Insurance Giant Lloyd’s of London Warns Of ‘Unique And Hard-To-Manage Risk’ Of Arctic Ocean Oil Drilling

by Kiley Kroh and Michael Conathan

Analysts at one of the world’s largest insurance markets are warning that offshore drilling in the Arctic would “constitute a unique and hard-to-manage risk” and urged companies to “think carefully about the consequences of action” before exploring for oil in the region.

Lloyd’s of London, a large UK-based insurance pool, issued a report today outlining the severe environmental and economic risk of oil and gas drilling in Arctic waters. The stunning report comes as Royal Dutch Shell prepares for exploratory drilling operations in the Arctic – even while leading experts warn that there’s virtually no infrastructure in place to clean up an oil spill in the fragile region.

As Arctic ice continues to melt due to climate change, Lloyd’s estimates the region will attract $100 billion in new investment over the next decade. However, analysts warn that responding to an oil spill in a region “highly sensitive to damage” would present “multiple obstacles, which together constitute a unique and hard-to-manage risk.”

The environmental consequences of disasters in the Arctic have the potential to be worse than in other regions. The resilience of the Arctic’s ecosystems in terms of withstanding risk events is weak, and political sensitivity to a disaster is high. As a result, companies operating in the Arctic face significant reputational risk.

It’s easy for oil companies to dismiss environmentalists concerned about the Arctic as politically-motivated. But when a centuries-old company that has made billions of dollars judging risks and insuring everything from Betty Grable’s legs to the World Trade Center’s new Freedom Tower, thinks an operation might be a little too edgy for them, it ought to make oil companies stand up and take notice.

Richard Ward, Lloyd’s chief executive, “urged companies not to ‘rush in [but instead to] step back and think carefully about the consequences of that action’ before research was carried out and the right safety measures put in place.”

Lloyd’s report includes a laundry list of reasons why oil companies ought to hit the pause button on offshore Arctic drilling, including:

  • Significant knowledge gaps across the Arctic need to be closed urgently
  • Arctic conditions will remain challenging and often unpredictable
  • The environmental consequences of disasters in the Arctic are likely to be worse than in other regions
  • The politics of Arctic economic development are controversial and fluid.

Here in the U.S., Shell is on the brink of permits to begin drilling in the pristine Arctic Ocean this summer, despite the concerns of environmental groups, Alaska Native communities, and even federal agencies such as the US Coast Guard and NOAA.  Aside from the long-term climate risk, their chief concerns revolve around Shell’s ability to respond to an oil spill challenging region – which can be dark, frigid, extremely remote, and sorely lacks even the most basic infrastructure.

The challenges posed by these harsh and unpredictable conditions are outlined in the Center for American Progress report, Putting a Freeze on Arctic Ocean Drilling: America’s Inability to Respond to an Oil Spill in the Arctic.  As the two-year anniversary of the Deepwater Horizon tragedy approaches, it is critical to remember the plethora of personnel and resources needed to facilitate the largest, most coordinated oil spill response effort in our nation’s history. A similar undertaking would be impossible in the Arctic.

These warnings are echoed in the Lloyd’s report, as well as in a new independent federal report issued by the Government Accountability Office, which concluded that Shell’s “dedicated capabilities do not completely mitigate some of the environmental and logistical risks associated with the remoteness and environment of the region.”

As both the CAP report and Lloyd’s recommend, a substantial commitment to science and monitoring is necessary to “close knowledge gaps, reduce uncertainties and manage risks.”  In addition, “full-scale exercises based on worst-case scenarios of environmental disaster should be run by companies,” as well as a significant investment in infrastructure and monitoring to facilitate “safe economic activity.”

If the world’s largest insurance market is warning companies to slow down because we are unprepared for the enormous risks of Arctic exploration, then the U.S. ought to think carefully before we encourage drilling.

Kiley Kroh is Associate Director of Communications for Oceans Communications at the Center for American Progress. Michael Conathan is the Director of Ocean Policy at the Center for American Progress.

11 Responses to Insurance Giant Lloyd’s of London Warns Of ‘Unique And Hard-To-Manage Risk’ Of Arctic Ocean Oil Drilling

  1. Cee2 says:

    Although this is mentioned in the lede, the article doesn’t really address it, but here’s another big issue: oil spill response in the arctic would be almost impossible, and/or astronomically expensive. Anyone who worked on the Deepwater Horizon or Yellowstone Oil spills (and there are thousands and thousands of us)now know to a much more exacting degree the infrastructure needed to support the thousands of workers needed for an oil spill response. The Deepwater Horizon Spill taxed the lodging, feeding, and material resources of a 3-state area along the Gulf of Mexico for an entire summer. Ask Exxon-Mobil how expensive it is to support 1,000 cleanup workers, and even get them to their job sites when the site in question is a flooding river. The location of a spill in the Artic WILL demand logistics equivalent to building a temporary military installation that will have to be supported without the benefit of roads. If they are serious about drilling for oil in these regions, I want to see hard evidence that they have planned for a response– in the form of about 100 acres of shipping containers that have been built and provisioned to serve as barracks, cafeterias, office space, communications centers, warehousing for spill response and human safety materials, ad infinitum. True, oil companies (or their CEO’s, or the CEO’s of the banks that finance them) are probably the only organizations on the planet that could support these logistics with their annual profits, but let’s see them invest those profits in these facilities first before they get any permits.

  2. Leif says:

    As I recall President Obama stated that he would approve all oil exploration that was “proven safe” to exploit. I wish that I could trust that he will take heed. Stopping the profits from the pollution of the commons would bring this madness to a screeching halt.

  3. Mike Roddy says:

    Disaster relief infrastructure in the Arctic is not going to do much good. Booms in the ice? Eskimos cleaning up birds? Chemicals, like they used in the Gulf?

    A disaster plan is almost worthless in those conditions, and the oil companies know it. All they want is to get to as much oil as they can in the short term.

  4. Kathleen sea says:

    This planet will no longer be habitable for humans when we are done here. The oil companies cannot be blamed. Their goal is understood: to satisfy our demand for fuel to run our SUVs (inefficientlt) and heat our minimansions. It is only when we have changed our habits that things can change.

  5. carrie says:

    I officially believe in Armageddon now…

  6. Paul Magnus says:

    Insurance industry is toast… move your pension funds…

    “Insurance companies have significantly and methodically decreased their financial responsibility for weather catastrophes like hurricanes, tornados and floods in recent years,” the Consumer Federation of America said in a statement after studying industry data.”

  7. Joe Romm says:

    The article mentions it and links to a big study CAP did.

  8. catman306 says:

    Couldn’t insurance companies just refuse to cover the Arctic oil explorations? Oil companies don’t need to purchase insurance?

  9. To protect the Enviornment and Animals we should not drill for oil in the Arctic.

  10. alan says:

    Oil companies are so large that they can self – insure – ie they are financially unaccountable to any outside institutions. Most are owned by Governments, and it could be said that they “own the Governments” due to their massive economic power.

  11. Joan Savage says:

    Remember the plethora of contractors involved with the BP Gulf spill? While Arctic exploration includes biggies like Gazprom, Shell and BP, lesser known companies also abound in the Arctic oilrush. It will be interesting to see if they heed Lloyd’s.