Will this Oil Spill End Up Costing Shell Big?

Source: http://www.flickr.com/photos/ollesvensson/

Source: http://www.flickr.com/photos/ollesvensson/

In 2008, a pipeline in the Niger Delta owned by Royal Dutch Shell (NYSE:RDSA)(NYSE:RDSB) burst and spilled 1,640 barrels of oil over a 72-day period, according to Shell’s official investigation. Ogoniland, where the oil spilled, is in the southeastern part of a delta on Africa’s Gulf of Guinea and is home to a fishing community of up to 31,000.

The amount of oil spilled in 2008 — just one of many major spills in the Niger Delta over the past several years — is a contested issue. Accufacts Inc., a U.S.-based research company, determined that between 1,440 barrels and 4,320 barrels flooded into the area around the community, centered in the town of Bodo, Nigeria. A separate report claims that real amount is between 103,000 barrels and 311,000 barrels.

“The difference is staggering,” commented Audrey Gaughran, director of global issues at Amnesty International, “even using the lower end of the Accufacts estimate, the volume of oil spilt at Bodo was more than 60 times the volume Shell has repeatedly claimed leaked.”

While the size of the spill has never been agreed upon by opposing parties, lawyers from Shell and representatives of the affected community are — five years after the fact — finally sitting down to meet in Port Harcourt, the capital of Nigeria’s Rivers region. As many as 15,000 residents are seeking millions of dollars in damages from the company.

The case has received a fair share of media attention and — as is often the case in similar situations — the more attention the situation receives, the higher the stakes become. A London law firm representing the Nigerians suggests that the actual size of the spill may be upwards of 600,000 barrels, enormously different from the 1,640-barrel estimate provided by Shell.

Shell has admitted liability for the spills but contests the amount of oil that was leaked and the extent of the damage. Both are hard to quantify, but depending on the ruling, the determination could result in a difference of millions or hundreds of dollars. The environmental arm of the United Nations has suggested that total restoration could take 30 years and cost $1 billion.

According to The Guardian, Shell is thought to be offering about $20 million in compensation, while the villagers are looking for closer to $200 million.

According to the U.K. newspaper, in a response to the UN investigation into the issue, Mutiu Sunmonu, the managing director of the Shell Petroleum Development Co. of Nigeria, commented:

“All oil spills are bad — bad for local communities, bad for the environment, bad for Nigeria and bad for [the company]. Although we haven’t produced oil in Ogoniland since 1993 we clean up all spills from our facilities, whatever the cause, and restore the land to its original state. The majority of oil spills in Nigeria are caused by sabotage, theft and illegal refining. We urge the Nigerian authorities to do all they can to curb such activity, and we will continue working with our partners in Nigeria, including the government, to solve these problems and on the next steps to help clean up Ogoniland.”

The Shell Petroleum Development Co. operates via a partnership with the Nigerian government and is the largest oil operator in the region. Reports indicate that Shell has exported more than $46 billion worth of oil from the country, although drilling in the region was halted in the 1990s due to violations of pollution laws.

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