Disclosure and Financial Reporting Term Paper

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Disclosure & Financial Accounting

Environmental and Financial Factors in the Petroleum Industry

The petroleum industry has a unique responsibility in the initiative to practice environmental safeguarding while producing the petroleum products in such great demand. The financial manager must be decide what weight to apply to costs in terms of new processes and methods that are efficient as well as environmentally friendly and complaint.

Weighing Costs in Failure-to-Disclose

Environmental and Financial Factors in the Petroleum Industry

Environmental Hazards

Profitability Factors

Future Outlook

Findings Related to Cost Factor of Compliance

BP, Conoco, and Phillips

Primary Considerations

Summary & Conclusion


Weighing Costs in Failure-to-Disclose

Environmental and Financial Factors in the Petroleum Industry


The objective of this work is the research the Petroleum Fuel industry and to render an accounting of what results from either complying with or non-compliance to environmental regulations as set down by governing and ruling bodies.


According to the work entitled: "Environmental Impact of the Petroleum Industry: Environmental Update #12": "Petroleum refining is one of the largest industries in the United States and a vital part of the national economy." Potential hazards that can damage the environment are associated with petroleum refiners. A petroleum refinery separates the crude oil and through processes of both physical and chemical techniques (fractionation, cracking, hydro treating, combination/blending processes, manufacturing and transport) creates other products. The petroleum plant will generally use products inclusive of kerosene, diesel fuel, motor oil, asphalt, waxes, and petroleum gas."

Environmental Hazards

Environmental hazards that exist at the petroleum refinery site are hazards such as (1) air pollution hazards; (2) water pollution hazards; and (3) soil pollution hazards. The petroleum industry is affected by market and environmental factors due to demand for product, decrease in U.S. production. High costs are associated with compliance to the Clean Air Act. Furthermore, costs in the effort to meet environmental regulations has resulted in many of these companies joining with government agencies, both states and federal in an effort of reduction of air pollutants that are extremely hazardous being released.

Profitability Factors

Profitability witnessed a 'sharp decline ... during the 1988 to 1995" time period however during the years 1996-2001 the petroleum industry witnessed, "along with capital expenditures ... An upswing in profitability." (1995-2001 Energy Finance) In the report assessed are the "effects of pollution and abatement requirements on the financial performance of U.S. petroleum refining and marketing operations." (1995-2001 Energy Finance) Key findings in the study include that (1) "Over the past decade, the profitability of the FRS companies' U.S. refining/marketing operations has been volatile and, in the 1990's thus far, below that of their other businesses generally; (2) The poor financial performance of the majors' U.S. refining/marketing operations was echoed by the corporate profitability of smaller, specialized refiners; (3) Although U.S. refining/marketing profitability has been low in the 1990's, the FRS companies noticeably increased their capital expenditures for their U.S. refining operations; (4) The share of total U.S. refining capital expenditures for pollution abatement increased from slightly over 10% shortly before the Clean Air Act Amendments of 1990 to over 40% in recent years; (5) Since the relationship between refining/marketing profitability and the net refined product margin is strong, some of the effects of pollution abatement standards on profitability can be assessed by examining the net refined product margin; (6) Pollution abatement operating costs have been and continue to be a small part of overall operating costs; (7) The main factor affecting the net margin from 1988 on has been a near continual decline in the spread between refined product prices and raw material input costs; (8) The decline in the price spread between crude oils of differing qualities contributed to the overall deterioration in the gross margin; (9)Lower refined product prices also contributed to the decline in gross margins in the 1990's; (10) The additional capital expenditures stemming from heightened pollution abatement requirements for the U.S. refining operations of the FRS companies have added to the capital intensity of U.S. refining in the 1990's; and (11)Although pollution abatement requirements clearly reduced the rate of return to refining/marketing assets, these requirements appear to account for only a small part of the steep decline in the rate of return to U.S. refining/marketing operations in the 1990's." (1995-2001 Energy Finance)

