision the firm should be making against future liabilities.

Despite an angry letter from two US senators(2) and a warning from Barack Obama about spending big money on their shareholders while nickeling and diming coastal people(3), despite the fact that it has no idea what its total liabilities in the Gulf of Mexico will be, BP seems to be planning to pay a dividend this year. It’s likely to amount to more than $10bn. As the two senators noted, by moving money “off the company’s books and into investors’ pockets”, BP “will make it much more difficult to repay the US government and American communities”.

Pollution has been defined as a resource in the wrong place. That’s also a pretty good description of the company’s profits. The great plumes of money that have been bursting out of the company’s accounts every year are not BP’s to give away. They consist, in part or in whole, of the externalised costs the company has failed to pay, and which the rest of society must carry.

Does this sound familiar? In the ten years preceding the crash, the banks posted and disposed of stupendous profits. When their risky ventures failed, they
discovered that they hadn’t made sufficient provision against future costs, and had to go begging from the state. They had classified their annual surplus as profit and given it to their investors and staff long before it was safe to do so.

Last week the British government bumped into another consequence of failing to take future costs into account. Chris Huhne, the new secretary of state for energy and climate change, revealed that nuclear decommissioning liabilities will cost the government £4bn more than it was expecting to pay over the next three years(4). This will cancel out two-thirds of the vicious cuts the government has announced and swallow most of his department’s budget. As Huhne pointed out, “It is a classic example of short-termism. I cannot think of a better example of a failure to take a decision in the short run costing the taxpayer a hell of a lot more in the long run.”(5)

The decommissioning costs imposed on society by nuclear power will be dwarfed by those imposed by the fossil fuel industry. They include, but are not confined to, the money that will have to spent on adapting to climate change. The United Nations estimates this cost at $50–170 billion a year, but a report last year by British scientists suggested that this is around three times too low, as it counts only a small proportion of likely impacts(6).

The UN has hired the consultancy Trucost to estimate the costs dumped on the environment by the world’s 3000 biggest public companies. It doesn’t report until October, but earlier this year the Guardian published the interim results(7). Trucost had estimated the damage these companies inflicted on the environment in 2008 at $2.2 trillion, equivalent to one third of their profits for that year. This too is likely to be an underestimate, as the draft report did not try to value the long-term costs of any issue except climate change. Nor did it count the wider social costs of environmental change.

A paper by the New Economics Foundation in 2006 used government estimates of the cost of carbon emissions to calculate the liabilities of Shell and BP(8). It found that while the two companies had just posted profits of £25bn, they had incurred costs in the same year of £46.5bn. The oil leaking into the Gulf of Mexico from the Deepwater Horizon well is scarcely more damaging, and its eventual impacts scarcely more expensive, than the oil which is captured by neighbouring rigs then processed and burnt as intended.

The full costs imposed by the oil companies, which include the loss of human lives and the extinction of species, cannot be accounted. But even if they could, you shouldn’t expect the companies to carry them. They might be incapable of capping their leaks; they are adept at capping their liabilities. The Deepwater Horizon rig, which is owned by Transocean, is registered in the Marshall Islands(9). Most oil companies pull the same trick: they register their rigs and ships in small countries with weak governments and no international reach. These nations are, in other words, incapable of regulating them.

Flags of convenience signify more than the place of registration: they’re an unmistakable sign that responsibilities are being offloaded. If powerful governments were serious about tackling pollution, the first thing they would do would be to force oil companies to register their property in the places where their major interests lie.

US lawyers are drooling over the prospect of what one of them called “the largest tort we’ve had in this country”(10). Some financial analysts are predicting the death of BP, as the fines and compensation it will have to pay outweigh its earnings. I don’t believe a word of it.

ExxonMobil was initially fined $5bn for the Exxon Valdez disaster, in 1989. But its record-breaking profits allowed it pay record-breaking legal fees: after 19 years of argument it got the fine reduced to $507m(11). That’s equivalent to the profit it made every ten days last year. Yesterday, after 25 years of deliberations, an Indian court triumphantly convicted Union Carbide India Ltd of causing death by negligence through the Bhopal catastrophe(12). There was just one catch: Union Carbide India Ltd ceased to exist many years ago. It wound itself up to avoid this outcome, and its liabilities vanished in a puff of poisoned gas.

