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July21,2016

U.S.SecuritiesandExchangeCommission100FStreet,NEWashington,DC20549-1090Attn: FileNo.S7-06-16,DocketNo.33-10064,BusinessandFinancialDisclosureRequired

byRegulationS-K

TheInstituteforPolicyIntegrityatNewYorkUniversitySchoolofLaw,1UniversityofChicagoAbramsEnvironmentalLawClinic,2andOceana3respectfullysubmitthesecommentsinresponsetotheSecuritiesandExchangeCommission’s“conceptrelease”onbusinessandfinancialdisclosures.Specifically,inresponsetotheSEC’squestionaboutincreasingenvironmentaldisclosures,4thesecommentsadvocateforeithernewrulesoraninterpretivereleasewithguidanceclarifyingthedisclosurerequirementsaroundtherisksfromoffshoreoilandgasoperations,particularlyinfrontierareaslikeultra-deepwaterandtheArcticOcean.

TheSECistaskedwiththetripartitemissionofprotectinginvestors;maintainingfair,orderly,andefficientmarkets;andfacilitatingcapitalformation.5Inpursuitofthatmission,theSECrequirescertainmandatorydisclosuresbyissuersofsecurities.Thisdisclosureregimeisdrivenbytheconceptthatallinvestorsshouldhaveaccesstocertainfactsaboutaninvestment.6Thedisclosureofmeaningfulinformationtothepubliccreatesacommonpoolofknowledgethatinvestorsmayusetoevaluateforthemselveswhethertobuy,sell,orholdaparticularsecurity.7Withchanging

1PolicyIntegrityisanon-partisanthinktankdedicatedtoimprovingthequalityofgovernmentdecision-makingthroughadvocacyandscholarshipinthefieldsofadministrativelaw,cost-benefitanalysis,andpublicpolicy.ThesecommentsdonotnecessarilyreflecttheviewsofNYUSchoolofLaw,ifany. 2TheAbramsEnvironmentalLawClinicattheUniversityofChicagoLawSchoolchallengesthosewhopolluteillegally;fightsforstricterpermits;advocatesforchangestoregulationsandlaws;holdsenvironmentalagenciesaccountable;anddevelopsinnovativeapproachesforprotectingandimprovingtheenvironment.3Oceanaisaninternational,nonprofit,marineconservationorganizationdedicatedtousingscience,law,andpublicengagementtorestoreandprotecttheworld’soceans.481Fed.Reg.23916,23935-36(Apr.22,2016).5WhatWeDo,U.S.SECURITIESANDEXCHANGECOMMISSION,http://www.sec.gov/about/whatwedo.shtml(lastvisitedJuly18,2016).6Id.7Id.

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circumstancesandthepassageoftime,thetotalmixofinformationthatinvestorsmayvalueinmakinginvestmentdecisionsmaychange.8

TheDeepwaterHorizonoilspillin2010madesalientsomeoftheuniqueriskscreatedbyoffshoreoilandgasoperationsinfrontierareas.BPshareholdersfacedtheconsequencesoffailuresinthecompany’ssafetyprocedures,spillresponsepreparedness,andcorporategovernance.Asoilandgascompaniescontinuetoexpandtheiroperationsinfrontierareas,9suchasdeepwaterandtheArcticOcean,investorswillcontinuetobearnewanduniquerisks.Theseregionshavefeaturesthatmakeaccidentsmorelikelyand/ormoresevereandresponsemoredifficultthanintraditionaloperations.TheDeepwaterHorizondisasterandRoyalDutchShell’sfailedeffortsintheArcticregion10clearlydemonstratedtheserisks,anditismorecriticalthaneverthatinvestorsreceivebetterinformationabouttherisksofcompanyplanstodrillinfrontierareas.

WerespectfullyurgetheSECtoproviderulesorinterpretiveguidancethatensureconsistentandeffectivedisclosureofmaterialrisksfromoffshoreoilandgasactivities.

Ourcommentsaresummarizedinthreesections:

1. OffshoreOilandGasOperationsinFrontierAreasCreateMaterialRisks

2. TheNewandUniqueRisksofOffshoreOilandGasOperationsinFrontierAreasAreNotBeingAdequatelyDisclosed

3. TheCommissionShouldClarifyDisclosureObligationsforOilandGasCompanies

Inparticular,insection3,werecommendthatSECrequireadditionaldisclosureaddressing:

• Estimatesofthelikelihoodandthetotalcostofacatastrophicwellblowout,includingadescriptionofhowthecompanywouldrespondbothtechnicallyandfinancially,andinthefaceofthosecostsandhowthecompanywouldbeaffected;

• Narrativedescriptionsofcompanies’spillpreventionpoliciesandpractices,includingdata-baseddescriptionsofhowwellthosepoliciesworkinpracticeaswellashowtheyaretailoredtoparticularenvironments;and

• Morecomprehensivedataoncompanies’day-to-dayenvironmental,health,andsafetyperformance.

8Forinstance,inresponsetothefraudulentuseofoff-balancesheetitemsbyEnronandothercompanies,disclosureofsuchitemswassubsequentlyrequired.SeeInteragencyStatementonSoundPracticesConcerningElevatedRiskComplexStructuredFinanceActivities,ReleaseNo.34-53773,71FR28326(May6,2006).9NAT’LCOMM’NONTHEBPDEEPWATERHORIZONOILSPILLANDOFFSHOREDRILLING,ABRIEFHISTORYOFOFFSHOREOILDRILLING15(2010),availableathttp://cybercemetery.unt.edu/archive/oilspill/20121211011815/http://www.oilspillcommission.gov/sites/default/files/documents/A%20Brief%20History%20of%20Offshore%20Drilling%20Working%20Paper%208%2023%2010.pdf(“[M]ostexpertsprojecttheworld’sappetiteforoilandotherfuelstogrowfortheforeseeablefuture.”).10SeeSectionII(C)ofthesecomments;seealsoKarolinSchaps,RoyalDutchShellPullsPlugonArcticExploration,REUTERS(Sept.28,2015),http://www.reuters.com/article/us-shell-alaska-idUSKCN0RS0EX20150928.

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I. OffshoreOilandGasOperationsinFrontierAreasCreateMaterialRisks

UnderthecurrentSECrules,oilandgascompaniesmustdiscloseintheirannualreportsanyenvironmentalliabilitiesthatarisefromtheirdrillingoperationsandthatmayhaveamaterialeffectontheircompany’sfinancialcondition.Disclosureofthematerialrisksofoperationsisimportanttoinvestors,andoperationsinArcticandfrontierareaspresentnewanduniquematerialrisks.

A. SecuritiesLawRequiresDisclosureofMaterialRisk

TheSEC’srulescurrentlyrequire,amongotherthings,publicly-heldcompaniestofileannualreports.DomesticcompaniesmustfileForm10-KandforeigncompaniesmustfileForm20-F.Certaincategoriesofdisclosurearerequiredinthesedocuments.Requireddisclosuresofmaterialenvironmentalrisksariseunderboth.Further,adutytodisclosurematerialenvironmentalrisksmayariseunderthegeneralanti-fraudprovisionsoftheSecuritiesActof1933(the“SecuritiesAct”)ortheSecuritiesExchangeActof1934(the“ExchangeAct”).11

RegulationS-Ksetsforthspecificrequirementsthatapplytomostpublicfilingsbydomesticissuers.Item101requiresabusinessdescriptionthatcoverstheeffectsthatcompliancewithenvironmentallawsmayhaveoncapitalexpenditures,earnings,andcompetitiveposition,aswellastheamountsbudgetedforsuchcompliance.12Item103requiresadescriptionofmateriallegalproceedings,includingadministrativeandjudicialproceedingsarisingfromfederal,state,orlocalenvironmentallaws.13Item303requires“ManagementDiscussionandAnalysis”ofthecompany’sfinancialconditionandtheresultsofitsoperations,whichincludes,amongotherthings,disclosureoftheknowntrends,demands,commitments,events,oruncertaintiesthatthecompanycannotconcludewouldnotreasonablyhaveamaterialeffectonitsfinancialconditionoroperationresults.14Withinthisdiscussion,companiesmustalsoincludedisclosureofanyenvironmentalliabilitiesthatcreateareasonablelikelihoodofamaterialeffectonthecompany’sfinancialconditionorresultsofoperations,andanyenvironmentalaccountingpolicies,ifcritical.15Finally,

11ExchangeActRule10b-5statesthat“Itshallbeunlawfulforanyperson,directlyorindirectly,bytheuseofanymeansorinstrumentalityofinterstatecommerce,orofthemailsorofanyfacilityofanynationalsecuritiesexchange,

a) Toemployanydevice,scheme,orartificetodefraud,

b) Tomakeanyuntruestatementofamaterialfactortoomittostateamaterialfactnecessaryinordertomakethestatementsmade,inthelightofthecircumstancesunderwhichtheyweremade,notmisleading,or

c) Toengageinanyact,practice,orcourseofbusinesswhichoperatesorwouldoperateasafraudordeceituponanyperson,

inconnectionwiththepurchaseorsaleofanysecurity.”17CFR§240.10b-5(2011).1217CFR§229.101(c)(1)(xii)(2011).1317CFR§229.103(2011);Instruction5ofItem103explicitlyrequiresdisclosureof(1)proceedings“materialtothebusinessorfinancialconditionoftheregistrant”,(2)proceedings“involv[ing]primarilyaclaimfordamages,orinvolvespotentialmonetarysanctions,capitalexpenditures,deferredchargesorchargestoincomeandtheamountinvolved,exclusiveofinterestandcosts,exceeds10percentofthecurrentassetsoftheregistrantanditssubsidiariesonaconsolidatedbasis”and(3)proceedingstowhicha“governmentalauthorityisaparty[…]andsuchproceedinginvolvespotentialmonetarysanctions,unlesstheregistrantreasonablybelievesthatsuchproceedingwillresultinnomonetarysanctions,orinmonetarysanctions,exclusiveofinterestandcosts,oflessthan$100,000;provided,however,thatsuchproceedingswhicharesimilarinnaturemaybegroupedanddescribedgenerically.”1417CFR§229.303(2011).15Id.

