As Hurricane Laura passed through Louisiana on August 27, 2020, a fire at a chemical plant led to the release of dark smoke and chlorine gas into the air, forcing residents in Mossville, Louisiana to turn off air-conditioning and shelter indoors. The fire, along with twenty-nine other oil and chemical spills, underscored the damage that hurricanes can do to major infrastructure along the Gulf Coast. As climate change increasingly presents new risks to infrastructure, this incident also underscores the need for accurate information on how oil, gas and petrochemical companies are preparing for new risks.
While most attention on climate risks has focused on so-called “transition risks,” investors have increasingly drawn attention to a lack of detailed disclosures on physical risks, such as rising sea levels and stronger hurricanes. Climate modeling predicts that hurricanes are likely to become more intense. Without action to make infrastructure more resilient, hurricane damage is expected to be far more costly, and without strong safety and emergency policies and procedures, future damage could be devastating for local communities.
In July 2020, the National Whistleblower Center published a report “Exposing a Ticking Time Bomb,” outlining the role that whistleblowers can play in reporting oil and gas companies that fail to prepare for climate risks. Whistleblowers could play a crucial role in revealing hidden physical risks, particularly risks to infrastructure in the Gulf of Mexico and along Gulf Coast that is threatened by growing storm risks.
With long-lived fixed assets that are often located in regions exposed to extreme weather events, the oil, gas and petrochemical industry is particularly exposed to physical risks. The industry’s infrastructure in the Gulf of Mexico and along the Gulf Coast, which includes roughly half of U.S. petroleum refining capacity, natural gas processing capacity, and downstream chemical production, is especially vulnerable. A majority of U.S. offshore production in the region takes places in areas defined as “high” or “extreme” risk for weather risks, while refineries and petrochemical plants in the region, which are built predominantly in low-lying coastal areas, are increasingly exposed to flooding risks.
Infrastructure damage can lead to costly repairs, and production delays can lead to major losses, particularly for refineries which operate with narrow profit margins. In 2005, Hurricane Katrina and Rita destroyed 115 offshore platforms and damaged 52 offshore platforms and 558 pipelines, spilling 11 million gallons of oil into the Gulf. The energy industry overall lost $10 billion dollars after Hurricane Katrina and Rita, with Chevron alone losing $1.4 billion to repairs and production delays.
While the American Petroleum Institute has stated that the industry has made effective improvements in the aftermath of Katrina, Hurricane Harvey still created a man-made environmental disaster when more than 650 energy and industrial facilities flooded, releasing at least 700,000 gallons of oil and other pollutants. The cost of ongoing adaptation remains high and may only grow with time as climate change adds to the cost and threat of hurricanes.
While oil, gas and petrochemical companies are uniquely exposed to specific physical risks, the level of detail provided in financial disclosures does not appear to match the industry’s overall exposure. A 2018 Schroder’s report found that “companies in the energy sector – which our analysis highlights as the most exposed – show relatively limited recognition of physical climate risks.”
With minimal to no details on specific risks or the companies’ plans for preparing, investors and local communities are being asked to trust that companies are preparing appropriately behind the scenes and that companies are appropriately factoring physical risks into valuation models. In a Nature Energy article published in February 2020, UC Davis Professor Paul Griffin warned that “without better knowledge of this risk, the average energy investor can only hope that the next extreme event will not trigger a sudden correction to the market values of energy firms.”
If companies do not disclose physical risks or their failure to adequately prepare, whistleblowers can. “Exposing a Ticking Time Bomb” describes an important pathway to ensuring proper disclosures of climate risks: collaborative work by whistleblowers, prosecutors and regulators to enforce anti-fraud laws.
While federal securities law does not explicitly require publicly traded companies to disclose climate-related risks, companies must disclose climate related risks if such risks are material to investors. Using the Dodd-Frank Act SEC Whistleblower program, whistleblowers could report companies who fail to disclose material physical climate risks or who mislead investors about their preparation for extreme weather events.
Whistleblowers who report to the SEC are uniquely positioned to identify companies who are failing to disclose risks. In contrast to shareholder lawsuits, whistleblowers do not have to show harm to investors in order to report fraud, meaning that whistleblowers can report companies who are failing to prepare before a devastating weather events strikes. Whistleblowers can keep their identity confidential, and whistleblowers who provide original information that leads to a successful SEC prosecution can obtain a reward of between 10% and 30% of monetary sanctions over $1 million.
Whistleblowers can also report companies who misrepresent their safety or emergency response preparedness to the government. A previous False Claims Act investigation of BP after the Deepwater Horizon disaster shows how companies could be held accountable for violating the False Claims Act when they lie about emergency preparedness on leasing applications. Under the False Claims Act, whistleblowers whose original information leads to a successful prosecution are entitled to a reward of between 15% to 30% of the monetary sanctions.
If oil, gas and petrochemical companies attempt to fraudulently hide their failure to prepare for new physical climate risks, corporate whistleblowers may need to play an important role in protecting local communities, taxpayers, and investors. Thanks to powerful U.S. whistleblower laws, corporate whistleblowers are well-suited to report fraud, while protecting their own identity and qualifying for an award.
