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What should frighten stiff Royal Dutch Shell shareholders

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By John Donovan

Any Shell shareholders diligent enough to wade through all the small print in the recently released Shell Strategic Report have grounds to shudder at the confirmation buried on page 8 that Royal Dutch Shell PLC mainly self insures its risk exposures. This information should be prominently displayed in large red text, flashing if that was possible.

The relevant section even cites the BP Deepwater disaster for which BP had no external insurance. As a consequence, one of the worlds biggest companies was brought to the edge of bankruptcy by just one calamitous event.

Why didn’t BP have contingency insurance? Why does Shell have to self-insure?

Simply because the risks are so humungous that it is impossible or too expensive to do otherwise.

Once upon a time, my company used to create and supply promotional games to Shell.We were able to insure against prize over-redemption – the risk that due to printers error or negligence on our part, more prizes were printed and claimed than was catered for in the prize fund. A Noughts and Crosses games themed game run by Esso/Exxon had to be cancelled on the second day when the company was swamped by claims for the £100,000 top prizes, when only a small number should have been printed. Contingency Insurance costs on our games were minimized by our no claims record. It was even possible to obtain Celebrity Death, Disablement and Disgrace contingency insurance when we built a promotional game around a popular UK TV celebrity, Bruce Forsyth. Celebrities have been known to insure body parts for up to $1 billion.

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Bruce is still alive and kicking almost 30 years later.

So its possible to obtain contingency insurance against every conceivable quantifiable risk.

The fact that the risks involved in Shell’s activities are so great and unquantifiable that Shell has to self-insure, speaks volumes.

That’s a risk too far even for Lloyd’s of London underwriters.

What should give shareholders even greater cause for concern is that it means there is no independent insurance expert scrutinising what Shell is doing.

Shareholder funds are being placed at risk when insurers will not provide cover at any affordable price.

Is it safe to trust Shell senior management to self-insure?

Ask the US authorities about Shell’s recent Alaskan debacle, when almost everything that could go wrong did go wrong.

Screen Shot 2013-10-21 at 09.32.45Shell is currently placing a multi-billion dollar bet on the Prelude FLNG project. We have published information and evidence from a Prelude insider and an expert analysis from Bill Campbell, the retired HSE Group Auditor of Shell International that would cause great concern to the project insurers, if Shell had any.

It probably doesn’t, because the risks are almost certainly too great to obtain cover.

SHELL SHAREHOLDERS BE WARNED.

Extract from Page 08 of SHELL STRATEGIC REPORT 2013

Shell mainly self-insures its risk exposures.

Shell insurance subsidiaries provide insurance coverage to Shell entities, generally up to $1.15 billion per event and usually limited to Shell’s percentage interest in the relevant entity. The type and extent of the coverage provided is equal to that which is otherwise commercially available in the third-party  insurance market. While from time to time the insurance subsidiaries may seek reinsurance for some of their risk exposures, such reinsurance would not provide any material coverage in the event of an incident like BP Deepwater Horizon. Similarly, in the event of a material environmental incident, there would be no material proceeds available from third-party insurance companies to meet Shell’s obligations.

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