11 Sustainability Assessment Model: Modelling Economic, Resource, Environmental and Social Flows of a Project – The Triple Bottom Line

Chapter 11

Sustainability Assessment Model:
Modelling Economic, Resource,
Environmental and Social Flows of
a Project

Tom Baxter, Jan Bebbington and David Cutteridge

Introduction

This chapter describes the development by British Petroleum (BP) (in collaboration with others) of an accounting tool for ‘making sense’ of the extent to which its operations could be said to be in accordance with the principles of sustainable development (SD). The accounting tool that has been developed is called the Sustainability Assessment Model (SAM). In brief, SAM seeks to track significant economic, resource, environmental and social impacts of a project over its full life cycle and then to translate these impacts into a common measurement basis – that of money. The outcome of this process is to produce both a graphical representation of the positive and negative impacts (we call this the SAM ‘signature’), as well as the construction of an indicator (the SAMi) of how well the particular project performs (which itself could be used to benchmark different projects). This information may then be fed back into project evaluation processes, either to inform the (re)design of the project or to feed into future project planning processes.

The SAM is a form of full-cost accounting (FCA; see Bebbington, Gray et al, 2001, for a summary of FCA) and attempts to identify all of the internal and external costs and benefits associated with a particular project. FCA involves a generic four-step approach (see Box 11.1), and how the SAM operationalizes each of the four steps in FCA is outlined below.

BOX 11.1 STEPS IN FULL-COST ACCOUNTING (FCA)

1 Define the focus of the costing exercise (which may be, for example, a product, production process, waste disposal option, project, part of an economic entity, an entire entity or an industry).

2 Specify the scope or limits of analysis (that is, what sub-set of all possible externalities is to be identified).

3 Identify and measure external impact (which involves making the link between a cost objective and the externalities arising from the cost objective).

4 Cost external impact (monetization of the externalities, or determination of the fuller costs that are associated with, but that are not already captured, by the current accounting for a cost objective).

Sustainability Assessment Model (SAM)1

In the first instance, SAM defines the cost objective as being a discrete project – in this case, a ‘typical’ oil and gas field development. The project focus has been specifically adopted because we believe that this gives visibility to the significant contributions to SD from a particular project and is useful where organizations organize their activities on a project basis.

Secondly, the boundaries of the SAM exercise have been defined widely. SAM tracks the SD impacts of a project over its full life cycle. In the case of an oil and gas development, phases include exploratory drilling, the design of, for example, a drilling and production platform, the construction, installation and commissioning of the platform, the production of oil and gas and the eventual decommissioning of the platform. These parts of an oil and gas development are usually directly within the control of the project. SAM, however, extends the analysis beyond the extraction of oil and gas and traces the external impacts from refining, the manufacture of products from oil and gas and eventual product use. Thus, SAM examines cradle-to-grave impacts of an oil and gas project.

The extension of the modelling to impacts that are outside of the direct control of the business raises problems. For example, some may argue that given that an impact is uncontrollable by a specific business (for example, the use of oil and gas is not within the control of oil and gas producers), the business cannot be held accountable for its impact. While this may be the case, we were keen to provide a cradle-to-grave model so that the impact of the activity on SD from society's perspective would be clear. The question of responsibility for impacts is a secondary, albeit a crucial, issue.

The third aspect of SAM has been to identify and measure the impact of the project. We have organized the impacts under the generic headings of economic, resource, environmental and social. The activity data used in the SAM was drawn from operational data for a particular oil and gas project. This data includes hours worked on the project, number of people employed, number of barrels of oil produced, amount of water used, amount of raw materials used in fabrication, waste produced, as well as financial data for the project itself. The links between this array of activities and economic, resource, environmental and social impacts have been derived. The type of data that is produced at this stage is very similar to that which many organizations produce in their social and environmental reports.

The final step undertaken has been to monetize the externalities identified as arising from the development of the oil and gas field. Monetization is the most difficult and contentious element of FCA for both practical and philosophical reasons. Firstly, for many people, the problems that SD seeks to address arise from fundamental structural and spiritual problems within society. The ‘deep Greens’ would suggest that a belief that one can reduce ‘the environment’, for example, to a monetary figure is what has caused the environmental crisis in the first place. Hence, to seek to remedy the problem by adding more of the very thing (economic calculative rationalism) that caused the problem in the first place is, at best, misguided. The second set of reservations over monetization of external impacts arises from the difficulty of obtaining a single uncontested figure for monetization. The main approaches to monetization (the maintenance cost approach and the variety of approaches that come under the broader heading of the damage cost approach) may yield significantly different measures of externalities. As a result, knowing what the resulting figures mean is often very difficult (we will return to this issue below when we consider how SAM may be used). in the case of SAM, we have primarily used damage cost estimates to monetize externalities. The application of these principles resulted in the following specification of the SAM.

