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Ten years after Deepwater Horizon, offshore oil and gas risk remains unattractive

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By John MillerVP and ESG Senior Research Analyst, Calvert Research and Management

Washington -- Ten years ago, on Earth Day 2010, a tragic -- but avoidable1 -- series of events led to a fire and explosion aboard the Deepwater Horizon, a semisubmersible offshore drilling rig operating at extreme depths in the US Gulf of Mexico. In the subsequent minutes, 11 crew members were killed and 17 more injured. In the following months, over 3.19 million barrels of crude oil spilled directly into the Gulf of Mexico.2 The environmental, ecological and economic reckoning of the spill continue to this day.

Oil and gas companies have ramped up offshore operations in regions as diverse as the North Sea, Guyana and Brazil. Operating at greater distances from shore, in deeper water, and in ever more complex geological reservoir environments, a critical question needs to be asked: Is the offshore oil and gas industry better prepared to prevent or mitigate another disaster? The uncomfortable answer to both questions remains skewed toward no.

In 2010, average daily oil demand stood at approximately 88 million barrels per day (bpd). Through year-end 2019, this daily consumption rose to just shy of 100 million bpd.3 To meet this call, absolute production from both onshore and offshore fields has increased. In the US Gulf of Mexico, offshore production has increased by more than 500,000 bpd since the 2010 Deepwater Horizon accident.4 Globally, offshore production has held at nearly 25% of total output through this period, even as fewer rigs have operated. 5

Operational risk in the offshore space can be projected by distance from shore (and associated emergency/health care infrastructure), water depth, reservoir depth and reservoir characteristics (high/low pressure, high/low temperatures and oil-to-gas mixture). Additional measures including health and safety (H&S) training, and management teams held accountable to safety metrics -- rather than drilling cost statistics - provide further risk insight. Calvert's environmental, social and governance (ESG) investment research directly incorporates these risks, as well as a custom indicator that assesses revenue streams associated with offshore drilling, in key performance indicators used to help measure the performance of companies in the oil and gas drilling space.

Calvert continues to see elevated ESG risk associated with offshore drilling companies - and the upstream oil and gas companies who contract for their services. For this reason, and in accordance with the Calvert Principles, Calvert strategies seek to avoid investment in companies with exposure to the space.

Bottom line: Ten years after the Deepwater Horizon accident, the ESG risk/reward balance in the offshore oil and gas space remains unattractive. The recent push into new offshore plays, often in territorial waters of nations with limited emergency infrastructure, only heightens environmental and social risks.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.