Fast-moving industries involved in the production of consumer goods, food, apparel and precious stones have all come under pressure about the provenance of materials, components and products in their supply chains. Many companies in these sectors have responded by developing mechanisms to assure customers and consumers that products can be traced and sourced with environmental and social considerations in mind. Such traceability has reshaped expectations of corporate accountability and transparency.
Attention is now turning to oil and gas. The sector is already facing a reputational crisis following the BP Deepwater Horizon oil spill, the WikiLeaks disclosures and recent events around the Keystone XL oil pipeline and controversy in the UK over the European fuel quality regulation means that it is likely inevitable that there will be growing demand for greater transparency. As in other sectors, traceability will be a key feature of the rising tide of transparency and accountability, as businesses, customers and consumers become more discerning in their choice of fuel.
The growth of traceability within the industry looks set to focus on so-called “unconventional oil production”, which has greater environmental and social impacts than conventional fossil fuels. The evidence is already there that the trend of traceability is playing out in the purchasing decisions of some leading businesses. Retailers such as Timberland, Walgreens,and Bed Bath & Beyond have pledged to avoid using unconventional oil derived from oil sands. The Royal Bank of Canada, often criticised for its involvement with oil sands, has recently responded to pressure by adopting more stringent social and environmental standards on its lending policy.
To date the oil and gas industry has taken a rather predictable line of defence: crude oil is fungible and traded as a commodity, and it is not practical to trace a final product back to its source. The position has been enabled by the lack of disclosure from the oil and gas companies themselves regarding the derivation of their products. But this looks set to change as non-governmental organisation campaigns gather speed, developments in science and technology unfold and regulation kicks in.
ForestEthics is helping companies trace the fuel their shipping suppliers use back to specific refineries. Players like Greenpeace, WWF, Friends of the Earth and The Pembina Institute are highlighting the damaging environmental and social consequences of unconventional oil, and are pressuring both businesses and consumers on the oil sands issue.
Newspapers such as the Financial Times have reported on the participation of BP and Shell in unconventional oil production and the resulting shareholder inquiries into these plans. High street campaigns have also been targeting retailers, especially those that trade off ethical claims.
In parallel, emerging technology is enabling the traceability of crude oil back to its origin based on the product’s very specific chemical composition. The science has already been proven in the Gulf of Mexico where the chemical “fingerprinting” of oil following Deepwater Horizon, enabled investigators to determine that it indeed come from the Macondo well.
Regulatory action is another potential challenge to the sector. The European fuel quality regulation is set to designate transport fuel from tar sands as resulting in 22% more greenhouse gas emissions than from conventional fuels. According to the Guardian, this would “make suppliers, who have to reduce the emissions from their fuels by 10% by 2020 very reluctant to include in in their fuel mix”. Low-carbon fuel standards are emerging in markets around the world.
The overriding risk for oil companies is that, as traceability develops through market or regulatory action, they will be caught on the back-foot, defensively attempting to minimise the reputational and financial loss that can come from investment in unconventional oil. In the worst case unconventional assets will be downgraded by investors or even entirely stranded if markets discriminate against them.
The key message is to jump before you are pushed and competitive advantage is likely to emerge for those companies that sell “oil sands free” fuels with appropriate branding and verified sourcing. Either way, oil companies and indeed all sectors, would do well to explore the issue of traceability before it emerges as a major force in customer and consumer choice.