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Saudi Aramco and ADNOC in the World's Most Sustainable Oil Companies Report

Mubasshir Mushtaq Posted Apr 8, 2008

The ratings covers 20 select leading Oil & Gas companies to benchmark each other which includes Total, Shell, BP, ExxonMobil and for the first time Saudi Aramco and ADNOC.

Purpose & Approach of Ranking

The basic purpose of the report, according to Dr. William Cox, Managing Director, of M&E, is to “tell oil/gas companies their level of objective compliance with nearly 400 international standards.” The study has been billed as “the most comprehensive and detailed of studies covering sustainability in the industry.”

The international standards against which the ranking is compiled and generated are based on standards set by institutions such as the Dow Jones Sustainability Index, Global Compact, U.N. Millennium Goals, OECD, International Labor Organisation, Extractive Industries Transparency Initiative, ISO, Sarbanes-Oxley, NYSE and others.

M&E surveyed all companies and researched public information services to determine actual point-by-point compliance with these standards. All percentages refer to the number of points with which a company complies out of a total of over 387. To make the report accurate, M&E distributed exhaustive questionnaires containing 60 questions to the leading oil/gas companies worldwide. The companies were asked to return it; failing which M&E would use its own research to compile the report.

Each year M&E redefines the report’s criteria, adapting them to where the industry is going. For example, this year M&E added a number of points for a reserve replacement ratio over 100 plus points for the number of years a company’s proven underdeveloped reserves will last.

Petrobas Leads in 'Sustainability'

Petrobras of Brazil has emerged as “the Most Sustainable Oil/Gas Company of 2008” and has been ranked No.1 in the report. Petrobras’ miraculous rise in the M&E ranking is an amazing case. When M&E started this study 5 years ago, Petrobras was among the “weakest companies” especially in terms of performance towards the environment and in its employee relations. Dr. Cox recalled one particular incident about Petrobras.

“I recall sitting in the Varig lounge in Sao Paulo in 2003 and watching a program on Brazilian TV reviewing the biggest environmental debacles of Petrobras, of which its sinking platform received the most international attention,” he said. But this was only one case.

“In fact, Petrobras, the State-run company, was a ‘dirty company’ in terms of its spills, environmental transgressions and suffering from regular strikes among its employees,” Dr. Cox told DinarStandard. But in 2006, Petrobras jumped to 2nd place in M&E ranking and retained its spot in 2007 as well. In 2008, the company climbed the ranking ladder and became No.1 by a small margin.

Common Features of Most Sustainable Oil Companies

Petrobras (No.1), Total (No.2), and Pemex (No.12) have been the “most dynamic improvers” while Statoil (No.4) and Shell (No.5) have been termed as “the most solid performers.” At No. 3, BP has been an ultimate “rebounder.”

The leaders in oil/gas companies have some common features:

1. Companies have been growing and increasing production, which makes it difficult to improve H&S (Health and Safety) rates, but Statoil (100%), Shell (83%) and Marathon (83%) have succeeded.
2. Petrobras and Statoil have reduced fatalities, accidents and other problems by improving their supplier management by 100%. Shell, Total, BP and ConcoPhilips have reduced it by 83%.
3. Petrobras (100%), Total (100%), BP (95%), Shell (95%) and Statoil (95%) have the most detailed environmental policies.
4. Leading companies like Petrobras, Shell, Total and ExxonMobil have received more external recognition in the form of awards or were at the top at the most important rankings in most of the areas relating to the oil/gas industry.

Saudi Aramco and ADNOC: Weak in Corporate Governance but strong in Health & Safety

The two leading oil companies in Muslim-majority countries are the state-owned Saudi Aramco and ADNOC (AbuDhabi National Oil Company) which have fared weak overall, particularly in corporate governance but they did better in HSE (Health & Safety) and HSE transparency. In general, companies that controlled the largest oil/gas reserves demonstrated the poorest governance and sustainability practices. The three state corporations PDVSA (state-owned Venezuelan oil company), Saudi Aramco and AbuDhabi NOC in part scored lowest in governance but together control 430 billion barrels of oil, compared with ConocoPhilips´ 9.4 billion or ExxonMobil´s 22.7 billion.

Source: Managment & Excellence Annual Study on World Oil/Gas Sector

Company is active in the following sustainability initiatives: Millennium Development Goals Global Compact Carbon Disclosure Project National or Local Sustainability / CSR association Other

But Dr. Cox is optimistic. “Poor governance,” he said, “does not necessarily mean poor management.”

“Most management processes are covered under Sustainability,” he said.

Dr. Cox also shared one interesting insight as to why Saudi Aramco and ADNOC have suffered in their report ranking. The governance standards in M&E study are mainly those pertaining to companies listed in the USA and Europe, covering such aspects as shareholder rights and independence of board members.