BP’s insurers will take a hit, so will the pension funds which invested so heavily in it, but, though some people are proposing costs of $40 or even $60bn, I will bet the price of a barrel of crude that the company is still in business ten years from now. Everything else – the ecosystems it blights, the fishing and tourist industries, a habitable climate – might collapse around it, but BP, like the banks, will be deemed too big to fail. Other people will pick up the costs.

There is an alternative, but it is unlikely to materialise. Just as Norway has treated its oil money not as profit but as provision against a tougher future(13), so the governments in whose territories oil companies work should force them to pay into a decommissioning fund. The levy should reflect the costs economists are able to calculate, plus a contingency for those we can’t yet foresee.

This would outrage the oil firms, as it would render many of them unprofitable. But there’s a simple answer to that: the money currently defined as profit is nothing of the kind.

References:

  1. BP Annual Review 2009. https://www.bp.com/assets/bp_internet/globalbp/globalbp_uk_english/set_branch/STAGING/common_assets/downloads/pdf/BP_Annual_Review_2009.pdf
  2. Letter from Senators Charles E. Schumer and Ron Wyden to Tony Hayward, 2nd June 2010. https://wyden.senate.gov/newsroom/press/release/?id=b2b6660f-9f23-4dbd-a4d2-11a0889edcc8
  3. https://www.guardian.co.uk/world/feedarticle/9112408
  4. https://www.guardian.co.uk/politics/2010/jun/01/chris-huhne-black-hole-nuclear-power-budget
  5. https://www.guardian.co.uk/politics/2010/jun/01/chris-huhne-black-hole-nuclear-power-budget
  6. Martin Parry et al, 2009. Assessing the Costs of Adaptation to Climate Change: A Review of the
    UNFCCC and Other Recent Estimates. International Institute for Environment and Development. https://www.iied.org/pubs/pdfs/11501IIED.pdf
  7. https://www.guardian.co.uk/environment/2010/feb/18/worlds-top-firms-environmental-damage
  8. NEF and WWF, 2006. Hooked on oil: breaking the habit with
    a windfall tax. https://www.neweconomics.org/sites/neweconomics.org/files/Hooked_on_Oil_1.pdf
  9. https://www.guardian.co.uk/environment/2010/may/30/oil-spill-deepwater-horizon-marshall-islands
  10. https://www.guardian.co.uk/business/2010/may/31/bp-compensation-claims-us-oil-spill
  11. https://business.timesonline.co.uk/tol/business/law/article4212940.ece
  12. https://www.guardian.co.uk/world/2010/jun/07/bhopal-disaster-india-seven-convicted
  13. The Government Pension Fund. See https://www.regjeringen.no/en/dep/fin/Selected-topics/the-government-pension-fund.html?id=1441

5 Comments

  1. From “companies and people should be liable for damages they do to others” does not follow “the government should force them to pay these potential costs preemptively.” If governments “must do something” why don’t they eliminate the liability limits they enacted a long time ago.

  2. JBob,

    that’s about the most confused suggestion I’ve read since a long time. Of course it was the governments’ genuine idea to have liability limits in the first place, wasn’t it? And of course, once “limited liability” is gone, the government should – if we adhere to this line of thought – of course play no role in assessing liability (jurisdiction) and enforcing it (executive) either, right?

    So, tell me again: What court would you go to in order to then enforce liability?

  3. We spoke to Robert F. Kennedy Jnr. about this the other day and he (through a class action) has already sued BP. He suggested that BP will have liabilities of over 35 billion from this disaster and that BP will break up as a consequence further concentrating the members of the ‘oiligarchy’. All the best, Darren

  4. Thomas,

    I’m not sure what your question is exactly. I’m just pointing out that the $75 million limit in liability that the government gave the oil industry creates a lot of moral hazard. As usual, government creates a problem and then demands (or Monbiot demands) yet more power to “fix” the problem.

    As for what court to use, I can’t point to a reputable private court to settle this dispute since the government currently monopolizes this industry and no alternatives are allowed to exist.

  5. JBob,

    ah – a “market-governed jurisdiction industry”. I take it we then also need “Justice Vouchers” a la Yes Men?

    You know what would happen if the “justice industry” went free market? “Justice” would become the product of organized gangs.

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