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The Arctic

To drill or not to drill?

Home / Hermes EOS Blog / The Arctic – To drill or not to drill?

Alaska is more than twice the size of Texas, making it the biggest state in the US. Its population, however, is just 700,000. As we flew to Barrow in the Arctic Circle these facts came to life as very quickly any sign of human activity disappeared out of the window, leaving just mountains and eventually, bleak, flat, treeless tundra.

Fragile wilderness
This was the first lesson of our trip to visit Shell in Alaska. Sitting at a desk one can intellectualise over the challenges that the remoteness of the Arctic presents to oil and gas exploration and production but until you see and feel the emptiness of the state you do not realise what this really entails.

Above all, however, it is its unspoilt beauty that lingers in the mind. This only serves to reinforce the major interlinked concerns of offshore oil and gas activity in the region: the risk of an oil spill, the difficulty of cleaning it up in one of the last great wildernesses of the world, and the effect of any pollution on the fragile ecosystem, including the hunting activities of the local native population that relies on whaling and the hunting of other Arctic animals for protein.

Addressing concerns
Shell sought to address these concerns by inviting a small group of investors to meet its Alaskan management, leadership representatives of native Alaskans from Barrow, the nearest settlement to its proposed offshore activity, and from across Alaska, as well as other stakeholders including Superior Energy Services, the contractor responsible for Arctic Containment Services, a company that plays a crucial role in Shell’s multi-layered spill response plan.

The leadership of its Alaskan project, almost all replaced since Shell’s problematic Arctic drilling campaign in 2012, appeared to be handpicked from across Shell globally. An important addition is a former US Navy Admiral who is responsible for the complex logistics. Importantly, the company has worked hard on feedback from its workers that fresh food and regular rotation back to shore are vital for morale and therefore health and safety.

Shell described the spill prevention equipment it will deploy during drilling on vessels in the vicinity of the operation to reduce emergency response times. It has a capping stack should the blowout preventer fail, which is the equipment that ultimately stopped BP’s Gulf of Mexico  spill. Booms and dispersants, as well as a containment dome, will help clean up any spill. This is an additional layer of response not present at conventional drilling sites. Furthermore, there is a second rig, capable of drilling a relief well, and a tanker to collect any spillage. Shell prides itself in its ability to solve technical challenges and its plans and management team seem stronger than during its 2012 campaign.

Listening to the community
Leadership representatives of the native Alaskans we met  included elders who had negotiated the historic land settlement with the US Government in 1972. Of course they were handpicked by Shell, but their full support for the development of the Arctic was nevertheless striking, as was their wish that it is Shell that conducts it. These leaders see this development as the only way to maintain their communities’ living standards and basic amenities such as electricity, sanitation, television and telecommunications. But as one leader pointed out, there is a complete spectrum of opinion in Barrow. Another described how Shell had listened intently to her community’s concerns and when we asked what Shell should do more of, she replied: “Listen.”

Make or break
Our clients and their beneficiaries have expressed deep concern about oil and gas development in the Arctic. It is to Shell’s credit that it arranged this visit and that its management team was prepared to spend time with us as it gears up for the most important project in its recent history. If the company experiences problems this year, it will not have another chance. We believe Shell is considerably better prepared than it was in 2012. But we expect it to continue to communicate transparently and seek further ways to improve safety and reduce risk. We also plan to discuss Shell’s plans with native Alaskans opposing its operations. We understand that until technology advances, ideally hastened by meaningful carbon regulation, and our dependency on fossil fuels declines, Shell and other oil majors are under pressure to seek out new assets. We continue to look for evidence and commitment that they are exploited as carefully as possible.

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Tim Goodman Tim Goodman is a director at Hermes EOS and sector lead for oil and gas. He is also responsible for Hermes EOS’ activities in North America. Previously, he worked in the insurance industry and held a number of senior operational management roles before acting as a company secretary in a UK-listed company. He is a member of the Institute of Chartered Secretaries and Administrators, having obtained the institute prize for the best overall performance when he qualified. Tim is a regular speaker on governance-related matters, a member of the US Council of Institutional Investors’ corporate governance advisory council and a former chair of the UK Quoted Companies Alliance corporate governance committee.
Read all articles by Tim Goodman

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