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August 20, 2011

Can Shell Be Trusted with Drilling in Arctic?
    by Robert Kropp

The company's permit from the Interior Department to drill in the Arctic precedes by days an oil spill in the North Sea, and follows a UN report critical of its acceptance of responsibility for oil spills in Nigeria.

SocialFunds.com -- On August 4th, Shell received from the US Department of the Interior the initial permits to begin drilling for oil in the Alaskan Arctic, an activity that the company states it will begin in July 2012. In its exploration plan, Shell estimated that in the event of a massive spill it had the capability of recovering 90% of the oil released.

Rebecca Noblin, Alaska Director for the Center for Biological Diversity, was blunt in her appraisal of Shell's estimate, calling it "absolutely ridiculous." Only five percent of the oil released during last year's Gulf of Mexico disaster was recovered, and eight percent from the Exxon Valdez spill in 1989.

Notwithstanding the concerns of environmentalists and other key stakeholders, the Interior Department's Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) stated in a press release that it "found no evidence that the proposed action would significantly affect the quality of the human environment."

The approval of Shell's plan to drill in the Arctic preceded by mere days an oil spill on August 10th, in which a pipeline owned by Shell ruptured and released 1,300 barrels into the North Sea. The spill was the worst in the UK in a decade.

Louise Rouse, Director of Engagement at the UK-based Fair Pensions, told SocialFunds.com, "There is a crisis happening at the moment that Shell needs to get a handle on. But beyond the company managing this particular spill correctly, investors need to think about Shell's other projects. The risk assessments Shell carried out in the North Sea clearly have not worked, and investors need to talk with Shell about the steps it is taking for risk assessment."

"Given that Shell was recently granted initial permits with respect to the Alaskan Arctic," Rouse continued, "Investors need to be confident that if that's the direction the company is taking toward these pristine environmental areas that risk assessment is sufficient."

Another questionable corporate governance decision made by Shell in the aftermath of the spill relates to transparency. Although the company learned of the spill on August 10th, it did not inform of the public of it until two days later. In an interview, a Shell executive stated, "The motivation from us was absolutely not one of trying to cover it up."

"Shell is going to have to explain why it is facing accusations of lack of transparency in the North Sea spill," Rouse said. "That's relevant to the Arctic, because one of the big concerns is that if the company enters into regions where there isn't a culture of political transparency, and there isn't a culture of NGO (nongovernmental organization) oversight, then we have to completely trust these companies."

According to a 1982 UN treaty known as the Law of the Sea, Canada, Russia, Norway, and Denmark, in addition to the US, have legal claims to the sea floor areas of the Arctic. The Russian gas export monopoly Gazprom is expected to begin drilling in the Arctic's Pechora Sea this month.

"The North Sea is a litmus test for Shell," Rouse said. "How transparent are they about something in a highly regulated and very public area like the North Sea?"

The timing of Shell's permit to drill in the Arctic may have preceded the North Sea spill, but it followed by days the publication of a groundbreaking report by the United Nations Environment Program (UNEP) that detailed the extensive environmental damage caused by oil extraction activities in the Ogoniland region of Nigeria's Niger Delta.

"Oil contamination in Ogoniland is widespread and severely impacting many components of the environment," the report states. "Even though the oil industry is no longer active in Ogoniland, oil spills continue to occur with alarming regularity."

Miles Litvinoff, Coordinator for the Ecumenical Council for Corporate Responsibility (ECCR), told Social Funds.com, "From the point of view of the communities and community-based organizations on the ground, there's a sense that the UNEP report is simply confirming what many people had previously recognized. There is a sense of impatience that the problems have been there for many years, and the risk that the report will simply become another marker without necessarily leading to remedial action."

A 2010 report from ECCR noted "a continuing failure by Shell…to operate in the Niger Delta fully according to robust international social and environmental standards."

And the UNEP report observed, "In January 2010, a new Remediation Management System was adopted by all Shell Exploration and Production Companies in Nigeria. The study found that while the new changes are an improvement, they still do not meet the local regulatory requirements or international best practices."

"It's notable that previous to this report, Shell was claiming that only ten or at the most fifteen percent of oil spills in the Niger delta was its responsibility," Litvinoff said.

"One of the key things about Nigeria is that people don't feel they have the full picture," Rouse of FairPensions said. "Shell recently settled two cases where they denied liability for a long time, and then accepted liability. When you sense you aren't getting the full picture, when you sense that the message is tightly controlled, that leads to concern."

In fact, Litvinoff said, the original draft of the UNEP report repeated the oil company's estimates. There was an outcry over it, he said, and the estimate was subsequently revised to 30%.

"It seems to be a more realistic figure," Litvinoff observed. "Shell's willingness to engage with civil society now is positive. They've indicated a willingness to engage with ECCR's partners in Nigeria. But is talk going to lead to action?"

Citing the Chatham House Rule regarding confidentiality, Litvinoff declined to share specifics about meetings with Shell that have been planned so far, but did say that ECCR is in contact with Shell about next steps and is urging Shell to be proactive so that changes on the ground benefit local communities.

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