The economic flows around an oil and gas development are taken as the starting point for analysis. These flows are derived from the allocation of total income from the field to various categories of expenditure (split within the model into taxes, dividends, reinvestment, social investment and money to contractors). The total of the economic flows is, therefore, the number of barrels that the field will produce, multiplied by the oil price at a point in time (a long-run average expected price is estimated). The economic flows, in turn, reflect actual movements in physical and social resources that are captured in the other sub-categories. in addition, an initial focus on traditional financial measures of activity is necessary in order to divide the impacts into those that are captured within the operator's accounting systems (that is, internal costs) and those costs that are external to the operator. The remaining cost and benefits identified by SAM relate to external costs and benefits.

The resource use flows identified by SAM attempt to capture the inherent values of the resources used in the development of an oil and gas field (to the extent that payments made and captured under economic flows do not capture these values). These resources include natural consumable resources, as well as intellectual capital and infrastructure. The figures for resource use are drawn primarily from the open literature (for example, the figure for the value of oil and gas used is drawn from the UK environmental accounts).

The tracking of external environmental impact flows that arise from business activities is what is most usually associated with FCA exercises (see, for example, Chapter 10). in this category, four sub-elements of environmental impact are identified: pollution impacts (primarily from combusting fossil fuels); nuisance impacts (such as noise, odour and visual impact); footprint (around any facility and/or pipeline); and waste impacts (to the extent that costs have not been captured in waste disposal costs). A variety of sources (both the open literature and BP's own work) were reviewed in order to obtain damage costs for the environmental impacts.

The final sub-category examined relates to external social impacts of oil and gas field development. The impact under this category has been estimated using three elements. Firstly, the value generated from direct jobs is estimated and the health and safety impacts of these jobs are quantified. This element thus includes both positive and negative values. The socially beneficial impacts arising from direct jobs consist of the multiplier effect that jobs generate in an economy. This figure estimates how much economic activity is generated from wages paid.

The second element in the social externalities category seeks to establish a link between the project and less directly tangible social impacts arising from the project. This was the most difficult element within the model development. When the project team attempted to define what broader social impacts arose from a project, it quickly became apparent that each individual had their own conception of what social sustainability was and how economic activity impacted upon their vision of a sustainable society. Some common ground was therefore sought. The UK government's SD priorities were selected as representing the UK's best estimate of which social aspects are the most relevant in achieving social sustainability. As a result, SAM seeks to link the impacts of a project to the UK government's strategy for sustainable development. The most direct financial link between project and the government is through taxation.

As a result, the second element of the social impacts of a project takes as its base the tax paid over the project life. The taxes paid are split on a pro-rata basis according to the UK government's spending patterns. The next step is to estimate what social benefit arises from tax spend in each category. For example, if UK£1 of tax is spent on education or health, what (on average) is the social benefit from that spend? As a result, a series of tax multiplier factors has been estimated. The pro-rata tax spend is then multiplied by the factor.

The final element in the social impacts category requires an estimate of the external benefits of oil and gas products. Three products are generated from a

Figure 11.1 The SAM signature for a typical oil and gas project

typical oil and gas field: mobility (via refined fuel), heating (which is either a direct result of combusting oil-based products or comes via the use of oil and gas in power supply) and oil-based products (which include the likes of pharmaceuticals, plastics and other chemicals). SAM attempts to estimate the benefits that are derived from these items. The need to identify the positive externalities that arise over and above the income derived from the sale of crude is necessary to ensure that all positive and negative externalities are captured in the model. in particular, if the negative environmental impact from fuel combustion is within the model, the benefit derived by society from the product should also be included.

Clearly, a series of choices has been made in order to develop data for SAM. Wherever possible, we have used data that is in the public domain; but we have had to estimate data in several places (thus the information can only be used as a guide to possible full life-cycle impacts). The data has been graphed by sub-category to produce a pattern of monetary quantified positive and negative impacts that arise from a ‘typical’ oil and gas development. We term this pattern the SAM ‘signature’ (see Figure 11.1). Where the bars are above the horizontal, a net benefit is produced in the capital sub-category. Where the bars are below the horizontal, a net dis-benefit is produced in the capital sub-category. in brief, the signature suggests that in order to generate social and economic positive outcomes, there have been negative resource and environmental impact outcomes. Such a conclusion is, perhaps, self-evident. SAM, however, provides some indication of the quantum of those costs and also indicates where in the life cycle the largest impacts arise.

