Royal Dutch Shell (NYSE: RDS-A) is the respondent in a landmark case currently before the U.S. Supreme Court. The outcome of Kiobel v. Royal Dutch Petroleum will have significant implications for the oil and gas sector, and potentially for other extractive companies operating in sensitive regions.
This, among other factors, could signal a new era of costly corporate liability for human rights and environmental violations around the world. The days of corporate impunity are drawing to a close, and companies that hope for sustained access to critical resources must deal better with the communities where they operate. Investors would do well to pay attention.
What’s this all about, precisely?
Here are the two questions at the heart of Kiobel v. Royal Dutch Petroleum, according to the official Supreme Court docket:
Whether the issue of corporate civil tort liability under the Alien Tort Statute (“ATS”), 28 U.S.C. § 1350, is a merits question, as it has been treated by all courts prior to the decision below, or an issue of subject matter jurisdiction, as the court of appeals held for the first time.
Whether corporations are immune from tort liability for violations of the law of nations such as torture, extrajudicial executions or genocide, as the court of appeals decisions provides [sic], or if corporations may be sued in the same manner as any other private party defendant under the ATS for such egregious violations, as the Eleventh Circuit has explicitly held.
In plain English, the court is considering whether it has jurisdiction to hear lawsuits regarding international law violations on foreign soil, and whether corporations can be sued for those violations in the same way that individuals can be.
The curse of the black gold
Like many oil companies, Shell has operations in the ecologically and politically sensitive Niger River Delta. The Niger River Delta exists in a complicated landscape of political instability, ethnic conflict, extreme poverty, and rich biodiversity. Ed Kashi, a photojournalist and National Geographic contributor, says the discovery and exploitation of oil in the region has only exacerbated its problems. A common refrain is that the Niger River Delta has suffered “the curse of the black gold.” Mr. Kashi actually wrote a book with co-author Michael Watts entitled, “Curse of the Black Gold, 50 years of Oil in the Niger Delta.”
When Shell entered the region more than half a century ago, the company did little to obtain the support of the local communities. To be fair, no other companies considered local communities’ needs in their extractive projects in those days either. This is changing. In modern times, we have a concept called “social license to operate,” and it is at the heart of why Shell is now the defendant in a landmark human rights case.
Generally speaking, a company has a social license to operate when the communities its project affects accept its presence; feel that their needs and concerns have been understood and addressed; perceive that they benefit from the company’s operations in some way; and welcome the company’s continuing operations. Let’s be honest: While this is essential, it’s also incredibly difficult to achieve. Imagine trying to earn community consent when the stakes are high, and the affected parties come with widely varied concerns and agendas.
What we are seeing now, though, is that the cost of failure to obtain community consent is higher than previously understood, and may be growing considerably. This theme is turning up repeatedly around the world across various extractive sectors, from oil to mining to – most recently – agribusiness. Companies’ ability to manage this issue will increasingly affect their bottom line.
Oil spills and murdered activists
Oil has leaked from Shell’s pipelines into the ground and water of Ogoniland, the Niger River Delta region at the forefront of the Supreme Court case. Experts reviewing aerial footage of Ogoniland estimate that the spilled oil volume rivals that of the notorious Exxon Valdez spill of 1989, when 10 million gallons of oil gushed along the Alaskan coastline. Until 2011, Shell had estimated the impact at less than 40,000 gallons. While Shell now discloses spill volume in Nigeria, the company makes no public estimates of cleanup costs.
We’re talking here about numerous small spills in Ogoniland, not one massive spill as in ExxonMobil‘s (NYSE: XOM ) Valdez case. The causes vary. Shell has long asserted that the majority of spills are caused by theft and sabotage, even as it acknowledges that some are the result of operational failures, accidents, or corrosion. This strikes me as a distinction without a difference. If sabotage is at play, then it necessarily implies Shell’s failure to maintain good relations with local communities, and reveals the cost of that failure. Ultimately, the company is responsible for securing its supply chain.
The environmental devastation these spills have caused is hard to overstate. Local fisheries have been destroyed, groundwater has become unsafe to drink, communities have collapsed, and people have sunk even further into poverty. They are aware that someone is profiting handsomely from the oil on their land, but it’s not them. They are angry, and they have been for a while.
Some have turned that anger to activism. Nigeria’s first mass protest against the oil industry originated in Ogoniland with writer Ken Saro-Wiwa and his Movement for the Survival of Ogoni People. Nearly half the Ogoni population rallied in 1993 to support Saro-Wiwa’s movement. The backlash was so significant that Shell pulled out of Ogoniland in 1993, leaving behind only pipelines moving oil from other areas. That is what it looks like to lose social license to operate. It’s not good for people, and it’s not good for business.
The Nigerian government was so alarmed by Saro-Wiwa and others’ activities – and the threat they posed to oil revenues – that it arrested Saro-Wiwa and some of his colleagues and subjected them to a trial that was widely viewed as a sham. The trial concluded with the public hanging of Saro-Wiwa and eight others in 1995. The world reacted with horror, and the name Ken Saro-Wiwa has come to be synonymous with gross injustice.
Many believe that Shell was complicit in the proceedings. Shell denies this. It’s up to courts of law to settle the matter, but public perception that Shell had a hand in the activists’ murder has stubbornly endured.
