Today, a Dutch court delivered a judgment finding Shell's (NYSE:RDS-A) Nigerian subsidiary partly liable for environmental and social damage its operations have caused in Nigeria. The result – while qualified – has potentially significant implications for Shell, as well as other extractive companies operating in sensitive areas around the world. With a ruling due this spring in a similar case before the U.S. Supreme Court, investors should consider integrating such factors into their stock analysis.
Black gold in the Niger River Delta
Shell and other oil majors have long and troubled histories in the Niger River Delta of West Africa. Oil exploration has strafed large swathes of the area, compromising water tables, devastating fisheries, and undermining livelihoods.
The local population largely blames Shell for poor maintenance of its infrastructure. Shell says the leakage is almost entirely due to sabotage. I would suggest that even if sabotage is the primary cause, it surely demonstrates that Shell has not nurtured its relationship with local communities and, as a result, the company is losing a resource -- leaked oil -- and spending money in court that could have been put to better use.
The court ruling seems to agree with me on the subject of sabotage:
Shell Nigeria should and could have prevented this sabotage in an easy way. This is why the district court has sentenced Shell Nigeria to pay damages to the Nigerian plaintiff .
For a full history of Shell's activities and missteps in the region, please read my free article, "Shell, the Supreme Court, and Corporate Liability."
No clear winner
Four Nigerian fishermen and farmers, and the Dutch arm of activist group Friends of the Earth, filed the suit in 2008 in the Netherlands, the home of Shell's global headquarters, seeking reparations for lost income from oil-contaminated land and watersheds. Activists saw the case as a test for whether the world would start holding multinationals accountable for the behavior of their foreign subsidiaries, in this case, Shell Nigeria.
The outcome in this case was mixed. The court ordered Shell Nigeria to pay unspecified damages to one farmer, but dismissed the other four claims. Shell declared itself happy with the verdict , which exonerated the parent company, while holding the subsidiary liable . However, a blog posting today from the Dutch arm of Friends of the Earth declared the ruling "a very important victory indeed ." Objectively, it appears the case does not set a clear precedent either way, but it does further weaken Shell's lame assertion of helplessness in the face of "sabotage."
According to a Reuters report, Menno Kamminga, professor of international law at Maastricht University, said the ruling could open the door for other Nigerians who claim losses resulting from Shell's operations to file lawsuits in the Netherlands. "The fact that a subsidiary has been held responsible by a Dutch court is new and opens new avenues," he said. The court did not just examine the parent company's liability, but also considered "abuses committed by Shell Nigeria, where the link with the Netherlands is extremely limited," he said. "That's a real breakthrough."
Next up will be the U.S. Supreme Court decision that is due sometime this spring. Analysts agree that the outcome of Kiobel v. Royal Dutch Petroleum will have implications not just for Shell, but also for all multinationals with operations in sensitive regions of the world where human rights violations are prevalent .
Shell is not the only company with a serious interest in the Niger River Delta. Total (NYSE:TOT), Chevron (NYSE:CVX), and ConocoPhillips (NYSE:COP) all have a significant presence there, as well, and studies have found that they have also contributed to the kind of pollution that is at issue in the Kiobel case. The Sustainable Investments Institute (Si2) conducted a recent study attempting to calculate a dollar amount for which corporations – explicitly including Total, Chevron, and ConocoPhillips – could be liable if they were held to account for the damage they've done in the broader Niger River Delta 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.
Chevron is currently engaged in a landmark legal battle, as well. The company is facing an unprecedented judgment against it in Ecuador to the tune of nearly $19 billion, for widespread pollution of the Ecuadorian rainforest. Shockingly, in the face of its own shareholders' calls for increased accountability, Chevron is pursuing a strategy of legal action against these shareholders .
This is a complex topic, and no single court case or shareholder campaign will decide its outcome. What does seem increasingly clear, though, is that companies operating in sensitive regions could save both money and brand by maintaining good relationships with the communities their activities affect. Investors should consider assessing things like outstanding court cases, environmental damage claims, and corporate reputation in sensitive regions when they analyze extractive stocks. I'll be writing much more on this theme in the weeks and months to come.