Future Outlook

The petroleum industry faces challenges in both arenas of political and economic and "Commodization of crude oil and petroleum products has increased price volatility and risk." (The Brattle Group, 2005) The petroleum companies are consolidating but simultaneously they are "divesting refining capacity to independents which have become large suppliers." The Brattle Group claims that "these trends have increased price volatility by reducing industry stocks because the efficiencies (savings) sought by the merging firms and the capital limitations seen by debt-strapped independents, discourage inventory holding.' (The Brattle Group, 2005)The Oil Pollution Act of 1990 was passed and stated findings by the Council in relating to the "implementation of financial responsibility provisions of the Oil Pollution Act (OPA) as related to offshore refineries. The Council concluded that 'properly implemented, OPA could safeguard the public interest by improving oil spill prevention and response without undue harm to the oil or gas industries." The problem that exists is the fact that "regulations similar to those outlined by the Minerals Management Service (MMS) in its Advance Notice of Proposed Rulemaking could have serious and substantial impacts on all segments of the oil and gas industries and disrupt commerce in many other areas." (National Petroleum Council Report, 1994)

Findings Related to Cost-Factor of Compliance

A 1991 study reported in the work entitled "Industrial Process Integration a Cost-Effective Approach to Preventing Pollution" written by Scheihing & Priebe (1991) for the EPA states that: "Making industrial processes more efficient with process integration will results in lower product energy intensity, will identify reduced costs approaches to expanding a process and will cost effectively prevent or reduce pollution. By looking upstream in a process, unnecessary waste products can be avoided at the downstream end." A report entitled: "WRI Report Warns Environmental Risks Could Reduce Shareholder Value of Leading Oil and Gas Companies" states that "shareholders in leading oil and gas companies could see losses of more than six percent of their investments due to prospective actions to curb climate change and growing constraints on access to energy reserves. Furthermore, only limited disclosure has been made to investors on the relevance of these environmental issues as to future financial performance.

It is important to understand the implications, as stated in the report "Investors ignore environmental issues at their own peril," said Duncan Austin, economist and co-author of the study. "A company's environmental performance is relevant not just for shareholders wishing to invest responsibly, but for any shareholder interested in the return on their investment. Environmental issues can have a significant impact on a company's bottom line and stock price." Now that investors understand the bottom-line and the Petroleum Industry can no longer pretend that all is well, consideration must be given not only to the financial aspects but to the environmental and safety aspects involved in the pumping, pipelining, transporting, and use of petroleum yet can there be true disclosure in the reality of this industry?

BP, Conoco, and Phillips

There are three petroleum companies, namely BP, Conoco and Phillips that gave indication in the previous annual financial reports that "climate policies have an impact on future business operations." This clearly relates the fact that financial indications do not claim environmental factors as effectors, at least not openly perhaps until a shifting within the structure of business and specifically concerning ethical elements in disclosure and financial reporting. The report states precisely how it is that "...Several other companies raise climate as an issue in a specific environmental, or supplementary, report. However, no company attempts to quantify in financial terms the potential environmental risks that it faces. There is even less disclosure about environmental and social factors that may impede access to reserves, even though such access is the key to ongoing profitability within the industry." According to the report the Impacts will be different from one company to another due to the unique profiles of each company. Companies are differently positioned to respond to these environmental issues, by virtue of different business concentrations, asset mixes, and geographical scope of operations." Finally stated in the WRI report is "Impacts will be different from one company to another due to the unique profiles of each company. Companies are differently positioned to respond to these environmental issues, by virtue of different business concentrations, asset mixes, and geographical scope of operations." (WRI, 2005)

Primary Considerations

The considerations that exist in the petroleum industry must be weighed on many dimensional scales in order to assign those considerations the weight they carry in their implications. Only with realistic disclosure and methodical planning processes that drive the organization toward a vision will the oil and petroleum companies position themselves to the place where the industry as a whole wants to be five, ten or…[continue]

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