A number of points can be made on the basis of Figure 11.1. Firstly, drawing from a sensitivity analysis of the model, three elements dominate all of the other flows. These elements are oil and gas use; pollution impact from combusting oil and gas (as it is used to provide heating and/or mobility); and the social benefit of the product (which is, again, heating, mobility and benefits derived from fossil fuel-based products). From an upstream position, therefore, a higher recovery rate will yield a better overall signature using this model. The other large impacts (the pollution impacts of oil and gas and the benefits derived from this product) are, however, outside the control of upstream operations and are heavily dependent upon how society uses this particular resource. From this, one could infer that while effective management of offshore impacts is beneficial, much greater benefit could be obtained by managing impacts arising from product use.

Using SAM

Developing the SAM signature is only the first step in evaluating a project. In order to use SAM to evaluate whether or not a project is ‘sustainable’, some operational definition of SD is necessary. In particular, a view has to be taken as to whether one needs to sustain total capital in order to be deemed sustainable or whether or not each sub-group of capital (economic, resource, environmental or social) need be sustained. This decision rests, at least in part, on the assumptions that may be made about the substitutability of different capital groups. Further elaboration on this point is required.

In SAM we noted that there were both positive and negative outcomes from a development. it would, therefore, be reasonable to assume that where the number is positive, that type of capital has been sustained, and where the number is negative, that type of capital has not been sustained. Furthermore, the extent to which these capital sub-categories could be combined depends upon the extent to which you believe that capital is substitutable. There is a spectrum of views on this matter and these views will affect how the various elements could be treated and when a project could be called sustainable. For example:

1 if all capital is substitutable and if the total of all the categories of capital is positive, the development is sustainable.

2 if all capital is substitutable except critical natural capital ('things’ that we only have one of), and if the total of all the categories of capital is positive, and if there is no loss of critical natural capital (for example, no species extinction), the development is sustainable.

3 If capital is not substitutable outside of its own capital sub-category, but there can be substitution within a category (for example, the creation of jobs in one location can be substituted for the loss of jobs in another), and if the total of any one of the capital categories is negative, then moves will have to be taken to remedy the negative impact on that capital until a neutral or positive position is created; or re-design the development to remove this impact. in order for a project to be sustainable under these conditions, all capital sub-categories would have to have a positive value.

4 If no loss in any capital is permissible, then any negative impact in any of the categories of capital (regardless of whether the total impact of the category is positive or negative) cannot be allowed. All negative impacts would, therefore, need to be remedied or designed out of the project in order for a project to be sustainable.

None of the above positions can be deemed to be ‘right’ in any predetermined manner. The third option, however, is a reasonably ‘mainstream’ view on capital substitution, and it is this assumption that has been tentatively adopted in the use of SAM.

While the signature provides an elegant visual presentation of the internal (under economic) and external (under the remaining categories) impacts of an oil and gas development, it is difficult to make sense of the graph in isolation. As a result, we propose that the data be converted into a ratio that would provide an indication of nearness to a sustainable position. We have termed this ratio the SAMi(the Sustainability Assessment Model indicator).

The SAMi combines the numbers into an overall measure, is premised on the third option regarding capital substitution and provides an indication of how ‘sustainable’ a project could be said to be. in the example used within this chapter, we get a SAMi of 25 per cent. A ‘score’ of 100 per cent would indicate that a project was a SD – that is, with no negative aspects in any capital subcategory. A score of greater than 100 per cent would indicate that the project contributed to SD.

Conclusions

In brief, this chapter has outlined a novel and visionary FCA tool – the SAM. SAM has been developed as a project evaluation tool that provides a sketch of how developing an oil and gas field impacts on economic, resource, environmental and social capital. The pattern of impacts in the SAM signature is used to calculate SAMi. SAMi itself attempts to indicate the SD performance of a particular project. We believe, however, that SAM could also be used to make detailed design decisions, as well as for assessing the performance of a company or industry sector. Finally, we suggest that SAM offers a potentially valuable (but not unique) way of conceptualizing the impact that activities have on the goal of SD. As such, SAM could be transferable to other industries and locations. It is likely that SAM will prompt different insights into SD in these industries.

Notes

1 This section draws from Baxter et al (2002).