Shell has understated the financial risks of exploring for oil in the Arctic Ocean and federal regulators should investigate possible misrepresentations to investors, critics of the drilling plan said Tuesday.
Oceana, an environmental organization, and the Abrams Environmental Law Clinic at the University of Chicago Law School on Monday petitioned the Securities and Exchange Commission for an investigation into what the drilling critics call "material misstatements and omissions" in Shell's financial filings.
Shell's multibillion-dollar attempt to get to the oil in remote offshore Arctic territory and the associated government permits issued for it "have resulted in controversy, litigation and substantial risk to the ocean environment and the company's investment," but not a single completed well, the petition said.
"In its annual reports, however, Shell paints a rosy picture of its prospects and appears to omit important information regarding significant risks," the petition said.
Those risks, which should be considered "material" to investors, are further delays from litigation – a risk about which Shell has complained to permitting agencies but failed to properly detail in its financial reports – and fallout from a potential oil-spill disaster, the petition said.
"A catastrophic Arctic spill, in short, could fall directly onto Shell's balance sheet, eating up available cash; cutting into profits; and, in light of BP's experience after the Deepwater Horizon disaster, potentially forcing the sale of valuable assets," the petition says. "Though such a spill might be unlikely, Shell should fully disclose the risk given its apparent materiality to investors."
Shell, in its financial reports, has also exaggerated its accomplishments in the Arctic program, the petition said. Despite "a series of equipment failures, legal violations, fines, and, ultimately, the grounding of a drill rig off an island near Kodiak, Alaska," for example, Shell's financial reports portrayed the 2012 drill season as successful, the petition said.
Shell has already invested $6 billion in the offshore Arctic program and appears to be relying heavily on it to reinforce booked reserves in the wake of a recent scandal over reserves overstatement, the petition said. In 2004, Shell admitted to exaggerating its global reserves and agreed to pay $150 million in fines to the SEC and the agency's British counterpart, the Financial Services Authority.
In contrast, other companies that bought leases in the U.S. offshore Arctic have not put nearly as much money at risk, and they have deferred or dropped plans to drill, the petition noted. Shell's disclosures are not as candid as those from ConocoPhillips, for example, which delayed offshore Arctic drilling plans, or even those from BP, which endured tough financial hits after the Deepwater Horizon disaster, the petition said.
Shell differs from the other companies with offshore Arctic leases because it is further along in its exploration program and because it has made "affirmative representations" about its ability to carry out exploration safely, said Michael LeVine, senior Pacific counsel for Oceana.
Shell has claimed it has adequate oil-spill response capabilities, even though those claims are suspect, LeVine said. And while Shell, in an application to federal regulators for more time to hold its Arctic leases, said legal challenges put its entire Arctic program at risk, "they don't say that to their investors," LeVine said.
Oceana is among the groups that have filed lawsuits and other legal challenges that delayed Shell's planned drilling. Among the lawsuits was one that resulted in two court-mandated rewrites of the environmental studies that were supposed to have been completed before the Interior Department in 2008 auctioned off leases in the Chukchi Sea, where Shell started drilling a single well in 2012 and where it intends to return this year to complete that well and drill five more.
The petition to the SEC, which runs for 59 pages and has 79 pages of supporting material, details the problems that Shell's program has encountered so far – including a contractor's criminal convictions for marine-safety and environmental violations aboard the two drill rigs used in 2012 – the potential for oil-spill disasters and the environmental vulnerabilities of the areas where Shell wants to drill.
The request for an SEC investigation seeks to better inform the public, including the investing public, about those risks, LeVine said.
"This effort is not about stopping any one particular project or company," he said. Instead, it is a continuation of Oceana's quest for a "transparent public process so that good information is available to everyone who is concerned about how these decisions are made."
Shell, in a statement, said its annual-statement filings to the SEC, made in a form known as 20-f, met legal standards for financial completeness and accuracy.
"We remain satisfied with our 20-f disclosure as it complies with all SEC legal requirements," said the statement. "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."
The petition to the SEC came as a federal judge is considering Shell's request for an injunction barring Greenpeace protesters from approaching any of the vessels in the company's 2015 exploration armada.
Greenpeace staged a high-profile and high-seas protest of Shell's drilling plan when six protesters boarded one of the rigs as it was traveling from waters northwest of Hawaii to the Puget Sound area in Washington.
U.S. District Court Judge Sharon Gleason on April 11 issued a temporary restraining order barring Greenpeace USA protesters from approaching within 1,000 meters of the Noble Discoverer and the Polar Pioneer, the two drilling rigs Shell plans to use in Chukchi, and the Blue Marlin, the vessel that is carrying the Polar Pioneer. That restraining order was issued a few hours after the six Greenpeace protesters, who had spent nearly a week camped on Polar Pioneer, departed the traveling oil rig and returned to their own vessel.
Shell wants a more permanent injunction to keep Greenpeace USA protesters at least 1,000 meters away from all its Chukchi Sea-bound vessels, the company's representatives argued in a court hearing on Tuesday.
The standard 500-meter safety zone established by the U.S. Coast Guard, which is aimed at preventing maritime conflicts with the big oil-exploration vessels, is not sufficient when it comes to Greenpeace protests, a Shell official testified in Tuesday's court hearing.
"From our side, we see that we need to protect our assets from Greenpeace," said David George, Shell's Alaska maritime assurance manager.
But Matthew Pawa, an attorney representing Greenpeace, said an injunction of the type Shell was seeking – targeting Greenpeace USA and its associates for a buffer zone larger than that established by the Coast Guard – would violate First Amendment rights to free speech and protest.