Oil giants on sticky ground

BP is the latest oil major to face a determined campaign from critics of tar sands developments. Sarah Arnott reports

The oil giant BP faced an unprecedented shareholder campaign against its investments in controversial Canadian tar sands yesterday. Nearly 15 per cent of investors balloted in advance of the oil giant's annual general meeting voted against the management on a resolution calling on BP to disclose more information about its £1.5bn "Sunrise" tar sands project in Canada.

A final investment decision on Sunrise is not due until later this year. But a campaign led by the pressure group Fair Pensions, which lobbies for ethical investment of UK pension funds, is calling for a review of the environmentally controversial plan, and for the company to consider in more detail its ecological impact and financial risks.

Some 140 investors, including Co-operative Asset Management and two California state pension funds, supported the resolution in advance of yesterday's vote. And although the motion was approved by a bare 6.1 per cent of the shareholder vote, another 9 per cent abstained and campaigners hailed it as a success.

"This was never going to be a resolution that was passed, but the campaign is a success because it raised difficult questions that BP is being forced to address," said Kevin Smith, at Platform, a social and environmental lobby group backing the Fair Pensions campaign.

Critics claim that tar sands accelerate climate change and destroy local ecosystems. "There are serious questions in terms of the impact on the climate, on the forests and waterways, and on indigenous communities," Mr Smith said. "There needs to be a long hard look at that, devoid of corporate spin, before any more investment is allowed to make the situation worse than it already is."

Shell, which has much larger tar sands interests, is also coming under pressure from the Fair Pensions campaign, as is Royal Bank of Scotland for underwriting such projects. Campaigners plan to enable individual pension holders to put pressure on their providers, and a website set up to channel the contacts has so far processed more than 3,000 requests.

"This campaign is important in the context of tar sands, and also the general trend of giving people a voice on the faceless decisions taken on their behalf," Mr Smith said. "We are trying to democratise international investment – a pension holder might only be one person, but there needs to be proper accountability about how these funds are being invested."

Tar sands are highly controversial, but the prize is huge for an oil-hungry planet – an estimated 174 billion barrels of oil are locked in the oil sands in Alberta alone, the world's biggest reserves outside Saudi Arabia. Both sides agree that extraction is more energy intensive than for conventional oil – although green groups put the multiple at 300 per cent, compared with 5 to 15 per cent from more conservative analysis.

The carbon impact does not stop there, say opponents. The Alberta tar sands lie in a swathe of primary boreal forest estimated to hold 11 per cent of the world's territorial sequestered carbon. Asad Rehman, Friends of the Earth's biofuels campaigner, said: "If we are serious about trying to reduce greenhouse gas emissions as we try to keep temperature rises below two degrees, it is going to be nigh impossible if there is a massive upsurge in extraction from tar sands and destruction of primary boreal forest."

But environmentalists' criticisms do not end with climate change. There is also controversy over the water needed in the extraction process, and what happens to it afterwards. It takes two to four barrels of water to extract every one of oil, according to campaigners, and only 5 to 10 per cent of it is sufficiently clean to return to Alberta's rivers, leaving the remainder in vast "tailings" lakes of contaminated water.

Oil companies involved in tar sands take a different view. With the oil price expected to be between $60 and $90 over the coming decade, according to BP’s latest estimates, the $45 to $70 tar sand extraction cost makes economic sense. And only so-called "unconventional" reserves can help meet the world's booming demand for oil, particularly from developing economies such as China and India.

BP says that its planned "steam assisted gravity drainage" technique at Sunrise will need only about 5 per cent of the land area than an equivalent mining project. About 90 per cent of the water used will also be able to be recycled, with the top-up coming from deep, non-drinking aquifers rather than rivers.

Shell, which has mines up and running in Alberta, has stressed the transparency of its activities, and the amount of time, money and effort that goes into both reducing the environmental impact and researching technological improvements. It has spent C$100m on research into tailings ponds since 2005. Not only do all projects comply with strict regulations, including requirements to return all natural habitats to pristine conditions once mining is completed. There are also tight restrictions on water usage and the maintenance of tailings ponds, Shell says.

The bottom line is that the world needs all the oil it can find, according to Malcolm Fraser, an energy analyst at McKinnon and Clarke. "There are environmental risks associated with these projects, but they have to be balanced against the impact of rising prices if we are not able to access these reserves," he said.

Executive pay: The other 'no' vote

Tar sands were not BP's only battle at yesterday's annual meeting. But the oil major breathed a sigh of relief when only 9 per cent of investors balloted in advance voted against a remuneration package that increased chief executive Tony Hayward's pay by 41 per cent in 2009.

A report, which showed Mr Hayward grossing £4m despite a 45 per cent fall in profits, caused consternation when it was published last month, raising fears of a re-run of last year, when more than a third of shareholders voted "no" over BP's long-term incentive plan.

This year, DeAnne Julius, the head of the remuneration committee, said Mr Hayward's raise was a reward for performance improvements – including a 4 per cent rise in oil production and $4bn-worth of cost cuts – that helped BP shares outstrip those of rivals such as Shell and Total. Some 91 per cent of proxy-voting shareholders agreed.

Mr Hayward's substantial pay increase comes against a background of a worldwide backlash against ballooning executive pay cheques. Richard Lambert, the director-general of the Confederation of British Industry, warned last month that bosses risked damaging support for business and being seen as "aliens" by the public. Notwithstanding such counsel, this month has already seen a string of massive pay awards, including a record-breaking £90m for Bart Becht, at Reckitt Benckiser, and £28m for BG Group's Frank Chapman.