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Discussing the costs of disaster for offshore US oil : Regulation and Environment

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Screen Shot 2015-08-28 at 08.10.57In this week’s Oilgram News column, Regulation and Environment, Gary Gentile asks if the risks associated with ultra-deepwater oil production endeavors are properly disclosed to shareholders.

By Gary Gentile | August 31, 2015

Opponents of offshore drilling in frontier environments, such as the Arctic, have opened up a new front in their effort to curtail such efforts — asking US financial regulators to require more robust disclosure of the risks involved.

A group of Democrats in the US Congress have asked the Securities and Exchange Commission to force companies to tell investors the cost of a catastrophic accident resulting from drilling in ultra-deepwaters or in the harsh and remote waters off the coast of Alaska.

And the environmental group Oceana wants the SEC to investigate whether Shell has been sufficiently forthcoming to investors in estimating the enormous costs of a massive spill along the lines of the 2010 Deepwater Horizon tragedy.

The letter from a dozen US senators makes no bones about them being anti-offshore drilling. The letter from three House members is less pointed, but equally forceful in suggesting that companies active in the Arctic are not being forthcoming enough about the risks involved.

Both letters, plus the detailed petition filed by Oceana, cite the approval of permits for Shell to drill offshore Alaska as an example of how current laws fall short on requiring full disclosure of risk.

“Full disclosure of financial risk is necessary to protect investors by enabling them to make more informed investment decisions,” the letter form the House members states.

Shell, which has filed detailed spill response plans and has equipment on hand to immediately respond to any spill, defended the adequacy of its financial disclosure.

“We remain satisfied with our 20-f disclosure as it complies with all SEC legal requirements,” Shell spokesman Curtis Smith said. “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.”

An argument can be made that regulations governing the disclosure and balancing of risk and reward have not kept pace with the industry’s ability to find and produce oil and gas in areas unreachable only 20 or 30 years ago.

The Outer Continental Shelf Lands Act (OCSLA) was overhauled in the late 1970s to require “expeditious and orderly development [of OCS resources], subject to environmental safeguards, in a manner which is consistent with the maintenance of competition and other national needs. …”

The vagueness of that balancing requirement has led to a wide interpretation by various administrations.

The final five-year leasing plan approved by the George W. Bush administration in 2008 included an aggressive schedule of lease sales off the coasts of California, Virginia and Florida, in addition to sales offshore Alaska.

In response to a successful court challenge, the Obama administration revised that plan, stripping it of the California and Florida sales. Obama later put environmentally sensitive areas offshore Alaska, such as Bristol Bay, off limits for future leasing.

But OCSLA demands development and the current administration has issued permits for Shell to drill in the Chukchi and Beaufort Seas, accepting assurances that the proper safeguards exist to prevent or respond to a major spill.

That doesn’t sit well with environmentalists, who argue that OCSLA’s murky balancing language isn’t sufficient to deal with the risks that accompany today’s sophisticated drilling technology.

“The law and the regulations haven’t kept up with the nature of the risk,” said Oceana Pacific Senior Counsel Michael LeVine. “Part of the argument we have had with the Department of Interior is that they have not properly balanced the risks and potential benefits.”

And so, if one agency’s hands are tied by outdated laws, then maybe another agency can be coaxed into action.

The analogy that comes to mind is that of Prohibition-era gangster Al Capone. The FBI could not make bootlegging charges against Capone stick. But the IRS was able to bring him down by charging him with evading taxes on his ill-gotten gains.

That is not an apt analogy, Oceana’s LeVine argues.

“This is not a back door way to stop drilling,” he said. “Investors should care about the risks that Shell is taking and should be provided information about it. Certainly we hope that different decisions are made.”

A different analogy would be to the Ford Pinto, the car with the gas tank positioned dangerously close to the rear bumper, making it prone to explosions in collisions.

It turns out Ford knew the risks, but decided it was cheaper to settle lawsuits than fix the cars.

If they had disclosed those risks in advance to shareholders, would the Pinto ever have been made? — Gary Gentile

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