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Shell gave its clearest signal to date that the company will seek to resurrect its hitherto ill-fated US offshore Arctic drilling programme. In filing a new multi-year exploration plan last Thursday for the Alaskan Chukchi Sea with US regulators, the company keeps open the possibility of a return to the region as soon as summer 2015.
However, the matter is far from certain. Obstacles remain including the completion by regulators of a new environmental impact assessment required after a US appeals court decision halted drilling activity for 2014.
Investors should be asking serious questions about Shell’s plans for Arctic offshore drilling. Regardless of the ethical and social governance positions on commercial exploitation of this pristine space, it’s not clear that Shell can make a convincing case to investors on the benefits.
A return to the US offshore Arctic would represent something of a shift for cost-conscious new CEO Ben Van Beurden. In response to questions posed at the company AGM in April, Van Beurden said that Shell was “reviewing all options” when it came to Arctic drilling. A decision to focus on this high-cost, high-risk venture seems out of step with his emphasis on cutting unsustainable capital expenditure. Nonetheless, Thursday’s filing places those concerned about the potential impacts of a major incident in the Arctic on high alert. This group should include Shell’s shareholders.
Shell’s attempts at US offshore Arctic drilling in 2012 were beset by multiple operational failings culminating in the running aground of the drilling rig, the Kulluk, on new year’s eve 2012. Two separate investigations – a 60 day review by the US Department of the Interior published in March 2013 and a US Coast Guard investigation published in April 2014 – were highly critical of Shell’s risk management practices and contractor oversight. Perhaps most worryingly, the US Coast Guard report accused Shell of “demonstrating a lack of respect for the unique risks inherent in Alaskan operations.”
Despite assurances from Shell spokesperson Curtis Smith that its new exploration plan reflects lessons learned from its disastrous 2012 drilling season, reports on Wednesday of anticipated failures at Shell’s high-cost and controversial oil sands projects in Canada should cause investors to challenge and scrutinise such assurances.
Lorraine Mitchelmore, the head of Shell Canada, was quoted in the Wall Street Journal this week saying that the company may not be able to meet its promised targets for reducing toxic wastes from oil sands, and calling for more time and eased regulation from the Canadian government.
Last year the company missed clean-up goals set in 2009 by Alberta’s Energy Resources Conservation Board, with the regulator waiving financial penalties for the time being but saying it would assess its options again in 2015.
This follows Shell’s inability in 2012 to meet EPA air emission requirements in Alaska. The EPA granted Shell’s request that permitted it to emit higher levels of pollutants. Nonetheless, Shell’s operations repeatedly violated even these higher levels and eventually the company paid settlements of $1.1m for violations of air permits.
In this context it should be a source of concern to investors to see Shell apparently failing, yet again, to comply with regulatory requirements for high-risk projects. Given the unprecedented level of civil society and political scrutiny of Shell’s Arctic plans, investors should be troubled that the company’s focus appears to be on encouraging regulators to reduce requirements at high-risk projects rather than ensuring full compliance with vital regulations.
ShareAction’s research with Platform and Greenpeace UK details how offshore Arctic drilling presents almost a perfect storm of risks – a requirement for long-term capital-intensive investment for uncertain return, a remote and uniquely challenging operating environment, ongoing litigation, and a lack of extraction and spill response infrastructure. If Shell’s assurances that lessons have been learned are to carry any weight, the company must address its repeated inability to meet regulatory minimums at high-risk and controversial projects.
The Gulf of Mexico oil spill demonstrated the catastrophic human, environmental and financial impacts of inadequate regulation. As the US government finalises the minimum regulatory requirements for offshore Arctic drilling, investors should support calls for the introduction and enforcement of stringent regulations. They should also press oil companies to demonstrate a commitment and ability to comply with such regulation rather than lobby for light-touch measures and waivers of requirements.
Louise Rouse is director of engagement at ShareAction
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