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item503(c)requiresdisclosureofriskfactors,whichincludesenvironmentalriskssuchasthoserelatingtoclimatechange,contamination,noncompliance,litigation,andhazardousmaterialexposure.16

Form20-F17alsosetsforthspecificrequirementsthat“foreignprivateissuers”mustmakeintheirannualreports.ItcontainsseveralprovisionsthatmirrorthosesetforthinRegulationS-K,includingbusinessoverview,liquidityandcapitalresourcesdisclosure,trendinformation,andlegalproceedings.18Additionally,itasksforadescriptionof“anyenvironmentalissuesthatmayaffectacompany’sutilizationof[materialtangiblefixed]assets.”19

TheSECdisclosureregimeaimstostrikeabalancebetweencreatingacommonpoolofmeaningfulinformationand“simplybur[ying]theshareholdersinanavalancheoftrivialinformation.”20Tothatend,typicallyonlythedisclosureof“material”informationisrequired.Informationisconsideredmaterialiftherea“substantiallikelihoodthatthedisclosure…wouldhavebeenviewedbythereasonableinvestorashavingsignificantlyalteredthe‘totalmix’ofinformationmadeavailable.”21Astospeculativeorcontingentevents,materiality“willdependatanygiventimeuponabalancingofboththeindicatedprobabilitythattheeventwilloccurandtheanticipatedmagnitudeoftheeventinlightofthetotalityofthecompanyactivity.”22SECguidancedocumentsuniversallyacceptthesejudiciallyestablishedstandards.23

ThegoaloftheSECdisclosureregimeistoenableinvestorstomakeinformeddecisions.Materialmisstatementsoromissionsthatrenderstatementsmisleadingoftenaffectstockprices.24Marketreactionsalone,however,arenotnecessarilydispositiveofmateriality.25Inaddition,shareholderstendtobeheterogeneousgroupswithdiverseinterests,withstockpriceperformanceasjustoneofmanypriorities.Someonlyexpecttoholdontostocksforshortperiodsoftime,whileothersexpecttoholdthemfordecades.Someinvestorsarediversifiedandareconcernedabouthowcertainoftheirinvestmentsaffectotheroftheirinvestmentsandinterests.Finally,someinvestorscareonlyabouttheirmaterialgain,whileothersarewillingtoforegoatleastsomegaininexchangeforallowingacompanytoactinanethicallyandsociallyresponsiblemanner.26

1617CFR§229.503(c)(2011).17Form20-Fisviewableathttp://www.sec.gov/about/forms/form20-f.pdf.18Items4.B,5.B,5.D,and8.A,Form20-F,supranote17.19Item4.D,Form20-F,supranote17.20TSCIndustriesv.Northway,426U.S.438at448-49(1976).21Id.at449.22BasicInc.v.Levinson,485U.S.224,238(1988).23SECStaffAccountingBulletinNo.99–Materiality(SECReleaseNo.SAB99(Aug.12,1999))[hereinafterSABNo.99].24“[T]hedemonstratedvolatilityofthepriceofaregistrant’ssecuritiesinresponsetocertaintypesofdisclosuresmayprovideguidanceastowhetherinvestorsregardquantitativelysmallmisstatementsasmaterial.”SABNo.99.25“Considerationofpotentialmarketreactiontodisclosureofamisstatementisbyitself‘toobluntaninstrumenttobedependedon’inconsideringwhetherafactismaterial.”Id.26LynnA.Stout,TheShareholderValueMyth,THEHARV.L.FORUMONCORPORATEGOVERNANCEANDFIN.REGULATION(June26,2012,9:16AM),https://corpgov.law.harvard.edu/2012/06/26/the-shareholder-value-myth/.

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B. TheUniqueRisksofOffshoreOilandGasOperationsinFrontierAreasAreBecomingIncreasinglyImportanttoInvestors

Environmentalaccidentsinfrontierareasposeseriousthreatstoshareholder’sinterests,asevidencedbysubsequentmarketreactions.27Shareholdershavereactedtothesethreatsbyseekingmoreinformationviarequestsforadditionaldisclosure.Investorshavealsolookedtothirdpartiestoevaluatecertainenvironmentalrisksassociatedwithoilandgasoperationsinfrontierareas,suggestinganappetiteforgreaterdisclosurefromcompaniesthemselves.

1. MarketReactions

Environmentalaccidentsroutinelyreduceshareholdervaluewhenacompany’sstockpricesubsequentlydrops.Inthefirsttendaysfollowingthe1989ExxonValdezspill,Exxon’sstockpricedropped3.9%,whiletherestoftheS&Prose2.8%.28Whilethestockpricewasrestoredfourweekslater,cumulativeabnormalreturns,definedasthesumofthedifferencesbetweenastock’sactualperformanceandabroadindexbaseline,remained-15%after50tradingdays,and-18%after6calendarmonths.29

ThereactionfollowingBP’s2010DeepwaterHorizonspillwasevenmoredramatic,withstockpricesdroppingforcompaniesalongthecontractorchain.InthefirsttendaysaftertheMacondospill,sharesinBP,Halliburton(thehandlerofdrillingprocessesaboardtherig),andTransocean(theownerandoperatorofthefailedrig)dropped8%ormore.30BPandHalliburtonwentontoexperiencefurtherdropsasthespillcontinued,withnotabledropsoccurringontheannouncementofcriminalinvestigations30daysafterthespillbegan.31

Evensmallerincidentscanproducestockpriceimpacts.ShellexperiencedsmalldropsinmarketpricefollowingtheannouncementofEPAfinesforthe2012Arcticdrillingseason.32

2. InvestorInitiatives

Anumberofinvestorinitiativeshavesoughtimproveddisclosurebyoilandgascompanies.InthewakeoftheDeepwaterHorizonoilspill,theInvestorNetworkonClimateRisk(INCR),acoalitionofmorethan98institutionalinvestorswithassetstotalingover$9trillion,ledbyCeres,anon-profitthatpromotesinvestoractivisminenvironmentalandsocialissues,madearequesttotheNationalCommissionontheBPDeepwaterHorizonOilSpillandOffshoreDrillingaskingforthe

27Negativemarketreactionsshowthatatleastsomecurrentinvestorswishtodisposeoftheirpositioninastockwhilepotentialfutureinvestorsdonotbelievethatthestockisworththeoriginalsellingprice.Bothshowthatdamagecausedbytheincidentisconsideredsignificanttopotentialbuyersandsellers,suggestingthatprospectiveexantedisclosureofsuchriskwouldbematerial.28MattPhillips,EchoesofExxonValdez:HowdoesBPStockHitCompare?,WALLST.J.:MARKETBEAT(April30,2010,11:40AM),http://blogs.wsj.com/marketbeat/2010/04/30/echoes-of-exxon-valdez-how-does-bp-stock-hit-compare/.29RoryF.Knight&DeborahJ.Pretty,TheOxfordExecutiveResearchBriefings,TheImpactofCatastrophesonShareholderValue(1996),availableathttp://www.iei.liu.se/program/ekprog/civilek_internt/ar_4/722a20/filarkiv_m20/1.117874/Uppsatsfrslag5VT2010-CrisisMgmtrapportOxfordUniversity.pdf30Phillips,supranote28.31InDeepwater:BPandExxonsharepricesafteroilspills,THEECONOMIST(June2,2010),http://www.economist.com/node/16270972.32Seehttp://www.bloomberg.com/quote/RDSA:LN/chart;thenviewstockpricechangefromSept.6toSept.9.