“These obviously do not fit well with the family/state-run businesses in the Arab world,” Dr. Cox told DS.

Dr. Cox said that he would not want to argue that the governance standard of USA and Europe should apply to Arabian oil/gas companies.

“These are standards required by investors buying stock in a company,” he said.

On the brighter side, Saudi Aramco and ADNOC have beefed up their transparency on HSE (Health and Safety), technical and human resource programs. ADNOC, for example, details in its HSE policy, “a systematic approach to HSE management designed to ensure compliance with Abu Dhabi and U.A.E Laws and Regulations and adopted local and international standards.” They implement this policy through a documented Health, Safety and Environment Management System (HSEMS) and conduct periodic audits to verify compliance.

Source: Managment & Excellence Annual Study on World Oil/Gas Sector

Company publicly communicates the following types of health and safety data: Fatalities Accident rates Days absent Efforts and investments to improve H&S

ADNOC began implementing a new HSE in 1997 and since 2003 it has published a separate HSE report.

“The 26-page report details ADNOC´s environmental sponsorship projects as well as HSE statistics complying with typical global standards,” Dr. Cox told DS.

ADNOC has improved consistently on TRIP (Total Recordable Incident Rate). In 2002, the rate was 2.96 for the company and 3.08 for contractors. In 2006 these figures were 1.84 and 0.78, respectively.

The same is true in terms of the LTIF (Lost Time Incident Frequency) metric. LTIF has come down drastically from 0.75 in 2002 to 0.60 in 2006 for the company. For contractors it has come down to 0.35 from 0.78.

Saudi Aramco and ADNOC have solid compliance in H & S which includes complying with OSHA standards, handling of hazardous materials in the production process and emergency plans etc.

Both of the companies have done well in supplier quality control. i.e. Supplier management system, Complaint system for suppliers, Objective supplier screening system and Controlling and enforcing reasonable environmental standards among suppliers.

When it comes to the presentation of information, Saudi Aramco and ADNOC have strongly upgraded their websites following globally accepted structures and contents.

The content includes their code of ethics and conduct, regularly updated press releases, confirmed oil reserves, reports and/or papers on world energy topics, annual environmental report etc.

Saudi Aramco and ADNOC: Areas to Improve

Saudi Aramco and ADNOC scored big in having proven biggest Oil reserves but they lose in global sustainability initiatives, which have considerable PR (Public Relation) impact for companies with high profiles in Europe, the USA and Latin America.

Corporate governance is one area in which both the companies need to improve specially in terms of global PR.

However, given the government owned structures, Dr. Cox does not see major drivers for corporate governance changes in the near term. “They will probably not venture into the areas of corporate governance in the foreseeable future,” Dr. Cox told DS.

According to Dr. Cox, both companies could improve in the following:

1. Publishing more about their human resource policies, including training and performance measurement.
2. Being more transparent about financials even though they are not listed companies.
3. Participating in more international sustainability initiatives such as the Global Compact or Extractive Industries Transparency Initiative.

Dr. Cox thinks that both the companies are “doing well in line with their own goals and cultures” but he spells out the differences between Saudi Aramco/ADNOC and such firms as Shell and Total.

First, both companies are not very exposed to critical media and publics as in the others’ markets.

“They need less social PR,” he told DS.

Second, their expansion does not geographically impinge on land or areas occupied by people or rare species.

“Thus, they do not need to generate as much public goodwill,” he said.

Dr. Cox is of the opinion that both the companies do not have to generate goodwill within the government because they belong to the government.

He cited the example of PDVSA of Venezuela which has gone “from bad to worse.”

“It is in line with the overall irresponsible and blind politics of Hugo Chavez and thus is hardly a surprise,” he said.

“Saudi Aramco and ADNOC cannot in any way be compared with the Venezuela/PDVSA case,” he emphasized.

Finally, Saudi Aramco and ADNOC are extractors more than refiners and processors.

“They do not have to worry about searching for and developing alternative energies as Statoil & Company do, whose reserves are much lower,” he advised.

Key Learnings: In M&E sustainability rating Brazilian Petrobras has been billed as the world’s “Most Sustainable Oil/Gas Companies 2008.” Saudi Aramco and ADNOC have fared “poorest” in sustainability practices although combined with PDVSA, together they control 430 billion barrels of oil, compared with ConocoPhilips’ 9,4 billion or ExxonMobil’s 22,7 billion. Both the companies have done well in H & S (Health & Safety) policies, presentation of content on its website etc. They need to improve on corporate governance, more transparency in financial matters (although they are not listed), active participation in global sustainability initiatives.

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