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US Securities and Exchange Commission (SEC) releases guidelines for greenhouse gas emissions reporting

Whether a particular Oil & Gas facility falls under a government reporting threshold or not, managers at all levels in the sector will have to handle the impacts of increased scrutiny by governments and the general public with respect to greenhouse gas emissions and environmental performance in general. Facilities that proactively develop emissions management systems early will generate a competitive advantage in a carbon-constrained future. 

In February 2010, the Commission published guidelines to inform public corporations of their recommendations regarding climate change and reporting of GHG emissions. This publication adds a strong voice to the many regulatory schemes already in operation or in planning that industry faces with respect to climate change and reporting.

The current and future implications on the performance and operations of energy companies, both positive and negative, are starting to be recognized by managers and leaders worldwide. These include capital investment decisions (for mandatory emissions reductions), insurance-related decisions, operating strategies and reporting activities.

As stated in the SEC publication: “On January 1, 2010, the US Environmental Protection Agency (EPA) began, for the first time, to require large emitters of greenhouse gases [in the United States] to collect and report data with respect to their greenhouse gas emissions. This reporting requirement is expected to cover 85% of the nation’s greenhouse gas emissions generated by roughly 10,000 facilities”. These requirements have not covered the upstream oil & gas (UOG) sector yet since there are still some unresolved items in the EPA ruling; however it is expected that by 2011 the UOG sector will also have to comply with the reporting requirements.

Examples of reporting protocols that are gaining acceptance globally include The Carbon Disclosure Project – which collects and distributes climate change information, both quantitative (emissions amounts) and qualitative (risks and opportunities) - on behalf of 475 institutional investors as well as the Climate Registry in North America which is a nonprofit organization that provides information to reduce greenhouse gas emissions and is attempting to establish standards throughout North America for businesses and governments to calculate, verify and publicly report their carbon footprints in a single, unified registry.

A number of the large multinational corporations in the oil & gas sector have already been impacted by regulations in other areas of the world, particularly in Europe. An interesting indirect impact for the industry is identified in the SEC report where it notes that a 2008 study listed climate change as the number one risk facing the insurance industry. It is only a matter of time before the changes sweeping the insurance industry find their way to the process industries and in particular to the energy sector where climate change presents both operational risks as well as market-based risks as the main supplier of fossil fuels.

Specifically for the oil & gas industry, the regulatory and legislative changes will have a significant effect on operating and financial decisions, including those involving capital expenditures to reduce emissions and, for companies subject to “cap and trade” laws, expenses related to purchasing allowances where reduction targets cannot be met.

The notice from SEC also clarified under which particular regulations the GHG emissions reporting would fall, including comments regarding the analysis of the materiality of known trends, events or uncertainties associated with Management Discussion and Analysis (MD&A) disclosure. As the Commission explains, when a trend, demand, commitment, event or uncertainty is known, “management must make two assessments:

  • Is the known trend, demand, commitment, event or uncertainty likely to come to fruition? If management determines that it is not reasonably likely to occur, no disclosure is required.
  • If management cannot make that determination, it must evaluate objectively the consequences of the known trend, demand, commitment, event or uncertainty, on the assumption that it will come to fruition. Disclosure is then required unless management determines that a material effect on the registrant's financial condition or results of operations is not reasonably likely to occur.

The report notes that: “New trading markets for emission credits related to “cap and trade” programs that might be established under pending legislation, if adopted, could present new opportunities for investment. These markets also could allow companies that have more allowances than they need, or that can earn offset credits through their businesses, to raise revenue through selling these instruments into those markets. Some companies might suffer financially if these or similar bills are enacted by the Congress while others could benefit by taking advantage of new business opportunities.” 

Clearly all operating companies in the UOG sector must take into consideration GHG emissions reporting irrespective of whether they are required to report by regulation or voluntarily joining a trading scheme - positioning themselves strategically in a carbon constrained world.

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