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Commission’sfinalreporttoincluderecommendationsthattheSEC“developrulesorguidanceunderitsexistingregulatoryauthoritytoensureconsistentdisclosureofmaterialoffshoredrillingrisks.”33Theletterrequestedrecommendationsthataddressedinformationonenvironmental,health,andsafetyperformance;investmentinaccidentandspillpreventionandresponse;spillcontingencyplans;contractorselectionandoversight;andgovernanceandmanagementsystems.34Lettersrequestingsimilarinformationweresentonbehalfof58globalinvestorsholdingmorethan$2.5trillioninassetsto27oilandgascompanies.35Additionally,lettersweresentto26insurancecompaniesthatbackpoliciesfortheindustry,askingfordisclosureonwhethertheywereconsideringadjustingtheirexposuretotheindustryorchangingtheirunderwritingrules.36Amorerecentletterwaspublishedonbehalfof62investorsholdingroughly$2trillion,requestingmoredisclosuresaboutclimate-relatedrisksandcitinghigh-costArcticanddeepwaterdrillingprojectsasspecificreasonsforconcern.37

CereshasalsoledtheINCRinanumberofotherinvestorinitiativesrelatedtorisksfromoilandgasoperations.In2012,Ceresfiledshareholderresolutionswith18oilandgascompaniesrequestingdisclosureofplansformanagingenvironmentalandworkplacechallengesrelatingtohydraulicfracturing,greenhousegasemissions,andworkplacesafety.38In2013,Ceresagainfiledshareholderresolutionswithninecompaniesrelatingtoenvironmentalrisksassociatedwithhydraulicfracturingandshalegastransmissions,focusingmostlyonquantitativeriskreporting.39In2014,Ceresproducedareportwhichincludedanexaminationofcorporatedisclosuresofsustainabilityrisks,strategies,andperformance.40Thereportincludedasectiononoilandgasproducers,whichfound“minimaltonoengagementwithstakeholdersonkeyenvironmentalandsocialissues.”41Theshareholdershavedemonstratedtheirinterestingreaterenvironmentaldisclosurethroughtheserepeatedinitiatives,particularlyregardingrisksinherenttooilandgasoperations,andtheSECshouldtakeactiontoensurethatcompaniesprovidethisinformation.

33LetterfromtheINCRtoCereslettertoSenatorsGrahamandReilly,co-chairsoftheNationalCommissionontheBPDeepwaterHorizonOilSpillandOffshoreDrilling(Dec.7,2010),http://www.ceres.org/files/letter-to-national-oil-spill-commission-december-2010.34Id.35ImprovingManagementofDeepwaterOilDrillingRisks,CERES(June5,2013),http://www.ceres.org/press/press-clips/improving-management-of-deepwater-oil-drilling-risks.36Id.SeealsoNathanialGroneworld,InvestorsAskOil,InsuranceGroupstoDiscloseSafetyPlans,N.Y.TIMES(Aug.5,2010),http://www.nytimes.com/gwire/2010/08/05/05greenwire-investors-ask-oil-insurance-groups-to-disclose-67189.html.37InvestorsPushSECtoRequireStrongerClimateRiskDisclosurebyFossilFuelCompanies,CERES(Apr.17,2015),https://www.ceres.org/press/press-releases/investors-push-sec-to-require-stronger-climate-risk-disclosure-by-fossil-fuel-companies.38Investorschallenge18oilandgascompaniesonclimatechange,hydraulicfracturing,andsustainabilityrisks,CERES(Feb.8,2012),http://www.ceres.org/press/press-releases/investors-challenge-18-oil-and-gas-companies-on-climate-change-hydraulic-fracturing-and-sustainability-risks-1.39InvestorsPressOilandGasCompaniestoReduceandReportRisksfromHydraulicFracturingOperations,CERES(Feb.5,2013),http://www.ceres.org/press/press-releases/investors-press-oil-and-gas-companies-to-reduce-and-report-risks-from-hydraulic-fracturing-operations.40TheCeresRoadmapforSustainability:Disclosure,CERES(2014),http://www.ceres.org/roadmap-assessment/progress-report/performance-by-expectation/disclosure/disclosure-gaining-ground.41TheCeresRoadmapforSustainability:Oil&GasProducers,CERES(2014),http://www.ceres.org/roadmap-assessment/sector-analyses/oil-gas-producers.

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Investoradvocacygroupshavealsopushedforbettergeneralizedsocialandenvironmentaldisclosure.TheSocialInvestmentForum(SIF),anon-profitassociationofover400professionals,firms,andorganizationscommittedtopromotingsociallyresponsibleinvestmentdecisions,publishedalettertoPresidentObamain2009requestingactiontopromotecorporatesocialresponsibility.42CeresandtheINCRhavealsoreachedouttoheadsofmajoroilandgascompaniesrequestingvoluntarydisclosureofclimaterisks.43

3. Third-partyresources

Anumberofconsultancieshaverespondedtothedemandforinformationondrillingriskinfrontierareasbypublishingreportsontheattendantrisks.Amongthereportsare:

• ERNST&YOUNG,BUSINESSPULSE:EXPLORINGDUALPERSPECTIVESONTHETOP10RISKSANDOPPORTUNITIESIN2013ANDBEYOND:OILANDGASREPORT(2013).

“Inourview,andthatofthesurveyrespondents,[health,safety,andenvironmentalrisk]isunquestionablythenumberonehazardforoilandgascompanies….[A]nyperceivednegligenceinthisarea[is]penalizedheavilybybothregulators(whohandoutenormousfines)andthewiderpublic(whoseperceptionoftheorganizationresponsiblecanbeirreparablydamaged.).Ofcourse…[s]afetyandenvironmentalhealthareofparamountimportantintheirownright.”

• LLOYD’S,DRILLINGINEXTREMEENVIRONMENTS:CHALLENGESANDIMPLICATIONSFORTHEENERGYINSURANCEINDUSTRY(2011).

• SUSTAINALYTICS,THEIMPACTSANDRISKSOFDEEPWATERANDARCTICHYDROCARBONDEVELOPMENT(2012).

• REPRISK,SPECIALREPORT:ARCTICDRILLING(2013).

• MARSHRISKMANAGEMENTRESEARCH,MANAGINGRISKONTHENEWFRONTIERSOFENERGYEXPLORATION(2013).

C. OffshoreOilandGasOperationsinFrontierAreasCreateUniqueMaterialRisks

Oilandgasoperationsinfrontierareasposeuniquedangersthatinvestorsmaydeemmaterial.

1. Operatinginfrontierareasisespeciallydangerous

Whilealldrillingoperationscarrysomerisk,operatinginfrontierareas,likedeepwaterorthe

42SocialInvestmentForumLettertoPresidentObama(January15,2009),“NewAmericanLeadershipforEnvironmentallyandSociallyResponsibleInvestingandCorporateResponsibility,”availableathttp://www.ussif.org/files/Public_Policy/Comment_Letters/Office%20of%20CSR%20Letter.pdf.43E.g.,WATERSCARCITYANDCLIMATECHANGE:GROWINGRISKSFORBUSINESSANDINVESTORS,CERESANDPACIFICINSTITUTE(February2013),availableatwww.pacinst.org/wp-content/uploads/2013/02/full_report30.pdf(recommendingsixspecificactionsforcorporationswithregardtoimprovingdisclosure);seealsoE.LynnGrayson,WaterScarcity:ACriticalClimateChangeChallengeforBusiness,LexisNexisEmergingIssuesAnalysis,2009EmergingIssues4174(August2009).

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Arctic,compoundstraditionalriskwithadditionalchallenges.44

Deepwaterdrillingsubjectsequipmenttolowtemperaturesandhighpressures.Themodificationsrequiredtodealwiththisaddedstressareexpensiveandpronetofailure.Deeperwellsarealsosubjecttointegrityissuesthatstemfromtheincreaseindrillingmudandcementneededtoreinforcewellwalls.Spillsandblowoutsondeepwaterrigsaremoredifficulttocontainthanthoseonshoreorinshallowwatersduetotheirdistancefromcontainmentresources.45Deepwaterandfrontierareahydraulicfracturing(“fracking”)maycauseadditionalchallengesaswell.Deepwaterfrackingisarelativelynewendeavor,andlittleisknownabouttherisks.46However,eventraditionalonshorefrackingcomeswithitsfairshareofrisks,47and,likewithotherdrillingtechniques,frackinginfrontierareaswilllikelyexacerbatethoserisks.

OperatingintheArcticOceancreatesuniquechallengesandrisksduetovolatileclimate,seaice,andtheremotelocationofdrillsites.48Accordingtoarecentlawreviewarticleonoffshoreoilandgasactivities:49

ThechallengesofoperatingintheArcticOceanaredifferent,butnolesssevere,thanthose in deepwater environments.50 These challenges include “extreme cold,extended seasons of darkness, hurricane-strength storms, and pervasive fog,” andtheneedtoprotectrich,sensitive,andimportantecosystems.51Thereisverylimitedinfrastructure in the region: the nearest Coast Guard station is in Kodiak, Alaska,

