Is Shell really Arctic ready?
Nick Butler | Jan 14 2013 14:59 | 10 | Share

Shell's drilling barge the Kulluk. Getty Images
There are two important lessons from the mounting problems facing Shell as a result of the series of accidents that have afflicted its drilling programme in the Arctic.
The first is that major companies must have the capacity to call a halt and to break the inexorable internal momentum that so often makes it impossible to stop projects once they have started. The ability to reconsider is a great sign of strength not weakness.
The second is that a company such as Shell, which prides itself (rightly) on its environmental performance, is only as good as its weakest contractor.
A series of relatively small problems have now brought Shell’s Arctic drilling programme to a halt. The latest incident in which a drilling ship that had been working in the Beaufort Sea was grounded at Sitkalidak as it was being moved south has led to a full review of the whole programme by the US Interior Department. There are demands for a full scale Congressional inquiry. The damaged rig, one of the few specially equipped to work in the Arctic – will not be easy to replace in time for the next drilling season.
None of the incidents has actually caused a significant environmental problem, which is why I use the words “relatively small”. But the Arctic is different. The area is stunning and within easy reach of the US news media. If a spill did occur, the risks are enormous. Lloyd’s of London put it: “Cleaning up any spill in the Arctic, particularly in ice-covered areas, would present multiple obstacles, which together constitute a unique and hard to manage risk.” When television news shows, the daily papers and well read magazines start running sequences of stories against a company, the physical risk is compounded by reputational damage. Even the Fox News channel, not normally hostile to the industry, is reporting the incident as the latest in a disastrous series of mishaps. Shell has not even managed to convincingly dismiss the suggestion that the rig was being moved for tax reasons.
When BP had its far more serious problems in the Gulf of Mexico, President Obama rechristened the company British Petroleum. Shell should be prepared for him to start calling it “Royal Dutch”.
The challenge is compounded by the fact that Shell has contracted out the drilling work to a US company called Noble. This sort of outsourcing is standard practice and no doubt at the margin saves a little money. But as the company is now finding you cannot contract out the reputation risk when things go wrong. Neither the media nor would-be claimants focus on contractors who have minimal capital and no name to protect when it is easier to embarrass and extract cash from a company that cares about its global brand.
To date, Shell has spent something close to $5bn on the Arctic project with no clear results. There is certainly a belief in the industry that the area contains significant and perhaps enormous resources. But Shell is beginning to look rather isolated in persisting with drilling. BP, Total and Statoil have all decided the risks are too great. BP has withdrawn its bid to drill and Statoil has suspended its plans. These are not trivial companies that take such decisions lightly.
Reconsideration would be the prudent step. This is not a matter of money of course. Shell can easily afford another $5bn. But is it in control of the risks it now faces? The evidence of this incident and all the others is that it is not. The question is whether Shell, which has proclaimed in an ill-considered advertising campaign that it is “Arctic Ready “, is ready to step back.
In the old days, the core of the powerful men in Shell – all Dutch of course – would have been convened at Wassenaar, the elite Dutch country club outside the Hague, by Aad Jacobs – the legendary chairman of Shell’s former supervisory committee. A quiet decision would have been taken in the interests of the company – and the country.
Shell is now a little more international (though there are still five Dutchmen out of 14 on the board). There is a more formal governance process with board committees, commitments to transparency and so on. Visibility and scrutiny, however, do not always make decision making easier. They can make it harder to admit a mistake, especially for the senior executives involved. It will be fascinating now to see if Shell still has the character to take the right decision.

Can Shell keep the benefit of the doubt?
Nick Butler | Jul 16 2013 07:00 | 1 | ShareFinancial Times

