Drilling in the Arctic could be more difficult, and costly, than Shell is letting on, environmentalists tell SEC

WASHINGTON — Shell isn’t telling investors about the potentially multi-billion dollar costs that could arise from a spill at its exploratory oil wells in the Arctic Ocean — an oversight environmentalists are asking the Securities and Exchange Commission to probe.

In a petition filed with the agency late Monday, Oceana, a leading ocean advocacy group, and the University of Chicago law school clinic urged the SEC to probe whether Shell Oil Co.’s regulatory filings fall short of the material information disclosure demanded under U.S. securities laws, by leaving out key details about the company’s Arctic drilling program.

Although the petition exploits a well-established mechanism for prodding SEC investigations, environmentalists have rarely used the approach to target oil and gas companies. Parallel efforts aimed at forcing oil companies to disclose how carbon dioxide constraints could affect their portfolios have used a different tactic by asking the SEC for broad guidance on the issue.

“Investors need full disclosure of the risks and challenges of Shell’s activities,” said Mark Templeton, who directs the Abrams Environmental Law Clinic at the University of Chicago Law School. “Without all of the relevant information, Shell shareholders, analysts and others 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.”

Related story: Feds launch review of Shell’s Arctic drilling plan

So far, Shell has spent some $6 billion in its quest for Arctic oil, including the roughly $2.2 billion it plunked down to buy drilling leases in the Chukchi and Beaufort seas north of Alaska. But operational challenges and litigation — including lawsuits aimed at a 2008 government auction of the Chukchi Sea leases — have combined to limit Shell’s forays into those Arctic waters to a brief drilling program in 2012.

That 2012 campaign was marked by mishaps, including an engine fire and the grounding of Shell’s Kulluk drilling rig on an Alaskan island. Although most of the incidents took place before and after Shell’s contracted drilling rigs and vessels were actively working in the Chukchi and Beaufort Seas, they illustrated the challenges of mounting a major exploration campaign in the remote and forbidding region.

The new petition with the SEC argues that Shell’s regulatory filings gloss over those difficulties, specifically highlighting what Oceana calls the company’s inadequate disclosure of the risks of a catastrophic oil spill and the effect adverse litigation has on its prospects in the Arctic.

In annual reports filed with the SEC, Shell acknowledges that large spills can result in major clean-up costs, as well as fines and other damages. But it avoids making any estimate of the potential price tag.

The government’s Bureau of Ocean Energy Management, meanwhile, has estimated that a catastrophic spill in the Chukchi Sea could cost $10.1 billion to $15.8 billion — a total that wraps in clean up, resource damage and the value of lost hydrocarbons but does not include potential fines, litigation expenses, repetitional damage and other items. For the neighboring Beaufort Sea, BOEM has put the cost of a catastrophic oil spill in the higher $12.2 billion to $27.8 billion range.

The potential cost of a spill could dwarf Shell’s reported $19 billion profit in 2013, notes April Medley, a second-year law student at the University of Chicago who worked on the project.

“A single catastrophic spill would effectively wipe away more than a single year’s worth of profits for Shell,” she said.

A number of legal challenges — mostly tied to government approvals of assorted Arctic activities, including the 2008 auction and regulators’ endorsement of Shell’s oil spill response plan — also have gotten short shrift, the Oceana and University of Chicago team said.

In a recent annual report, Shell noted that its subsidiaries are subject to costs from litigation “in the ordinary course of business.” But Shell goes into much more detail describing how the litigation has hampered its work in a request to the Interior Department for a suspension of Arctic leases that would effectively extend their duration.

And another Arctic leaseholder, ConocoPhillips, has gone further in describing the risks and effects of that litigation in its own filings.

Shell spokesman Curtis Smith said the company is confident that its annual reports — filed in conjunction with the SEC Form 20-F — satisfy disclosure rules.

“We remain satisfied with our 20-F disclosure as it complies with all SEC legal requirements,” Smith said. “It’s also our view that a very unlikely spill in the Arctic would not be financially material to the company given the precautions we have taken to prevent and respond to a worst-case scenario.”

Shell officials repeatedly have stressed that their Burger prospect in the Chukchi Sea is a low-pressure target, located in relatively shallow water about 70 miles off the Alaska coast.

And they point to several barriers designed to keep their Arctic wells in check, including the weight of drilling fluids circulated through them and a blowout preventer with two shearing rams designed to slice through drill pipe so it can be sealed in an emergency. Shell also plans to have its Arctic containment system near Kotzebue, Alaska; that device, modeled after similar equipment created for the Gulf of Mexico after the Deepwater Horizon disaster, is meant to cap an underwater gusher.

The SEC filing represents a novel bid by Arctic drilling foes to highlight the risks of the activity — going beyond potential environmental perils to the financial ones that might be more persuasive to shareholders.

“We view this petition as a continuation of work we have been doing and a new effort to engage a new constituency,” noted Michael LeVine, senior Pacific counsel for Oceana. “Our goal continues to be to encourage the full and fair disclosure of information, in particular with regard to the risks that are faced in the Arctic Ocean.”

LeVine stressed that Oceana believes investors would want “information about the magnitude of the potential loss and the potential inadequacy of the company’s response mechanisms.”

And while the effort is targeted at Shell, he noted, that’s a function of the company’s role as a first-mover when it comes to a new generation of U.S. Arctic drilling.

“Really, this is about a broader conversation about risks and benefits,” he said. “Shell happens to be the company that’s furthest along in its efforts.”