44SeeNAT’LCOMM’NONTHEBPDEEPWATERHORIZONOILSPILLANDOFFSHOREDRILLING,DEEPWATER:THEGULFOILDISASTERANDTHEFUTUREOFOFFSHOREDRILLING51-52(2010),availableathttp://cybercemetery.unt.edu/archive/oilspill/20121211011815/http://www.oilspillcommission.gov/sites/default/files/documents/A%20Brief%20History%20of%20Offshore%20Drilling%20Working%20Paper%208%2023%2010.pdf.45SUSTAINALYTICS,DEEPERANDCOLDER:THEIMPACTSANDRISKSOFDEEPWATERANDARCTICHYDROCARBONDEVELOPMENT10(2012)[hereinafterDeeperandColder],http://www.sustainalytics.com/sites/default/files/unconventional-oil-and-gas-arctic-drilling_0.pdf.46DavidWethe,DeepWaterFrackingNextFrontierforOffshoreDrilling,BLOOMBERG(Aug.27,2014),http://www.bloomberg.com/news/articles/2014-08-07/deep-water-fracking-next-frontier-for-offshore-drilling.47Impactstotheenvironmentincludestressonsurfaceandgroundwatersupplies,contaminationofthedrinkingwatersupply,airpollution,andotheradverseimpactsfromdischargeanddisposal.SeeHydraulicFracturing,U.S.ENVTL.PROT.AGENCY,https://www.epa.gov/hydraulicfracturing(lastupdatedApr.27,2016).48TherisksanduncertaintiesinvolvedinArcticdrillingeffortsaresogreatthatinearly2012,GermanbankWestLBinstituteapolicyagainstfinancinganyArcticoilprojects.POLICYFORBUSINESSACTIVITIESRELATEDTOOFFSHOREOILDRILLINGANDPRODUCTION,WESTLB(Feb.2012);MatthewCarr,WestLB,OilPlatformLender,Won’tDoArctic,AntarcticBusiness,BLOOMBERG(Apr.27,2012),http://www.bloomberg.com/news/2012-04-27/westlb-oil-platform-lender-won-t-do-arctic-antarctic-business.html.49MichaelLeVine,AndrewHartsig,&MaggieClements,WhatAboutBOEM?TheNeedtoReformtheRegulationsGoverningOffshoreOilandGasPlanningandLeasing,31ALASKAL.REV.231,242(2014).50SeeMichaelLeVine,etal.,OilandGasinAmerica’sArcticOcean:PastProblemsCounselPrecaution,38SEATTLEU.L.REV1271(2015).51OversightHearingon“TheFinalReportfromthePresident’sNationalCommissionontheBPDeepwaterHorizonOilSpillandOffshoreDrillingBeforetheH.Comm.onNaturalRes.,112thCong.37,38(2011)(jointstatementoftheHonorableBobGraham,Co-Chairman,NationalCommissionontheBPDeepwaterHorizonOilSpillandOffshoreDrilling,andtheHonorableWilliamK.Reilly,Co-Chairman,NationalCommissionontheBPDeepwaterHorizonOilSpillandOffshoreDrilling);seealsoLegislativeHearingonH.R.2231BeforetheSubcomm.onEnergyandMineralRes.oftheH.Comm.onNaturalRes.,112thCong.2–7(2013)(statementofMichaelLeVine,PacificSeniorCounsel,OCEANA).

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roughly 1,000miles from the likely locations of oil and gas exploration,52 and thenearest large deepwater port is inDutchHarbor.53 There is no provenmethod torespond effectively in icy waters, and traditional response methods may beineffective.54Inaddition,theArcticregionischangingrapidlyasaresultofwarmingclimate,and the lackof informationabout themarineecosystemor thosechangesmakesitdifficulttoassessormitigatetheeffectsofindustrialactivities.5556

Traditionaloilandgasextractionoperationscreateenvironmentalrisks,andthoserisksareexacerbatedinfrontierareas.Deepwaterinstallationsdisturbthehabitatsofmanylargemarinemammalsandfish,whileoffshoredevelopmentintheArctichasthepotentialtoimpactimportantmigratorypathsofmarinemammalsandbirds,sensitivehabitats,andrelativelyuntouchedecosystems.Inaddition,oilmustbetransportedtoshore,whichalsohasconsequences.Shorelinedegradationreducesnaturalstormdefenses,anespeciallyimportantfactorinstorm-proneregionsliketheArcticandtheGulfofMexico.57Drillingoperationstypicallydischargedrillingfluids,cuttings,producingwater,anddomesticwaste.Thisdischargeoftencontainshazardousandtoxiccompounds.58Asaresultofthegreaterdepthofdeepwaterwells,greaterquantitiesofdischargearereleased.59

Inadditiontotheenvironmentalconsequencesofnormaloperations,unintendeddischargeofwasteorwelloilintotheenvironmentisapossibility.Thereareseveralwaysforoiltoentertheenvironment.Potentialcausesincludemalfunctioningvalves,corrosion,blowout,andhumanerror.Spillsfromisolateddrillingrigstakelongertocontaincomparedtoonshoreorshallowwaterspills.60Theenvironmentalconsequencesofaccidentsinfrontierareascanbedevastating.Forinstance,theDeepwaterHorizonspillisestimatedtohavekilledanunprecedentednumberof

52DanJoling,CriticsSayGroundingShowsArcticDrillingDanger,USATODAY,(Jan.3,2013),http://www.usatoday.com/story/news/nation/2013/01/02/arctic-drilling-danger/1805577/.53SeeDeborahZabarenko,ArcticOilSpillWouldChallengeCoastGuard,REUTERS(Jun.20,2011),http://www.reuters.com/article/2011/06/20/us-arctic-oil-idUSTRE75J6O620110620(quotingU.S.CoastGuardAdm.RobertPappJr.assayingthat“[t]hereisnothinguptheretooperatefromatpresentandwe’rereallystartingfromgroundzero”).54SeeWORLDWILDLIFEFUND,NOTSOFAST:SOMEPROGRESSINSPILLRESPONSE,BUTUSSTILLILL-PREPAREDFORARCTICOFFSHOREDEVELOPMENT(2009),availableathttp://assets.worldwildlife.org/publications/401/files/original/Not_So_Fast_Some_Progress_in_Spill_Response__but_US_Still_Unprepared_for_Arctic_Offshore_Development.pdf?1345754373(showingdifficultieswithspillresponseinAlaska);PEWENV’TGRP.,OILSPILLPREVENTIONANDRESPONSEINTHEU.S.ARCTICOCEAN:UNEXAMINEDRISKS,UNACCEPTABLECONSEQUENCES73–75(2010),availableathttp://www.pewtrusts.org/~/media/legacy/oceans_north_legacy/page_attachments/Oil-Spill-Prevention.pdf(showingtheparticularrisksassociatedwithdrillingintheArctic);JacobD.Unger,note,RegulatingtheArcticGoldRush:RecommendedRegulatoryReformstoProtectAlaska’sArcticEnvironmentfromOffshoreOilDrillingPollution,31ALASKAL.REV.263.(2014)(proposingamulti-factorreformtobetteraligncorporateincentivesandtocompensateharmedindividualsforlossesduetooilspills).55INTERAGENCYWORKINGGROUPONCOORDINATIONOFDOMESTICENERGYDEVELOPMENTANDPERMITTINGINALASKA,MANAGINGFORTHEFUTUREINARAPIDLYCHANGINGARCTIC8(2013),availableathttp://www.afsc.noaa.gov/Publications/misc_pdf/IAMreport.pdf.56 LeVineetal.,supranote49,at242. 57SeeLLOYD’S,ARCTICOPENING:OPPORTUNITYANDRISKINTHEHIGHNORTH42-43(2012).58ArepresentativeoffshoreinstallationintheNorthSeadischarged1,681,916cubicmetersofdischargewaterintotheoceanin2008.DeeperandColder,supranote45,at10.59DeeperandColder,supranote45,at10.60Id.

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animals,includingbetween50,000to84,000birds,upto1billionfish,andupto8.3billionoysters.6156,000to166,000smalljuvenileand4,900to7,600largerseaturtleswerekilledaswell.62Manymorespeciessufferedasaresultofthespill,andstudiesarestillbeingreleasedthatshowthefullextentofthedamagedone.63Standardoilspillresponsetactics(e.g.,mechanicalcontainment,insituburning)canbehamperedbyremoteness,icecover,orinclementweather.64

Acatastrophicoilspillinfrontierareascanalsoresultinseverefinancialconsequencesfortheoilandgascompanyatfault.Forexample,theBureauofOceanEnergyManagementestimatedin2012thatalow-volumecatastrophicspillintheChukchiSeaortheBeaufortSeawouldresultindamagesofapproximately$10.07billionand$12.16billion,respectively,insocialandenvironmentalcosts;ahigh-volumespillwouldresultindamagesofapproximately$15.75billionand$27.77billion,respectively.65BOEMestimatedthatthereisa75%chancethatoperationsintheChukchiSeawillleadto“oneormorelargespills.”66Thesefigures,however,donotincludeallofthepotentialcostsincurredbyacatastrophicspill.67BPandtheU.S.DepartmentofJustice,forinstance,agreedtoasettlementthatrequiresBPtopay$20.8billioninfines.68Betweenthatsettlement,thesettlementofcivilclaims,andrequiredpaymentstoaTrustFund,theDeepwaterHorizonincident,asofJuly2016,hascostBPastaggering$61.6billion69

