Could Shell Become The New BP?

Cory is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Kulluk’s grounding on New Years Eve is just the latest in a string of setbacks for Royal Dutch Shell (NYSE: RDS-A)’s Arctic dream. After a disappointing summer the rig snapped its tow cables in extremely rough seas while being pulled back to Seattle for the Winter.

On November 15, 2012 BP (NYSE: BP) pleaded guilty to criminal charges stemming from the worst oil spill in US history. As a result the EPA has issued a temporary ban on BP from signing any new contracts with the US Government, in particular the US Department of Defense. In 2011 BP’s US military contracts were worth about $1.35B or about 0.35% of BP’s 2011 revenues of $386.46B. BP’s share price slipped a bit on the news, but it has already regained the loss and is at its highest level since mid-September.

Wall Street’s reaction to the EPA ban wasn’t nearly as severe as it’s response to the disaster itself. During the two months following the explosion, BP’s shares fell more than 50% as the world watched the Gulf of Mexico turn black.

Only 2 weeks after BP’s guilty plea, the Kulluk grounding couldn’t come at a worse time for Shell investors (or a better time for polar bears). Offshore drilling is risky business under any conditions. Cutting corners to improve margins can quickly lead to disaster as it did for BP, and heavy losses for stockholders. Let’s take a closer look at Shell’s recent mishaps and compare them to BP’s safety violations leading up to the Deepwater Horizon disaster. 

  • In July 2012, Shell’s oil-spill barge, called the Arctic Challenger, was cited by inspectors due to welds, structural fire-fighting capabilities and electrical system issues.
  • Also In July 2012, one of two drilling rigs, the Noble Discoverer, slipped its moorings off the coast of Dutch Harbor and drifted toward the Aleutian Islands. The situation was resolved quickly and the only damage was to Shell’s reputation.
  • In September 2012, the Arctic Challenger’s steel containment dome was “crushed like a beer can” during a test in calm waters.
  • In November the US Coast Guard discovered the Discoverer had safety management and pollution control issues. As a result it grounded the vessel.
  • Finally, on December 31, 2012, the second rig, named Kulluk, snapped its tow cables in rough weather and grounded on one of the Kodiak islands in the Alaskan Gulf.

All three of these issues occurred off the coast of Southern Alaska, not the Arctic. All five problems occurred at roughly the same latitude as the North Sea. They aren’t indications that the company isn’t Arctic ready, but rather that offshore drilling is just plain dangerous.

Now let’s take a look four key events involving BP leading up to the Deepwater Horizon disaster.

 

  • In March, 2005, 15 people died and over 170 were injured when ruthless cost cutting  at BP’s Texas City Refinery finally resulted in in a massive explosion and fire. BP was cited for over 300 safety violations at the plant that saw five different managers in the six years leading up to the accident.
  • In July, 2005, BP’s $1B production platform, called the Thunder Horse, took on so much water that it appeared to be sinking. The cause of the near sinking of the new rig was determined to be ballast system valves that allowed water to flow in when it should have flowed out.
  • In March, 2006, over 267,000 gallons of oil leaked from BP’s poorly maintained pipelines on Alaska’s North Slope.
  • In October, 2009, again at the Texas City Refinery, the US Department of Labor's Occupational Safety and Health Administration found more than 700 safety violations.

Although there are parallels, Shell’s recent mishaps aren’t nearly as severe as BP’s were leading up to the Macondo explosion and botched containment effort. Compared to BP’s dismal safety record, Shell’s recent offences seem like jaywalking on Sunday morning. Furthermore, the problems are largely isolated to Shell’s extremely old rigs crewed and managed by the Noble Corporation.

Although Shell might never be slapped with billions in fines, settlements, and lost contracts, it also won’t be the first to tap the extensive oil reserves trapped under the Arctic ice. Although not quite the Arctic, ExxonMobil (NYSE: XOM)’s $14B Hebron development off the Newfoundland coast has been given a green light and is scheduled to begin producing about 150,000 barrels of oil per day of heavy crude in 2017. Meanwhile in western Siberia, Exxon has entered into a joint venture to explore the Arctic shelf with Rosneft, Russia’s enormous state owned oil company.

So far Shell has invested an estimated $5B in its attempts to tap the Arctic. So far it hasn’t seen a penny of return on its investment. Perhaps Shell should leave frozen ocean drilling to Norway’s Statoil, who intend to enter Alaska’s Chukchi Sea in a couple years.


crenauer owns shares of ExxonMobil Corp. The Motley Fool recommends Statoil (ADR). The Motley Fool owns shares of ExxonMobil Corp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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