Bringing us back to the present, you may have noted earlier that Ken Saro-Wiwa was among nine people executed in 1995. One of the others was named Dr. Barinem Kiobel, and his wife brought the current case against Shell all the way to the Supreme Court. The outcome is likely to be significant not just for Shell, but for all other extractive companies.
The Center for Constitutional Rights summarizes the lawsuit as seeking “… relief for crimes against humanity, including torture and extrajudicial executions, and other international law violations committed with defendants’ assistance and complicity between 1992 and 1995 against the Ogoni people.”
The Supreme Court is currently deliberating as to whether it has jurisdiction in this case, and a decision is not expected until next year.
Then there is the environmental side of things. In 2011, the United Nations Environment Programme (UNEP) released a blistering report on the damage that oil companies have done in Ogoniland, and what they must do to rectify the situation. UNEP estimates that the cleanup will take 25-30 years, and recommends that it begin with a $1 billion cleanup reserve for Ogoniland, to be funded by the government and oil companies. Shell said at the time that it would comply fully with the recommendations, but a Reuters investigation one year later found little evidence of progress.
Activists have sought legal relief in various jurisdictions. Beyond Kiobel v. Royal Dutch Petroleum in the U.S. Supreme Court, Shell has been sued in the Netherlands, the United Kingdom, and Nigeria. In October 2012, four Nigerian farmers and the Dutch arm of environmental group Friends of the Earth filed suit against Shell in a Dutch court in mid-October. The plaintiffs in that case seek compensation for damage from oil spills, as well as a thorough cleanup. It is the first time that a Dutch firm has been sued in a Dutch court over damage that took place abroad. Radio Netherlands says that a verdict in this case is expected at the end of January 2013.
Meanwhile, the British law firm of Leigh Day & Co. filed papers in March 2012 against Shell on behalf of 11,000 Nigerians of the Bodo community for compensation for oil spill damages. As in the Dutch case, Leigh Day says that this is the first time any oil company has faced a claim on U.K. soil for damage done abroad.
The Sustainable Investments Institute (Si2) conducted a recent study (link opens a PDF) attempting, among other things, to calculate a dollar amount for which corporations could be liable if they were held to account for the damage they’ve done in the broader Niger River Delta region. In the assessment, Shell would not be the only company at risk. Total (NYSE: TOT ) , Chevron (NYSE: CVX ) , and ConocoPhillips (NYSE: COP ) all have significant interests in the region. Si2 concluded that “… total liabilities, excluding punitive damages, could range anywhere from $16 to $51 billion. With punitive damages, the costs could be far higher. For several of the companies analyzed, the potential costs of addressing oil spill damage in the Niger Delta could wipe out a significant portion of annual earnings—more than 40 percent of 2011 net income in some cases.”
Those are sobering numbers. Of course, the question is whether Si2′s estimates are likely to come to fruition. I asked Peter DeSimone, Si2′s co-founder and deputy director, to offer his thoughts:
In the short term, it’s very likely that some of these potential liabilities will be realized, especially those in connection with UNEP’s proposed $1 billion cleanup and remediation fund for Ogoniland. Beyond this time horizon, it’s difficult to tell. Continued violence, community organizing, government sentiment, spill activity, and the outcomes of pending lawsuits will all be variables in determining whether potential liabilities end up on companies’ books. … The upper end of our estimates uses the UNEP Ogoniland study as a proxy for the entire region, but investors and other key stakeholders will not know the true extent of the damage until a scientific assessment is made public. One element of certainty is that international attention to this issue is growing, as is anger over the spills in Nigeria. At the same time, all of the present operators have big plans to continue to develop assets in Nigeria. If they are going to maintain their licenses to operate there, I would put my money on many of these companies increasing cleanup and remediation activities and realizing these liabilities sooner rather than later.
Chickens coming home to roost
Global momentum for greater accountability is building. No matter what you think of BP (NYSE: BP ) , the company’s proactive response to the Macondo spill drew attention to the comparatively dismal efforts of oil companies in other regions of the world. There are significant court cases playing out right now against various oil majors for poor management of their effects on the communities in which they operate. In a future article, I will cover the astonishing story of a case against Chevron for its actions in Ecuador.
Regardless of any single court decision, though, companies ignore their social licenses to operate at their own peril. You’ll note from Shell’s story that the company’s claim that much of the oil spilled in the Niger Delta was the result of sabotage. The community’s rejection of Shell is costing the company its primary resource. Consider the cost, too, of the necessary increase in security for company facilities and staff. Finally, severely eroded community relationships contribute to a real risk of resource nationalization, which can effectively sink the company’s entire investment.
Simon Billenness, president of the CSR Strategy Group and co-chair of the Business and Human Rights Group of Amnesty International USA, summed this situation up perfectly in a recent interview:
The result of Kiobel v. Royal Dutch Petroleum will have a major impact on Shell and other companies in extractive industries. Irrespective of the outcome of that one case, however, it is clear that the days of corporate impunity in remote regions of the world are coming to an end. Companies that wish to have ongoing access to critical resources will have to deal openly and fairly with the communities affected by their operations. Companies that fail to do so risk becoming shut out of opportunities to expand their reserves and increase their shareholder value.