Out in the cold: why Shell's Arctic plans are a risky investment

Posted by Charlie Kronick — 21 May 2012 at 2:30pm - Comments
by. Credit: Marcin Wichary
Shareholders should question Shell's risky Arctic drilling plans

The past few weeks has been dubbed by many as the 'shareholder spring'. Chief executives of some of the world’s biggest companies – Aviva, Cairn Energy, RBS, and HSBC among others – have suffered as shareholders have expressed their very strong disapproval of high pay for executives, as performance has stagnated or even crashed. The new report that we, along with FairPensions and Platform, have released today shows just how much more shareholders and executives will have to worry about soon. 

As the international oil companies like Shell run out of easily accessible oil, they’re being pushed to the environmentally destructive, high-cost oil provinces like the deep waters of the Gulf of Mexico, the tar sands of Canada and the Arctic oceans off Greenland, Russia, Canada and the US. We know the risks of deep water and tar sands - we’ve been documenting the damage they do for years - and now Shell has picked up where Cairn Energy left off, leading the charge of the big oil companies into the Arctic. 

None of the oil companies inspires confidence when it comes to drilling safety: there is virtually a 100% certainty of spills when drilling for oil, but the Arctic raises even bigger worries. The US regulator - the Bureau of Ocean Energy Management - estimates a one-in-five chance of a major spill occurring in just one block of leases held by Shell in the Beaufort Sea off Alaska. This would be worrying enough, but Shell’s level of preparation for any such accident isn’t just relaxed, it’s nearly non-existent. 

Shell’s worst-case estimate for a spill has quadrupled from 5,500 barrels a day in its 2009 oil spill response plan to 25,000 barrels a day in its 2011 plan. When questioned by MPs from the parliamentary Environmental Audit Committee, Shell admitted it has no plans to test its well capping equipment in icy conditions, despite acknowledging ice may be present at the drill site. Hardly surprising, given that it's in the Arctic. 

Equally worrying for investors is the fact that, when questioned by the same committee, Shell admitted it has not calculated how much a large spill would cost to clean up, despite the serious financial repercussions a large-scale spill is likely to have. Add into the mix the fact that oil in the Arctic is likely to be less plentiful – and significantly more expensive to extract – than has been predicted by the oil industry, leading oil industry analysts Bernstein Research to conclude that "development costs [in the Arctic] will be at the high side of the industry range. Development times are likely to disappoint."  

Because of the huge environmental risks of chasing the last drops of oil – both to the Arctic itself and to the global climate – it’s not surprising that millions of people around the world are committed to stopping Shell’s Arctic expansion plans. What this report shows is that even if they don’t care about the environment, investors should be very concerned about the risks Shell is running with their money, and their future prosperity.

They told the AGM that their projects were budgeted on being profitable with a $60 oil price. No way is that going to be anywhere near enough to cover the costs of exploring and developing in the Arctic.

If Shell are not telling their customers the whole story, it is time to invoke the Sarbanes Oxley laws in America. That may make things interesting for their many lawyers.


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Probable confirmation that Shell are lying (and the other 'big oil' companies too) about what oil price is needed for Arctic projects to become profitable, lies in Saudi Arabia confirming $75 a barrel is needed for more difficult projects 'in the desert!!. If $60 appears in R and A, irregardless of whether this is WTI or Brent price then investors need to be encouraged to bring legal action, esp. as disaster response comments are derisory. The guide price for the Athabasca destruction in Alberta was $90 and margins are low, therefore we have the manipulation of the oil price upward, quite apart from demand considerations in order to justify these risky projects, with not one jot of consideration given to the social costs involved.

According to Broder in the New York Times, Shell spent over $4 billion in lobbying the government and other relevant agencies to acquire a license to drill in the Arctic. This was over a 7 year period. Is that legitimate use of shareholders' investment. Some might argue that if they get the oil without a major spill, it might be worth the investment. But the risk is ridiculously high - remember the Deepwater Horizon spill of BP. The problem is that no one has any knowledge or experience of dealing with an oil spill in the Arctic. Will Shell destroy the Arctic for us or will they find oil and clean up afterwards. I am tempted to lean towards the former. Only time will tell.


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stay upfront in the cold & competitive industry. Please, Keep on Sharing.

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