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May 24, 2012

Investors Warned to Question Shell's Plans for Arctic
    by Robert Kropp

Citing the likelihood that control of a spill in ice-covered waters will fail, and outlining Shell's poor track record in the Russian Far East, Greenpeace advises investors to ask hard questions about the risks to the company's financial health.

SocialFunds.com -- A new report from Greenpeace focuses on the risks to investors of the oil and gas giant's plans to begin exploring for oil in the Arctic this summer.

Last August, 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, which Shell has said will begin in July. The company's plans to drill three exploratory wells in the Chukchi Sea off the northwest coast of Alaska have been challenged by a coalition of nine environmental and native Alaskan groups.

Furthermore, despite the approval earlier this year by the Interior Department of Shell's spill response plan, concerns remain over its effectiveness. Greenpeace reports that an executive in charge of Shell's spill response described the likelihood of a well control problem as "very, very small." The company has admitted that it has "not assessed the potential cost of a worst-case spill in the US Arctic," according to the report.

The report also points out, "Current technology is ill equipped to deal adequately with a large oil spill in Arctic waters." It quotes a letter from WWF-Canada, submitted last year to Canada's National Energy Board, which stated, "A spill response in the Beaufort Sea would not be possible more than half the time from June through September. By October, no response would be possible more than four fifths of the time and no response is possible from November to May."

Thus far, Shell's experience in drilling in ice-covered waters is limited to the Sakhalin-2 project in the Russian Far East. "There are significant reasons to doubt" that the experience has been positive, the report states. Cost overruns for the project have totaled more than 100% of initial estimates, and environmental concerns have led to challenges to further funding of the project.

Furthermore, by entering into a global strategic alliance with Gazprom, a Russian company, Shell has allied itself with a partner whose poor environmental, social, and corporate governance (ESG) record includes the sinking of an oil rig last year that killed 53 workers. And Shell has made no comment on whether it had recouped its initial investment in the project, raising concerns about its transparency.

"Booking new reserves is a priority for Shell as it seeks to boost its reserves replacement ratio," which has been on the decline for most of the past decade, according to Greenpeace. But even the financial benefit of deepwater drilling in the Arctic should be questioned by investors, dependent as it is on high oil prices and government subsidies.

Compounding the challenges for investors is "the potential environmental and financial impact of any potential major oil spill," which, the report points out, "has not yet even been assessed." Investors would do well to remember the financial impacts of the Gulf of Mexico oil spill, and question whether Shell's Arctic exploration poses an equivalent risk to the company's financial heath.

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