Shell Spins to Shield a Shambles

It all looked so different for Shell in late June. After six years and $4.5 billion, it was ‘highly likely' that the company would receive its permits to drill in Alaskan Arctic waters. Drilling season was to kick-off in mid-July, 5 wells would be completed in 2012, and Shell would be exiting the Arctic on 24th September to ensure sufficient oil spill response time before the ice returned.

Two months later Shell has yet to receive its oil drill permits (the permits received last week were purely for exploratory work, with the US authorities making it clear they cannot drill for oil). The only real action the drill ship Noble Discoverer has seen was slipping its anchors in Dutch Harbour, successfully drilling 2 wells is now considered ambitious, Shell’s spill containment ship is undergoing substantial repairs to receive certification, Shell has admitted failure to meet certain emissions restrictions despite spending $30million, and the company has requested an extension to the drilling season on the basis that it’s ‘fairly confident’ that ice will not return until mid-November.

For the world’s second largest oil company – one which was proudly boasting of its supposed 20 years’ Arctic experience at its May AGM – it’s an embarrassing shambles. For regulators and investors in Shell (including millions of British savers exposed to Shell through their pension savings) it’s a warning that should be heeded. 

It’s almost amusing that after this series of mostly self-inflicted setbacks Shell Alaska’s Vice President Pete Slaiby gave a media interview saying of Shell’s Arctic plans: “This is no shot in the dark”. “These things have been planned for 6 years”. The evidence suggests significantly more planning time is required. Indeed Shell’s spin machine has gone into overdrive providing revised definitions of success for an oil exploration programme that, for 2012, currently lies in tatters: “The ability to go up there, work the logistics, to work the things like crew change, to have a faultless year, will just be a success," said Shell Alaska’s vice president Pete Slaiby. "I think success builds on success."

Analysing the problems that have befallen Shell this summer the dominant theme is ‘ill-preparedness” – a spill-containment rig not fit for purpose to an alarming and presumably obvious extent and anchor problems which reports suggest had occurred previously in New Zealand.  One has to wonder why Shell was in such a rush to begin what will be a multi-year exploratory drilling phase when it was evidently not ready. The result has been to expose the oil major to ridicule and criticism – including from US interior secretary Ken Salazar.

Rather than furiously spinning to cover its failings and requesting extensions to previously agreed deadlines because it is ‘fairly confident’ ice will not return until November, Shell should take a pause in its rush to drill and address criticisms of its oil spill response plans.  Shell has downplayed the significance of its spill containment ship saying it represents only the 4th line of defence against a spill. However, it neglects to mention that another essential line of defence, its capping stack, has not yet been tested in icy waters. Shell itself acknowledges in its oil spill response plan that ice can be expected at its drill sites and when pressed at the AGM Peter Voser acknowledged that Shell could not guarantee that there will be no ice.

The impact of a spill in the Arctic could be catastrophic for the environment, the company responsible, its shareholders, and the industry. Shell’s setback laden Arctic foray should provide sufficient warning to both regulators and investors that they need to ignore the spin and scrutinise Shell’s plans and preparedness much more closely.