61NAT’LOCEANICANDATMOSPHERICADMIN.,FinalProgrammaticDamageAssessmentandRestorationPlanandFinalProgrammaticEnvironmentalImpactStatement4-561(2016),http://www.gulfspillrestoration.noaa.gov/restoration-planning/gulf-plan.62Id.at4-197.63Foralistofstudiescompletedsofar,seeNOAAStudiesDocumentingtheImpactoftheDeepwaterHorizonOilSpill,NAT’LOCEANICANDATMOSPHERICADMIN.,http://response.restoration.noaa.gov/deepwater-horizon-oil-spill/noaa-studies-documenting-impacts-deepwater-horizon-oil-spill.html64LLOYD’S,ARCTICOPENING:OPPORTUNITYANDRISKINTHEHIGHNORTH39(2012)ThereissomeargumentthatoilcleanupintheArcticcouldbemoreefficientthanelsewhere.Oilhaslowerevaporationandbiologicaldegradationratesincoldtemperaturesandtheicemayactasabarrierbetweentheoilandthemarineenvironment;thosefactstogethermaypromoteinsituburningandenablegreaterrecovery.However,keepingoilinplaceforcleanupactivitiescreatesitsownproblems,suchasairpollutionfromburning,andthereisagreatdealofuncertaintyastowheretrappedoilwouldendupastheiceshifts.65BUREAUOFOCEANENERGYMGMT.,ECONOMICANALYSISMETHODOLOGYFORTHEFIVEYEAROCSOILANDGASLEASINGPROGRAMFOR2012-2017,at43(Table13)(June2012)[hereinafterBOEMEconomicAnalysis],availableathttp://www.boem.gov/uploadedFiles/BOEM/Oil_and_Gas_Energy_Program/Leasing/Five_Year_Program/2012-2017_Five_Year_Program/PFP%20EconMethodology.pdf66BUREAUOFOCEANENERGYMGMT.,FINALSECONDSUPPLEMENTALENVTL.IMPACTSTATEMENT,CHUKCHISEAPLANNINGAREAOILANDGASLEASESALE193,atVol.1,154-55(Feb.2015),availableathttp://www.boem.gov/uploadedFiles/BOEM/About_BOEM/BOEM_Regions/Alaska_Region/Leasing_and_Plans/Leasing/Lease_Sales/Sale_193/2015_0127_LS193_Final_2nd_SEIS_Vol1.pdf67BOEMEconomicAnalysis,supranote65,at72(Table25)(“Impactsnotquantifiedincludeotherhealtheffects,commercialshipping,otherimpactstotheOCSoilandgasindustry,propertyvalues,recreationalandcommercialfishing,andotherconsumerpriceimpacts.”)68RakteemKatakey,DelQuentinWilber&MargaretCroninFisk,BP’sRecordOilSpillSettlementRisestoMoreThan$20Billion,BLOOMBERG(Oct.5,2015),http://www.bloomberg.com/news/articles/2015-10-05/bp-s-record-oil-spill-settlement-rises-to-more-than-20-billion.69StevenMufson,BP’sBigBillfortheWorld’sLargestOilSpillReaches$61.6Billion,WASHINGTONPOST(July14,2016),https://www.washingtonpost.com/business/economy/bps-big-bill-for-the-worlds-largest-oil-spill-now-reaches-616-billion/2016/07/14/7248cdaa-49f0-11e6-acbc-4d4870a079da_story.html.

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2. Thedangersofoperationsinfrontierregionsincreasetheregulatoryandlitigationriskfacedbyoilandgascompanies

Theadditionalrisksassociatedwithdrillinginfrontierareashaveresultedinnewregulationsandcarefulscrutiny.Theseregulationsandscrutinyareimportantforhelpingtopromotesafetyandenvironmentalprotectioninriskierfrontierareasbutcanalsoresultincoststocompanies’valuethatcanbeharmfultoinvestorsifnotproperlydisclosed.Regulatoryriskincludestheriskarisingfromnoncompliancewithcurrentenvironmentalandsafetyrules.Regulator-imposedpenaltiesandfinescandamageacompany’sfinancialposition.Further,opponentsoftheseoperationscanlobbyregulators,challengepermitsorseekinjunctionstohaltordelayexplorationandextractionprojects.Forexample,Shell’sexplorationplansinAlaskaweredelayedbylitigationandpermittingchallenges,amongotherfactorsfrom2007through2014.70

Additionally,thedangersofoperatinginfrontierareasincreasesthelitigationriskthatanoilandgascompanymayface,whichcanexposeshareholderstounexpectedliabilitiesifnotproperlydisclosed.Litigationarisingfromoilandgasoperationscanbebroadlygroupedintothreecategories:compensationclaimsfromharmedthird-parties,shareholdersuitsbasedonmismanagementofsuchoperations,andlitigationchallenginglicensesandpermits.Third-partysuitsarisefrompersonalinjury,lossofbusiness,andenvironmentaldamages.71Thecostsoflitigationandpayingoutcompensationfortheseclaimscanaddupquicklyand,inthecaseofmajorspills,havesignificantimpactsonprofits.72Often,inthewakeofmajorincidents,shareholdersinitiatetheirownsuitsagainstcompanies.ThebestrecentexamplesofthisphenomenonarethemultitudeofshareholdersuitsagainstBP,allegingthatthecompanymisledinvestorsintheyearsleadinguptothespill.Thesesuitsproceededunderbothfederalsecuritiesandstatelaws.73Oilcompanylitigationbythirdpartiesandshareholderstendstobelonganddrawn-out,whichextendsanddelaysthefinancialeffectsofaspillincident,creatinglongstandinguncertaintyastothetruecosts.74

70LetterfromPeterSlaiby,ShelltoMarkFesmire,BSEEre:ShellOffshoreInc.andShellGulfofMexicoInc.requestforaninitialfive-yearSuspensionofOperations(July10,2014)(SOORequest),availableathttp://oceana.org/sites/default/files/shell_soo_request_7_14.pdf.71ForasummaryofthetypesofclaimsraisedinsuitsfiledfollowingtheMacondospill,seehttp://eli-ocean.org/wp-content/blogs.dir/2/files/Claims-and-Litigation.pdf.72BP’spre-taxexpendituresstemmingfromoilspillcompensationclaimsfollowingtheMacondospillwasnearly$41billion.Inthefirsteightmonthsfollowingthe1989ExxonValdezspillover150suitswerefiledagainstthecompany,seeBarnabyJ.Feder,ExxonValdez’sSeaofLitigation,NYTIMES(Nov.19,1989),http://www.nytimes.com/1989/11/19/business/exxon-valdez-s-sea-of-litigation.html?pagewanted=all&src=pm,includingaclassactionlawsuit,wherethejuryoriginallyawarded$5billiontothe32,500classmembers(laterreducedto$507.5millionaftera20yearfightbythecompany).OilSpillLawsuitsComeQuickly,SOUTHSOURCE(Jun.29,2010),http://source.southuniversity.edu/oil-spill-lawsuits-come-quickly-23808.aspx.Threeyearsafterthespill,Exxonpaid$1billiontosettlegovernmentlawsuits.PressRelease,Entvl.Prot.Agency,ExxontoPayRecordOneBillionDollarsinCriminalFinesandCivilDamagesinConnectionwithAlaskanOilSpill(Mar.13,1991),https://www.epa.gov/aboutepa/exxon-pay-record-one-billion-dollars-criminal-fines-and-civil-damages-connection-alaskan.73AlisonFrankel,BP’sOtherVictims:ShareholdersShutOutbyMorrison,REUTERS(Nov.15,2012),http://blogs.reuters.com/alison-frankel/2012/11/15/bps-other-victims-shareholders-shut-out-by-morrison/.74AclassactionsuitagainstExxonregardingeffectsofthe1989ValdezspillwithajuryfindingagainstthecompanyreachedtheSupremeCourtin2007andwasn’tfullyresolveduntil2009.OilSpillLawsuitsComeQuickly,supranote72.LitigationagainstChevronstemmingfromoilexplorationinEcuador’sLagoAgriooilfieldhasbeenongoingsince1993,asthecompanyfightswhatisnowan$18.2billionjudgment.Chevronhasgonesofarassuingtheopposingcounselfor

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II. TheNewandUniqueRisksofOffshoreOilandGasOperationsinFrontierAreasAreNotBeingAdequatelyDisclosed

Despitethemanyuniquematerialriskscreatedbyoilandgasoperationsinfrontierareas,corporatedisclosuretodatehasbeeninconsistentandinadequate.Outofahandfulofmajoroilandgascompaniessurveyed,BPprovidesthemostcompletedisclosureoftheserisks.Thisdisclosurecanthusbeusedasabaselinefromwhichboththedisclosureofothercompaniesaswellasidealdisclosurecanbeevaluated.

A. BP’sDisclosureIsThoroughbutCouldBeImproved

BPcurrentlyprovidesthemostcompletedisclosureofdrillingrisksitfacesandtheprocessesinplacetomitigatethoserisks.Its2015AnnualReportprovides,forinstance,adetailedbreakdownofoilspillsandlossofprimarycontainmentexperiencedoveramultiyearperiod.Thedisplayshowsthenumberoflossofcontainmentincidents,thenumberofresultingspills,thenumberofspillstolandorwater,thevolumeofoilspilled,andthevolumeofoilunrecovered.75Additionally,theanalysisincludesamultiyeardisplayofworkerinjuryfrequencyanddistinguishesbetweenemployeesandcontractors.76

BP’sgovernancesystemreceivesdetailedtreatment.Asafetyandoperationalrisk(S&OR)functionthatprovidesquarterlyreportsdirectlytotheCEOregardingthecompany’shealth,safety,andenvironmentalperformanceisdescribedindepth,77asisitsoperatingmanagementsystem(OMS),whichdefinesBP’sprinciplesforgoodoperatingpractice,conductsinitialassessmentsofcomplianceandsafetyplans,andprovidesforperiodicupdatesthereaftertocureexistingornewgaps.78OMSalsoincludessafetyandcompliancetraining,althoughcriteriaforsuchtestingareomitted.79

Inits2012AnnualReport,BPprovidedafairlydetailedoverviewonitseffortstoengageinsaferdrillingpractices,includingitscomplyingwithitsagreementswiththeU.S.governmentfollowingtheDeepwaterHorizonspill,seekingindependentprocesssafetyadvice,andundertakingoperation-specificsafetyimprovementssuchaswellcasingdesignimprovementsandauditchecklistsforrigintakeandstart-upoperatingprocedures.80Inits2015AnnualReport,BPstatesthatithascompletedallofthe26recommendationsfromitsinternalinvestigationoftheDeepwaterHorizonaccident,andprovidesalinktothelistofrecommendations.81

allegedlyconcealingandpromotingfraudulentinformationinthecase.http://articles.washingtonpost.com/2013-06-29/business/40270607_1_patton-boggs-ecuador-case-plaintiffs75BPAnnualReportandForm20-F2015,p.43.76Id.at43.77Id.at72.78Id.at72.79Id.at45;Id.at52.80BPAnnualReportandForm20-F2012,p.47-48.81BPAnnualReportandForm20-F2015,p.43.