Congratulations to Ben van Beurden, the new chief executive of Shell. We are moving into a period when gas is the dominant fuel and Mr van Beurden has great experience in that area, particularly in liquefied natural gas. He is also Dutch which is a good reminder that despite everything Shell has not lost its nationality, after all. The candidates who lost will all soon find alternative jobs. Shell is now the great training ground and there is a shortage of talent at the top level in the international energy business. Mr van Beurden meantime will have to focus on Shell’s big problems, of which I will focus on three.
The first, and perhaps most soluble, is Shell’s excessive appetite for capital which leaves investors unhappy. For a company doing so well total shareholder return is mediocre. Over the year the share price is flat, which means 15 per cent down on the trend of the FTSE 100 index.
There are signs, picked up in a very interesting analysts’ report last week by Morgan Stanley, that companies are recognising the problem and rebasing the business – reducing the amount of capital employed by selling minority stakes to eager Asian investors, and slowing the pace and sequencing of new projects. If that is right then I agree with Morgan Stanley’s prediction that much of the sector is due for a re-rating after falling so much against the market over the past two years.
The second and much less tractable problem is Nigeria. A senior Shell executive told me a decade ago that Nigeria was a running sore for the company. For Shell’s sake it is a good job that so few media organisations or non-government organisations have the capacity to cover what is happening in the Niger delta on a regular basis. Shell spends a lot of time and effort trying to improve things but frankly things have not improved. Violence, theft and death are all the norm, month after month. Shell’s strategy now is not absolutely clear. It deplores what is happening quite openly. Its website clearly acknowledges the problem.
But Shell has produced about 970,000 barrels of oil and gas from the country and has made ten of billions of dollars in profit over the years. Some minor assets are for sale. But there is no sign of an exit, which in any case would achieve very little. The implication is that the company has run out of ideas and believes that all it can do is to distance itself from the reality on the ground.
On both shareholder concerns and Nigeria, Shell has the benefit of the doubt. In a sector where few issues are matters of black and white, right or wrong, it matters enormously that a company is basically trusted to do its best.
The third issue is Alaska. There the company has lost the benefit of the doubt. Shell has wasted some $6bn drilling in the Gulf of Alaska, so far with no real results. Now the issue has come to dominate the brand image of the company after the Greenpeace ascent of the Shard building in London. One does not have to be a hardline Greenpeace supporter to admire the nerve of the young women who made the climb.
Of course it was a stunt – campaigning is about stunts. But this was a stunt with great style that worked not just because it was instantly visual on television and computer screens around the world but also because it focused attention on the underlying question – why is Shell drilling in the Arctic Circle? There is no shortage of oil and gas elsewhere and Shell is holding reserves of 14bn barrels plus extensive quantities of resources not yet booked. Exploration and production in the Arctic are very expensive. There are genuine risks that don’t exist even in the Gulf of Mexico. Shell’s only answer is that the volumes available could be huge but is the company so desperate that this is its only way forward?
Shell is a very decent company. No one who meets its leaders could possibly accuse people such as Sir Mark Moody-Stuart, the former chief executive, or Jorma Ollila, the current chairman, of being hard faced or environmentally illiterate. But to claim that Shell is “Arctic ready” – the tag line of a particular stupid public relations campaign – was ludicrous. To allow Shell’s reputation – so carefully and expensively built up over decades since the errors of Henri Deterding – to be destroyed in this way is a heroic failure of judgment.
Mr van Beurden is new to the Shell executive committee. He was not party to the previous gung-ho decisions to keep drilling in the Arctic despite one technical failure after another. I hope he has the nerve to use his new authority to call a halt and to impose common sense. If he does that he will have a lot of support, inside the company and beyond.

Brics: risky businesses
Dec 12, 2012 5:34pm by Avantika Chilkoti

What price a reputation? Earning a good one takes time. Losing it can take a moment. So some of the biggest companies based in Brazil, Russia, India and China may not be pleased to read a report issued this week by RepRisk, a consultancy that calls itself “the leading provider of business intelligence on environmental, social and governance (ESG) risks”.
RepRisk generates a RepRisk Index by compiling “facts, criticism and controversies” gathered from NGOs, academics, media, politicians, regulators and communities. In BRIC Report – The Most Controversial Companies in Brazil, Russia, India and China, it identifies three companies in each Bric country with the highest Peak RepRisk Index (Peak RRI), an indicator of the highest level of criticism a company has faced over the past two years. Scored between 0 and 100, any company rated above 50 is considered high risk.
The three Russian companies mentioned are all in the oil and gas sector, with environmental disputes responsible for much of the risk. Gazprom scored 60 on the back of its majority stake in the contentious Nord Stream Pipeline and an EU antitrust case. Femco Group, which specialises in transporting vessels for the development of offshore oil and gas fields, scored 50 after reports that one of its ships carried military equipment destined for the Assad regime.
The three worst ranking Brazilian companies are also in natural resources. Petrobras, which has faced criticism for a series of oil spills and tax issues, scores 55. Mining giant Vale, which has faced protests against its operations in Brazil, Canada, Colombia, Guinea, Indonesia and Mozambique in the past year, has a Peak RRI score of 66. The company has teamed up with Norte Energia – also in Brazil’s top three with a Peak RRI of 43 – to work on the Belo Monte dam on Brazil’s Xingu River, the most controversial project on the RepRisk database.
India’s top three all score less than 50. Maruti Suzuki has a Peak RRI of 49 after riots at its Manesar plant earlier this year. Vizag Steel’s Visakhapatnam Steel Plant attracted controversy after a fatal blast this June, bringing the company’s Peak RRI to 40. And Coastal Gujarat’s problematic Tata Mundra plant drags its Peak RRI score to 46.
In China, HEG Electronics, China National Petroleum Corporation and Riteng Computer Accessory Co, a supplier to Apple, had the three highest scores. Anna Tuson, senior analyst at RepRisk, told beyondbrics that in China, “there is a larger group of companies considered high risk according to the RRI, so while the top three showed significant risk, this appears to be more of a norm in this region, with a number of companies on the ESG risk radar”.
Says Tuson: “Countries such as Indonesia and Mexico also attract a lot of criticism – the former in relation to rainforest destruction, palm oil production and illegal logging, while the latter tends to be linked to controversies involving corruption and impacts on indigenous people as well as environmental issues. Turkey and South Korea, on the other hand, are ranked considerably low in terms of public criticism.”
RepRisk’s clients are mostly banks and institutional investors, with a smattering of multinational companies – though a glance at its website suggests they do not include any companies mentioned in this report. Maybe this is a sales pitch.