A Tale of Two Oil Slicks

April 13, 2012

By Alexis Flynn

On Thursday, Royal Dutch Shell announced it was investigating a potential leak in the Gulf of Mexico. On the same day, it reported a more than sevenfold increase in the amount of crude spilled over the last year in Nigeria, one of its major host countries. But only one of these events is believed to be the catalyst for investor fright.

Royal Dutch Shell shares fell around 5% at one stage Thursday after the Anglo-Dutch oil giant said it was taking a closer look at an oil sheen near two of its offshore platforms in the Gulf of Mexico. Later its shares rose and reversed most of the day’s losses after the company said the sheen didn’t stem from its two nearby platforms, and that the amount of oil was small.

Meanwhile, the company’s admission that its facilities in Nigeria spilled some 5,300 tons of crude last year — up from 700 tons the year before — didn’t seem to merit a drag on its stock.

While it would be easy to explain the apparent contradiction by pointing to investors unconcerned at the suffering of people thousands of miles away, their rationale in this case — that even one spill in the U.S. could cost billions while many spills in Nigeria probably won’t — is hard to fault.

There are many reasons why this is the case. The U.S. is a cohesive, functioning state, while Nigeria is beset by widespread corruption and inefficiency. The U.S. also boasts one of the strictest regulatory regimes in the world when it comes to offshore drilling, while Nigeria does not.

Shell executives and investors needn’t look far to see the consequences of an error in U.S. waters. BP shareholders are still counting the costs of the Deepwater Horizon disaster, when an explosion on a drilling rig leased by the U.K. firm killed 11 and set off the worst offshore oil spill in U.S. history. And with Shell still waiting on drilling permits before it can begin exploration work in Alaska’s Beaufort Sea, the company is not in the mood to run afoul of U.S. authorities.

In contrast, the cost of spilling oil in Nigeria may be a stain on the company’s reputation but not on its purse strings. Although the company faces a number of lawsuits from local communities, two of which were filed last month in Port Harcourt and London, Shell said in its most recent annual report that although the “various environmental and contractual disputes” it faces in Nigeria “could be seen as material” if taken together, “these matters are not expected to have a material impact on Shell.”

Thursday’s spill disclosure, contained in Shell’s 2011 Sustainability Report (PDF), also showed that the number of onshore Nigeria operational oil spills increased to 63 in 2011, up from 32 the previous year. Operational spills are characterized as those related to equipment failures or accidents. The company attributed the higher number of onshore spills to more pipelines being put back into operation, as an improved security situation allowed its workers easier access to facilities.

Shell’s local Nigerian onshore unit, the Shell Petroleum Development Co., says it cleans up “all spills in the Niger Delta when they occur, as fast as possible, no matter what their cause.”

A United Nations report last year — funded by Shell — concluded that at least $1 billion would still be needed to clean up the severely polluted Ogoniland region of the Niger Delta in a process that could last up to 30 years. However, activist rights groups Amnesty International and the Centre for Environment, Human Rights and Development have said the lack of an effective regulator to oversee the local oil industry means companies aren’t under pressure to act.

The extent to which Nigeria remains Shell’s environmental weak link is starkly illustrated in a table at the end of its sustainability report: Of the total volume of oil spilled as a result of operational issues from Shell’s global facilities last year, around 87% was in the West African country. A pipeline leak at its Gannet Alpha platform in the U.K. North Sea, the country’s worst in the decade, accounted for much of the remaining oil spilled.

The unfortunate reality is that this dynamic is unlikely to change any time soon, certainly not until all Nigerian stakeholders, including the government and regulators, better police the local oil industry. While Shell’s impending annual general meeting is expected to feature a host of activists questioning the firm’s top management on their oil spill track record, it is unlikely that their top institutional shareholders will be following suit.

Corrections & Amplifications:

Of the total volume of oil spilled as a result of operational issues from Shell’s global facilities last year, around 87% was in Nigeria. A previous version of this article incorrectly implied that 87% of all spills occurred in the West African country.

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