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BPstatesthat52%ofitshoursworkedin2015werecarriedoutbycontractors.82Guidanceforcontractors’conformancewithOMSwaspreparedin2012,andthe2015reportstatesthatOMSnowincludesrequirementsandpracticesforcontractors.83

Asectiononoilspillpreparednessandresponseisalsoincluded.84Thissectionmentionsexercisesconductedin2015withgovernmentregulatorsinplanningforoilspillresponse.85Additionally,BPstatesthatitfurtherdevelopeditsoilspillresponseplanrequirementsin2012.VaguediscussionofspecializedmodellingtechniquesandstockpilesofdispersantisalsoincludedwithoutdiscussionofhowandtowhatextenttheywillallowBPtobetterrespondtooilspills.86BPalsostatesthatitsuseofemergingtechnologiesisenhancingitsoilspillresponsecapability,andmentionsuseofaerialandunderwaterroboticvehicles,aswellassatelliteimagery.87Informationsubstantiatingortestingthisclaim,however,isomitted.

Finally,BPprovidesamultiyearbreakdownofitsenvironmentalexpenditures,distinguishingbetweenexpenditurepertainingtoitsGulfofMexicooilspillresponseanditsotherenvironmentalexpenditures.Thesecategoriesarefurtherdisaggregatedintooperatingexpenditures,capitalexpenditures,clean-upcosts,additionstoenvironmentalremediationprovisions,andadditionstodecommissioningprovisions,withsomediscussionofthemajorcontributionstoeachsegment,aswellashowthesenumbersareassessed.88

Thoughthorough,andagoodstartingplaceforothercompaniestofollow,BP’senvironmentaldisclosuresstilldonotfullyinforminvestorsofallmaterialrisksrelatingtodrillinginfrontierareas.SuggestionsforfurtherimprovementaremadeinSectionIIIofthesecomments.ButothercompaniesdonotevenmatchtheminimallevelofBP’sdisclosures.Thislackofinformationabouttherisksimpedesinvestors’abilitiestomakeinformeddecisions.Withahigherlevelofdisclosure,investorsareabletomoreaccuratelyunderstandboththerisksinherenttotheoperations,andthecompany’sabilitytopreventandrespondtosuchsituations.

B. OtherOilandGasCompanies’DisclosuresFallShortofBP’s

IncontrasttoBP’sdescriptionofitssafetyprogramsandcorrespondinggovernancechecks,othercompanies’disclosuresremainatahighlevelofgenerality.Shellmentionsa“safety-focusedculture”andprovidesasasingleexamplethatitsoffshorewellsaredesignedwithatleasttwoindependentbarrierstomitigatetheriskoflossofcontainmentincidents,andthatthesebarriersareregularlytestedandmaintained.89Employeeswhobreakcertainsafetyrulesmayfaceterminationandcontractorsmayfaceremovalfromtheworksite.90Furtherinformationontheserulesorthefrequencywithwhichsuchdisciplinaryactionoccursisomitted.ConocoPhillips

82Id.at43.83Id.at45.84Id.at47.85Id.86Id.87Id.88Id.at223.89ShellAnnualReportandForm20-F2015at53.90Id.

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discussesimprovementsinitsHSE(health,safety,andenvironment)ManagementSystemStandard,whichclarifiedcompanyrequirements91Furtherdetailsonthesesystemsandprocessesareomitted.ConocoPhillipsdoesnotincludestatisticsdescribingitsinjuryrateandprocesssafetyincidentrates,thoughtheywereincludedinpreviousreports.92ExxonMobildescribesitsOperationsIntegrityManagementSystem(OIMS)which“isacornerstoneof[its]approachtomanagingsafety,security,health,andenvironmentalrisks,aswellastoachievingexcellenceinperformance.”93Thissystemissaidtobecontinuallyassessedandcomplianceissaidtoberegularlytested.94Whilethe11elementsoftheOIMSFrameworkarelisted,furtherinformationonhowOIMSworksorhowitistestedisomitted.

AmongShell,ConocoPhillips,ExxonMobil,andChevron,onlyShelladdressesitsoilspillresponseplansinanydetail.Shelldisclosesthatoilspillsmayresultinsignificantclean-upcosts,fines,andotherdamages,butdoesnotprovideanyestimatesoranalysisofwhatthesemightsumtoortheimpactthattheymighthaveonthecompany.95Alloffshoreinstallationsaresaidtohavespillresponseplansinplacethatdetailstrategies,techniques,availableequipment,andtrainedpersonnelandcontacts.96Additionally,Shellsaysthatitmaycalluponresourcessuchascontainmentbooms,collectionvessels,aircraft,andtheservicesofoilspillresponseorganizations,andthatitconductsregularexercisestoensurethecontinuedefficacyoftheseplans.97Substantiationoftheseplans’efficacyandfurtherdetailsoftestingcriteriaareomitted.Shellalsosaysthatitmaintainssite-specificemergencyresponseplans,butdoesnotfurtherdescribethem.98Thenumberofoperationalspillsinboth2015and2016,however,isincluded.99NeitherConocoPhillipsnorExxonMobilprovideinformationregardingtheiroilspillpreparedness.ConocoPhillipsonlyreferencesitsmembershipinseveralOilSpillResponseRemovalOrganizations(OSROs).100

ExxonMobil,ConocoPhillips,andChevron(butnotShell)disclosetheirenvironmentalexpenditures.ExxonMobildistinguishesbetweencapitalexpendituresandotherexpenditures,statingthattheseexpendituresincludeinvestmentininfrastructureandtechnology,aswellaspreventativeandremediationstepstominimizetheenvironmentalimpactsofitsoperations.101Theamountsetasideforenvironmentalliabilitiesisalsodisclosed,althoughthesourcesoftheseliabilitiesisomittedasthecompanyfindsthatnoindividualsiteisexpectedtocreatemateriallosses.102Chevrondisclosesitsenvironmentalremediationreservesandadditionsthatithashadtomakeovertheperiodfrom2013to2015,andprovidesabreakdownoftheapproximatesourcesof

91ConocoPhillips2015AnnualReportat23.92See,e.g.,ConocoPhillips2012AnnualReportat18.93ExxonMobil2015SummaryAnnualReportat11.94Id.95ShellAnnualReportandForm20-F2015at56.96Id.97Id.98Id.99Id.100ConocoPhillips2015AnnualReportat21.101ExxonMobil2015AnnualReport.102Id.

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itsliabilities.103ConocoPhillipsdisclosesitsexpensedandcapitalizedenvironmentalcostsin2015,anditsexpectedcostsin2016and2017.104Italsodisclosesitstotalaccruedenvironmentalcostsinboth2014and2015,andstatesthatit“expect[s]toincurasubstantialamountoftheseexpenditureswithinthenext30years”105

Shelldisclosesthatissubjectto“avarietyofenvironmentallaws,regulations,andreportingrequirements”andthatnoncompliancecouldleadtosignificantcosts.106Thisdisclosure,however,remainshypothetical,andShelldeclaresthatnoneoftheactualcostsithasfacedhavebeenmaterial.107Theriskofcertainoperationsincreasingseismicactivityisdisclosed,althoughtheextentandeffectsofthisriskarenotdiscussed.108ConocoPhillipsdisclosesthatitissubjectto“numerousinternational,federal,stateandlocalenvironmentallawandregulations,”andprovidesalistofseveralofthefederalandinternationallaws.109Chevronalsodisclosesthatitissubjectto“variousinternational,federal,stateandlocalenvironmental,healthandsafetylaws,regulationsandmarket-basedprograms,”anddisclosesitsestimatedworldwideenvironmentalspendingfor2015andexpectedenvironmentalcapitalexpendituresfor2016.110

Noneofthecompaniesdiscussedinthissectiondescribedgovernanceorauditprocessesthatpertaintotheirsafetymanagementsystems.ShelldisclosesthatitsAuditCommitteedoesreviewthemanagementof“health,safety,security,environmentalandsocialimpactsofprojectsandoperations,”butdoesnotlisttheprocessitself.111ShelldoesalsodisclosethatitsCommitteevisitsShelllocationstoobservehowstandardsarebeingimplemented.112Also,noneofthecompaniesdiscussedinthissectionincludedcontractorriskmanagementprocesses.Withoutthisdisclosure,investorslackinformationabouttheimplementationofsafetyandriskmanagementsystems,andareunabletofullyassessthecompanies’abilitytomanageandrespondtopotentialimpactsandrisks.

