Executives up for big bonuses in Great Australian Bight oil rush

Oil executives could get big windfalls if they find large new reserves, but experts say incentives reward risk

BP group chief executive Bob Dudley collects bonuses tied to the expansion of his company's proven reserves (Pic: BP Plc)


Four out of five companies looking to drill the Great Australian Bight will pay their top executives vast bonuses if they strike oil beneath the ocean.

Environmental experts warned these incentives clashed with international climate goals, which imply a phaseout of fossil fuels.

A report released by financial activist group Market Forces on Thursday calculated the biggest exploration-related bonus for any oil company with interests in Australia was a potential AU$1.13 million a year for Bob Dudley, the chief executive of BP.

Dudley’s company is the first in line to open up the Great Australian Bight’s oil leases, although it experienced a setback on Wednesday when the Australian government regulator rejected BP’s environmental plan for a third time.

Reports to the national offshore drilling administrator show other international majors Chevron and Murphy joining BP making investments in the Bight basin, as well as local companies Santos and Bight Petroleum. All except for Bight Petroleum offer incentives for their top executives to open up new reserves.

BP’s annual report shows that all executive directors are entitled to bonuses if the company hits targets for “relative reserves replacement” – in other words if it grows its reserves faster than it depletes them. The report notes that BP did this faster than any other major oil company in the world in 2015-16.

Andrew Hopkins, sociology professor at the Australian National Universitysaid it was likely that if the top executives in the company receive such bonuses, then they probably appear further down the organisation. Only those at the top have their bonus conditions disclosed publicly.

Hopkins said tying executive bonuses to finding new reserves could lead them to make decisions that could lead to major oil spills. BP’s modelling shows oil from a spill in the Bight could reach as far as the New South Wales coast.

“That really is an incentive to drill faster and faster drilling is more dangerous or increases the risk of blow out,” he said.

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Hopkins’ book, Disastrous Decisions: The Human and Organisational Causes of the Gulf of Mexico Blowout, found problematic bonus regimes contributed to BP’s Deepwater Horizon disaster, the largest marine oil spill of all time.

“That’s what was going on in the Gulf of Mexico,”said Hopkins. “They say they’ve learned their lesson. They’ve learned other technical lessons. But whether they’ve learned these management and organisational lessons, they provide no evidence of that whatsoever.”

Author of the Market Forces report, Dan Gocher said: “These things have to make a difference. These are their incentives. That’s why they go to work every day.”

The practice is common throughout the oil industry. A report last year found that executives at all of the 13 largest US oil companies received reserve expansion bonuses.

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The reserve-related bonus are only a fraction of the overall payout an executive might hope for. Bonuses are also awarded for results on safety and environmental protection, which oil companies might argue balances the exploration impetus. None of the oil companies mentioned in the report returned requests for comment.

Gocher also questioned the rationale of paying out bonuses to executives who oversee the expansion of oil reserves when the world is trying to phase out fossil fuels. In order to prevent the world warming by more than 2C, the limit agreed by world leaders, more than a third of proven reserves must stay in the ground.

The Great Australian Bight. Photo: Alan & Flora Botting/Flickr

The Great Australian Bight. Photo: Alan & Flora Botting/Flickr

The governor of the Bank of England has warned that new reserves could become “stranded assets”. BP’s Dudley has questioned this concept, which is predicated on the world’s governments taking strong enough action to prevent dangerous climate change.

Gocher said: “Executive bonuses predicated on unearthing more fossil fuels when the world needs less shows the extent to which these companies’ business model is broken. They are not just in a state of denial, but actively accelerating towards a brick wall.”

Oil company share prices are tied to the amount of reserves they have on their books. Companies do not yet know the size of the reservoir of crude in the Great Australian Bight, but a significant find could boost shareholder profits. But if reserves can never be burned, Gosher said the impact on shareholders would be negative.

Even so, his report noted that 12 of Australia’s largest superannuation funds, which manage shares for millions of Australians, continue to vote overwhelmingly in favour of reserve-linked bonuses despite having made pledges that recognise the importance of climate action.

“There can be no more glaring example of the failure of superannuation funds to effectively engage with companies on climate change than their continued blind support for executive remuneration packages which expressly incentivise the expansion of fossil fuel reserves,” said Gocher.

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