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February 26, 2014
Investors Warned Again of Risks in Arctic Drilling
    by Robert Kropp

A coalition of nonprofit organizations releases a report for institutional investors detailing the considerable financial, environmental, and social risks associated with Shell's plans to drill for oil in the waters of the US Arctic.


It's not as if the risks of oil exploration in the Arctic were not self-evident. After the US Department of the Interior's Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) granted Royal Dutch Shell the initial permits to begin drilling for oil in the Alaskan Arctic in 2011, Greenpeace published a report detailing some of those risks.

“Current technology is ill equipped to deal adequately with a large oil spill in Arctic waters,” the report stated. In fact, for long stretched of the Arctic winter any response at all would be impossible: “The potential environmental and financial impact of any potential major oil spill has not yet even been assessed.”

Yet Shell went ahead with its exploration anyway, in 2012. An Investor Briefing prepared by the UK-based FairPensions identified a number of serious problems in Shell's Arctic activities, including the grounding of the company's Noble Discoverer drill ship, unpreparedness for weather conditions, and inadequate spill response equipment.

In January of this year, after a coalition of environmental and Alaska Native groups successfully challenged the US government's environmental analysis, Shell announced that it would not return to the Arctic in 2014.

Despite a history of dangerous and expensive mishaps, “Shell has sought new regulatory approvals to return to the US Arctic Ocean,” a new report entitled Frozen Future: Shell’s ongoing gamble in the US Arctic states. “Despite the failure of Shell’s offshore Arctic exploration to date, the company is still the most publicly committed of IOCs (international oil companies) to offshore drilling in ice-covered waters.”

The report was co-published by a coalition of nonprofit organizations, including Platform, Greenpeace UK, ShareAction, Oceana, Oil Change International, and Pacific Environment. Written for Shell’s institutional investors, it “explores the many operational questions that remain unanswered to the satisfaction of the US government and others, along with economic risks to Shell’s planned Arctic projects that remain unanswered to the satisfaction of financial analysts.”

Also in January, for the first time in ten years, Shell issued a profit warning to its investors, much of which has been attributed to exploration costs; it has been estimated that Shell has spent in excess of $5 billion thus far in its fruitless exploration for oil in the Arctic.

The risks detailed in the report include uncertain long-term profitability, an inadequate oil spill response, contractor management concerns, and regulatory uncertainty. In the event of a major oil spill, for example, “Shell would also likely face uncertain impacts on share price and credit ratings, unprecedented reputational damage, and a threat to its ability to do business in the US,” according to the report.

“Since Shell is self-insured to only $1.15bn per event,” the report continued, “it is likely that Shell would have to conduct a...‘fire sale’ of assets to meet the resulting financial liabilities of a major Arctic spill.”

Chapters of the report detail each risk in depth, and conclude with a series of questions for institutional investors to ask Shell.

“Investors should be concerned that an examination of Shell’s 2014 Chukchi Sea exploration plan indicated that the company has not learned the appropriate lessons from its 2012 failures,” the report concludes. “And while the risks of such projects are many and identifiable, the potential returns from such projects remain highly uncertain.”

 

 
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