C. CaseStudy:Shell’sDisclosureRegarding2012ArcticOperationstoPresent

Shell’sproblemsintheArcticOceanhavebeenwelldocumented.113Thecompanyinvestedmorethan$7billiontopurchaseleasesandundertakeexplorationintheU.S.ArcticOcean.Aftermorethanadecade,thecompanymanagedtocompleteonewellandhasnowwalkedawayalmostentirelyfromitsinvestment.114Thecompanyhasannouncedthatitsexplorationprogramis

103ChevronCorporation2015AnnualReportat24.104Id.at64.105Id.106ShellAnnualReportandForm20-F2015at60.107Id.108Id.109ConocoPhillips2015AnnualReportat62.110ChevronCorporation2015AnnualReportat24.111BPAnnualReportandForm20-F2015at72.112Id.113SeeFrozenFuture:Shell’sOngoingGambleintheArcticOcean.http://oceana.org/sites/default/files/reports/Shells_Frozen_Future_2_25_14.pdf114Seehttp://usa.oceana.org/companies-give-arctic-ocean-leases(showingthatShellandothercompaniesrelinquishedtheirleases).

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stoppedfortheforseeablefuture,andithasgivenupleases.Alongtheway,thecompany’sproposalsweremetwithlitigation,controversy,andneardisaster.Famously,thecompany’seffortsin2012ledtothegroundingofitsdrillrig,theKulluk,finesforviolatingpermits,problemswithitscontainmentdomeandspillresponsebarge,andmyriadotherproblems.AttachmentAtothisletterisapetitionseekingtohavetheSECopenaninvestigationintoShell’soperations.ItprovidesadditionaldetailsaboutShell’sproblemsin2012.115

Shell,inits2012AnnualReport,disclosedthat“therewerechallenges”inits2012Alaskanexplorationoperations.Amongthemanychallenges,Shelldisclosedthatthecontainmentdomewasdamagedduringitsfirstfull-scaledeploymenttest,thattherewerechallengesinmovingitsrigstoandfromtheareaofoperations,andthattheArcticChallengerwascertifiedtoolatetobeusedduringthe2012drillingseason.ShellprovidedfurtherdiscussionoftheKulluk’sgrounding,butclaimedthatit“occurredafterthecompletionof[its]explorationprogrammeanddidnotinvolvedrillingoperations.”116

ShellassertedthatitsdrillingintheArcticOcean(thesiteofitsexploratorywells)was“conductedsafely,inaccordancewithpermitsandregulatorystandards.”117However,therewasnomentionofthependingEPAinvestigationorofthespecialpermitsShellwasgivenwithmorelenientemissionsstandards.

Morecritically,ShellprovidednoanalysisoftheparticularsafetyissuesthatitsArcticoperationsfaced.Forinstance,despitementioningthefailureofitscontainmentdomeanditsinabilitytodeployoneofitsspillcontainmentvessels,Shellstillassertedthatitsoperationswereconductedsafelywithoutprovidingabasisforthatconclusion.

ShellalsoasserteditsfamiliaritywithandpreparednessfordrillingoffofthecoastofAlaskawhileprovidingnoanalysisregardingtheproblemsitfacedduetosevere,butroutine,Arcticweather.Earlierannualreportsdiscussplanstobegindrillinginthesewatersandalsohavenodiscussionofthesignificantweather-relatedrisksinherentinArcticdrillingoperations.Thepermanenceoftheseriskssuggeststhattheyoughttohavebeenanticipatedanddisclosedbeforetheymaterialized.However,the2011AnnualReportonlycontainsboilerplatelanguageabouthowthecompanytakesallnecessaryprecautionstolimitenvironmentalrisks,butthatsomecannotbeassessedorforeseenbeforehand.Similarnondescriptlanguageappearsinseveralpreviousannualreports,includingin2010,2009,2008,and2006.

Shell’s2014proposedexplorationplanstatedthatits“2012explorationdrillingoperationsintheArcticwereconductedsafely,andwithnoseriousinjuriesorenvironmentalimpact.”118However,aDOIreviewin2013hadcometoaverydifferentconclusion,statingthat“Shell’sdifficultieshaveraisedseriousquestionsregardingitsabilitytooperatesafelyandresponsiblyinthechallengingandunpredictableconditionsoffshoreAlaska.”119Thecompany’s2014AnnualReportclaimedthat

115SeeAttachmentAat7-11.116ShellAnnualReportandForm20-F2012at49.117Id.118SeeSeanCockerham,AdministrationConsidersWhethertoAllowShelltoResumeArcticOilExploration,MCCLATCHYDC(Nov.27,2013),http://www.mcclatchydc.com/2013/11/27/209993/administration-considers-whether.html(quotingShell’sproposed2014explorationplan).119U.S.DEP’TOFTHEINTERIOR,REVIEWOFSHELL’S2012ALASKAOFFSHOREOILANDGASEXPLORATIONPROGRAM16(Mar.8,2013),http://www.doi.gov/news/pressreleases/upload/Shell-report-3-8-13-Final.pdf.

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itsArcticContainmentSystemhadbeenimproved,120butomittedthefactthatithadnotbeentestedandhadpreviouslybeenrejectedas“unfeasible”intheArctic.121

Despiteitsdifficulties,ShellcontinuedmakingeffortstooperateintheArctic.In2015,ShellsoughttoundertaketwosimultaneousdrillingoperationsintheChukchiSea,andrequestedapprovaltodrilluptosixwells.122Eventually,thecompanywasallowedtocompleteonewellintheChukchiSea.Uponcompletingthatwell,ShellannouncedthatitwashaltingitsexplorationprogramintheArcticOcean“fortheforseeablefuture.”Ultimately,thecompanyhasgivenupitsleasesandwalkedawayalmostentirelyfromitsmulti-billion-dollarinvestment.

Upthroughits2014report,ShellneverdisclosedtheriskofneedingtoabandonalldrillingeffortsintheArctic.123Betterdisclosurewouldhaveprovidedinvestorswithamoreaccuratepictureoftherisksinherentintheseactivitiesandallowedamoreinformedassessmentofthecompany’schoices.

III. TheCommissionShouldClarifyDisclosureObligationsforOilandGasCompanies

Inordertopromoteconsistentandeffectivedisclosure,theSECshouldclarifyexistingdisclosureobligationsforoffshoreoilandgasoperationsinfrontierareas.TheSECcouldaccomplishthiseitherbyinterpretingitsexistingrulestorequiregreaterdisclosureofenvironmentalandfinancialrisksrelatedtofrontierdrilling,orcoulddevelopnewregulationsonenvironmentaldisclosures.TheSECDivisionofCorporateFinancehas,inthepast,issuedexpressionsofitspoliciesandpracticesregardingthespecifickindsofdisclosurethatshouldbemadeincertainindustries,includingoilandgas,inadditiontomining,banking,insurance,andrealestate.124Forinstance,certainchangestooilandgasreservereportingrequirementsweremadeinorderto“provideinvestorswithamoremeaningfulandcomprehensiveunderstandingofoilandgasreserves,whichshouldhelpinvestorsevaluatetherelativevalueofoilandgascompanies.”125Theseproposalswerespurredby“significantchangesintheoilandgasindustry.”126

120SeeShellAnnualReportandForm20-F2014at55.121SHELLOFFSHOREINC.,BEAUFORTSEAREG’LEXPLORATIONOILDISCHARGEPREVENTIONANDCONTINGENCYPLAN4-3(Jan.2010),http://www.boem.gov/uploadedFiles/BOEM/Oil_and_Gas_Energy_Program/Plans/Regional_Plans/Alaska_Exploration_Plans/2012_Shell_Beaufort_EP/2010_BF_rev1.pdf(“WellcappingisnotfeasibleforoffshorewellsfrommooredvesselswithBOPEsittingbelowthemudlineinawellcellar(gloryhole)....”);Id.at4-5to4-6(Table4-1)(statingthat“[p]roventechnologyisnotavailable”forwellcapping).122SeeSHELLGULFOFMEXICOINC.,REVISEDOUTERCONTINENTALSHELFLEASEEXPLORATIONPLAN:CHUKCHISEA,ALASKA1-2(Mar.2015),http://www.boem.gov/uploadedFiles/BOEM/About_BOEM/BOEM_Regions/Alaska_Region/Leasing_and_Plans/Plans/2015-03-31-EP-Revision-2.pdf123Shell’s2012reportexplicitlymentionedthatthecompanywaswereonly“paus[ing]”theirdrillingactivityinAlaska,anddescribeditas“along-termprogrammethat[it]intend[s]topursueinasafeandmeasuredway.”SeeShellAnnualReportandForm20-F2012at49.WhileShellmentionedtheexistenceofdrillingrisksthatmightleadtoa“lossoflicensetooperate”ineachpriorreport,ShellcontinuedtodescribeArcticdrillingaspartofits“longer-term”strategyandincludeditinitslistof“futureopportunities”inits2014Report.SeeShellAnnualReportandForm20-F2014at15.Its2014reportalso,indescribingitsArcticContainmentSystem,explicitlymentionedits“explorationseasoninAlaskain2015.”ItmadenomentionofceasingalloperationsintheArcticanywhereelseinthisreport,oranypriorreports.SeeId.124SeeRegulationS-KItems801-802.125SeeReleaseNo.33-6384(Mar.16,1982)[47FR11476].126Id.

