If Royal Dutch Shell’s Arctic drilling program leads to a major spill, it could cost the oil company — and therefore its shareholders — an entire year’s worth of profit, according to a Tuesday legal filing by the conservation group Oceana and a University of Chicago law clinic.
But the company’s investors are not aware of that risk, the two groups alleged. Because of that, the groups filed a petition to the Securities and Exchange Commission, requesting that the agency launch a formal investigation into Shell’s risk disclosures to shareholders relating to its activities in the Arctic Ocean.
“Investors need full disclosure of the risks and challenges of Shell’s activities,” said Mark Templeton, director of the Abrams Environmental Law Clinic in a press release. Otherwise, he said, they “cannot fully assess the company’s financial prospects in the Arctic Ocean and cannot influence Shell’s choices about whether to continue to make huge capital investments in the region.”
Over the past decade, Shell has invested more than $6 billion on its Arctic drilling program. Now, the company intends to spend $1 billion more on its efforts to drill in the Chukchi Sea during the summer of 2015.
To date, the company has little to show for its expenditures. That’s in part due to the extreme ice and weather conditions during its error-riddled 2012 foray into Arctic waters. Perhaps most notably, amid a significant but not uncommon storm in December 2012, Shell’s drill rig Kulluk broke its tow line and ran aground near Kodiak, Alaska in an accident that the Coast Guard attributed mainly to the company’s “inadequate assessment and management of risks.”
Now, as Shell plans to spend more to continue its Arctic journey, the groups are arguing that Shell omitted or misstated substantial legal and environmental risks in its regulatory filings for shareholders, thereby violating U.S. securities laws. Shell is legally required to provide its shareholders the data necessary to make informed decisions about their investments in the company.
Years of annual filings neglected to fully disclose this legal risk, according to the petition.
Each stage of Shell’s Arctic pursuit, from federal lease sale proposals to lease sales themselves and approvals to begin oil exploration, has been subject to numerous legal challenges — some of which could have terminated the whole program with significant financial consequences to investors.
Oceana and the Abrams Environmental Law Clinic also alleged omissions in Shell’s disclosure of potential costs from environmental risks. According to the team, the company neglected to communicate that its spill-response technology and strategies remain untested in Arctic waters, where icy conditions, perilous weather and 1,000-mile distance from the nearest Coast Guard base would make oil spill response and clean-up exceptionally difficult.
The Bureau of Offshore Energy Management estimates that cleanup response in the Chukchi Sea for a major spill would cost between $10- and $15 billion. In the Beaufort, those estimates reach $12- to $27 billion. That excludes fines, inevitable litigation expenses, and the costs of reputational damage, all of which allegedly went unstated in Shell’s disclosures.
“Companies like Shell cannot run from the reality that proposed oil drilling creates enormous risks for the ocean and for the company,” Oceana CEO Andy Sharpless said in a statement. “There is no proven way to clean up a spill in icy Arctic conditions, and Shell has an obligation to make investors aware of that.”
The massive losses that befell BP and its shareholders after the 2011 Deepwater Horizon disaster in the Gulf of Mexico offer a cautionary tale about overlooked risks. The 200 million gallon oil spill left that company facing nearly $20 billion in penalties, and at least hundreds of millions in litigation fees — all of which were unaccounted for in BOEM’s cost projections of Shell’s liability in the Arctic.
According to the groups, if the petition is accepted, an investigation by the SEC could help prevent future disclosure violations or require Shell to revise its filings.
For it’s part, Shell is pushing back on the allegations.
“Shell is satisfied its disclosures comply with SEC’s legal requirements,” said Shell spokesman Curtis Smith in comments to Reuters. He added that “a very unlikely spill in the Arctic would not be financially material” to Shell, due to the prevention and response measures the company has taken.
According to a recent analysis from the Department of Interior, there is a 75 percent chance of a spill greater than 1,000 barrels should an oil company like Shell discover and fully produce oil in the Chukchi leases.
Elise Shulman is a communications associate for the Ocean Policy team at the Center for American Progress.