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Theimpetusforadditionaldisclosuretodayisnottechnologicalchange,butratherexpansionintofrontierareasthatposenewanduniquerisksaswellasgreaterrealizationandappreciationoftheserisks.Giventhattheseriskshaveproventobesubstantial,consistentandeffectivedisclosureofparticularizedriskswould,justasinthecontextofreservereporting,provideinvestorswithamoremeaningfulandcomprehensiveunderstandingoftherelativevalueofoilandgascompanies.

Theguidingconcernbehindourrecommendationsisthatthemanyrisksrelatedtooffshoreoilandgasdrillingcanhavepotentiallydevastatingconsequencestocompanyvaluationandthusoughttobedisclosed.Thedrillingrisksthatwehavedescribedaboveareparticularanduniquetotheday-to-dayoperationsofoilandgascompanies(particularlytheiroperationinfrontieroffshoreareas)andgowellbeyondthegenericrisksthatafflictallcompanies.Informationreflectingacompany’scareinitsdailyoperations,itspreparednessforworstcasescenarios,andthetotallossesitmightincurunderworstcasescenariosis,inaggregate,valuabletoinvestorsseekingtodifferentiatebetweencompaniesinanindustrythatfacessingular,large-scalerisks.

A. AdditionalRequestedDisclosure

Specifically,rulesorclarificationofrequireddisclosurecouldoccurunderthreebroadbanners:(1)catastrophicaccidentdisclosureandmanagement,(2)spillriskmanagementsystemsandresponsecapabilities,and(3)environmental,health,andsafetyperformance,generally.Thefollowingarerecommendationsastowhatinformationismaterialtoinvestorsandshouldbeprovided.

1. CatastrophicAccidentDisclosureandManagement

Companiesshouldincludeestimatesofthelikelihoodandthetotalcostofacatastrophicwellblowoutduringbothexplorationanddevelopment,withadescriptionofhowthecompanywould(1)respondtechnicallyinthefaceofthosecosts,and(2)beaffectedbythosecosts.Disclosureofthisinformationprovidesinvestorswithabetterbasisthancurrentlyexiststounderstandhowacompanywillbeabletowithstandacatastrophicevent.Whetheraworst-casescenariowillresultininsolvencyorsimplyalargelossisimportanttoaninvestorindeterminingtherelativevalueoffirmsofvarioussizestakingonvariouslevelsofrisk.

Acompanyshouldalsoincludeinformationabouthowitenvisionsitwouldabsorbthefinancialshockfromacatastrophicwellblowout.Thisdisclosurecouldincludeadisaggregateddescriptionofhowthecompanyismeetingitsminimumoilspillfinancialresponsibilityforitscoveredoffshorefacilities,includingcontractors’insurance.Itcouldalsoincludedescriptionofhowtreasuryriskmanagementsystemshedgeagainstcatastrophicoffshoredrillingriskthroughreinsurancesidecars,catastrophebonds,andotherderivativefinancialinstruments.

2. SpillRiskManagement

Companiesshouldprovidenarrativedescriptionsoftheirspillpreventionpoliciesandpractices,includingdata-baseddescriptionsofhowwellthosepoliciesworkinpracticeaswellashowtheyaretailoredtoparticularenvironments.Thesedescriptionsshouldinclude,explicitlyorbyintegration,identificationoftheparticularriskswithindrillingprocessesandwhatsafeguardsareinplacetopreventaccidentsateachstep.Thisshouldincludedisclosureofanytestingperformedandprecautionstakenateachpointoftheoperations,andshouldincludewhetheracompanyhaspreparedIntegratedOperationsPlans.Thereshouldalsobenarrativedescriptionofcontractoroversightpoliciesandpractices.

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Theinformationshouldbesupplementedbynarrativedescriptionsofthecorporategovernancepoliciesinplacetoensurethattheseriskmanagementpoliciesandpracticesareparticularized,uptodate,andeffective.Here,too,acompanyshouldsupplyinvestorswithkeyperformanceindicatorsthatinvestorsmayusetotrackitsprogressfromyeartoyear,andshouldalsodiscloseanymechanismsinplaceforcontractorriskmanagementandoversight.

Companiesshouldincludenarrativedescriptionsofplanstomanageblowouts,shouldtheirdrillingriskmanagementsystemsfail,includinginformationonthefrequencyofplanupdatesaswellascollaborationwithothercompaniesandgovernmentsaspartofresponseplans.Plansshoulddetailtheavailableresponseequipment,includingthecostofrentingorbuildingsuchequipment,howandwheresuchequipmentwastested,itslikelyefficacy,whowilloperatetheequipment,andhowtheoperationwillbesupervised.Theyshouldalsoincludeanarrativedescriptionofthesizeofspillsthatthecompanyispreparedtorespondto,includinginformationonthebasisforthecompany’sconclusions.

3. OtherEnvironmental,Health,andSafetyRiskManagement

Companiesshouldprovidecleardataontheirenvironmental,health,andsafetyperformanceinadisaggregatedmannerthatdifferentiatesbetweenpersonalandprocessincidents.Whilesmallaccidentsmaynotrisetothelevelofmaterialityontheirown,acompany’sday-to-dayperformanceinthiscontextprovidesinvestorswithasenseoftheoverallcarewithwhichthecompanyoperates,andabettersenseofthelikelihoodthatalargeraccidentmayoccur.

Inadditiontodataonthefrequencyofincidents,companiesshouldprovideestimatesofthepotentialcostsposedbytheserisksinfrontierareas.

Thedatashouldbesupplementedbynarrativedescriptionofpoliciessurroundingdata,e.g.,whetherthereisthird-partymonitoringandauditingwithreportingtotheBoard.Further,acompanyshouldsupplyinvestorswithkeyperformanceindicatorsthatinvestorsmayusetotrackitsprogressfromyeartoyear.

B. TheAdditionalRequestedDisclosureCanHelptoReduceStockPriceVolatility

Theadditionaldisclosuresdescribedabovemayservetoreducestockpricevolatilityfollowingenvironmentaldisasters.Afteradisasteroccurs,afirm’sstockpricemaybeaffectedbychangesininvestors’assessmentsoftheprobabilityofincreasedregulatorycostsaswellasthelikelihoodofothersimilaraccidents.127Disastersalsoincreaseinvestors’awarenessofthepotentialforandmagnitudeofcertainrisks.128Thenegativestockpriceeffectsofenvironmentaldisastersmaybepartiallymitigated,however,ifhighqualityinformationisalreadyinplace.129

HeflinandWallaceempiricallytestedthesepropositionsbyexaminingshareholderwealthchangesfortheoilandgasindustryasawholefollowingtheDeepwaterHorizonspill.Theyfoundthat,whiletherewerenoshareholderwealthchangesfortheindustryasawhole,shareholdersinfirmswithU.S.deepwateroffshoreoperationsfacedsignificantdeclinesinwealth.130Thisresultsuggests 127FrankHeflinandDanaWallace,TheBPOilSpill:ShareholderWealthEffectsandEnvironmentalDisclosuresat1(2011),availableathttp://ssrn.com/abstract=1933531.128Id.129Seeid.130Id.at2.

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thatinvestorsincreasedtheirexpectationsofregulatoryordisastercostsonlyforfirmswithdeepwateroffshoreoperations.HeflinandWallacetestedwhetherdisclosuresmitigatednegativestockpriceeffectsbyconstructingenvironmentaldisclosureratingscoresfromvariousfirms’10-Kreports,andfoundthatfirmswithU.S.offshoreoperationswithbetterenvironmentaldisclosuresufferedsmalllossesinshareholderwealth,suggestingthat“investorsanticipatefirmswithmoreexpansiveenvironmentaldisclosuresarebetterpreparedtohandlepotentialregulatoryordisastercostsfollowing[a]spill.”131

Theabovedescribeddisclosures,ifmademandatory,wouldrequireoilandgascompaniesoperatinginfrontierareastodemonstratetoinvestorsthat(i)theyhaveidentifiedandunderstoodtheriskstheyface,and(ii)theyhavethoroughlyconsideredhowwillreactto,respondto,andworktomitigatesuchrisks.Whenaccidentsdohappen,investorscanhavefaiththatcompanieswillbeabletoresolvethemwithouttheprospectofmassivefuturecosts.

WelookforwardtotheCommission’sactiononthesecommentsandwouldgladlyansweranyquestionstheCommissionoritsstaffhas.

Sincerely,

MaggieA.ClementsDeniseA.GrabSaraSavaraniJasonA.SchwartzINSTITUTEFORPOLICYINTEGRITYNYUSCHOOLOFLAW

SusanMurrayDEPUTYVICEPRESIDENT,PACIFICOCEANA

MarkTempletonABRAMSENVIRONMENTALLAWCLINICUNIVERSITYOFCHICAGOLAWSCHOOL

131Id.at3.