Environmental Audit CommitteeWritten evidence submitted by Shell International Ltd

Thank you for your letter dated 13 June, 2013 in which you requested Shell to address written questions to inform the work of the Committee. We understand that this will form part of an additional evidence-gathering exercise with respect to the EAC’s Protecting the Arctic Report of September 2012.

With respect to the Kulluk investigation by the US Coast Guard (USCG), the outcome of the review remains pending and it is unlikely that it will be concluded prior to the summer Parliamentary recess. There are also a number of activities currently underway with the US Department of the Interior (DOI), including discussions concerning its recent report on Shell’s 2012 programme and the development of additional regulations. Given this, Shell is constrained in its ability to provide oral evidence to the committee prior to the Parliamentary recess in July. Recognising the Committee’s desire for this evidence, Shell respectfully proposes that it provide further oral testimony as soon as practicable after the USCG’s investigation has been formally concluded.

In the interim, we respectfully offer the following written submission with respect to the questions raised in your letter of 13 June, 2013.

Why did Shell announce that it was “pausing” its Arctic drilling programme?

As mentioned in our stock exchange release, additional time is required to ensure that we have the necessary assets in place for the programme.

We consider Alaska to be a long-term project and think about the entirety of the project rather than a single specific season. Production from Alaska is not expected until the middle of the next decade. Alaska is just one part of Shell’s exploration programme. In 2013 we will be drilling in 18 other oil and gas basins around the world.

What reassessment of the risks associated with drilling in the Arctic will Shell undertake before operations are re-commenced?

Shell successfully and safely conducted drilling operations in both the Chukchi and Beaufort Seas in 2012. Our goal is always to have flawless operations; and we undertook significant planning and preparations to achieve that goal. As part of Shell’s normal operating processes, Shell assesses and reassesses risks associated with all of its operations. In addition to Shell’s own processes, certain aspects of the 2012 season have been reviewed by the DOI. The US Coast Guard is also reviewing the post-season transit incident involving the Kulluk. All of this information will be considered as we prepare for future operations.

When do Shell’s exploration licenses off Alaska expire?

Shell owns or has interest in 275 Chukchi Sea leases and 138 leases in the Beaufort Sea. The expiration of these leases currently falls between 2013 and 2019.

Why did Shell continue to pursue regulatory approval for its spill response equipment some time after the permitted drilling window had commenced, and why was an extension to this safe drilling window sought?

Shell’s Oil Spill Response Plans (collectively, OSRP) were approved by the US Bureau of Safety and Environmental Enforcement (BSEE) on February 17, 2012 and March 28, 2012, in advance of the operating season. To the extent this question refers to Shell’s Arctic Containment System (ACS), US Federal regulations do not currently require use of a containment system for the Alaska drilling programme outlined by Shell. Therefore, the ACS is not required oil spill response equipment; rather it is considered fourth level source control equipment. Shell voluntarily exceeded regulatory requirements by agreeing to put the ACS in theatre during drilling into hydrocarbon-bearing zones. No single company operating anywhere in the US Outer Continental Shelf has ever made such a commitment.

At all times during the design, engineering, construction and testing of the ACS—a system never built before—the focus was on ensuring the safe completion of a sound system. Because the ACS was not completed before the 2012 drilling season, Shell and the DOI agreed that drilling operations would be limited to topholes in 2012. Topholes are defined as the shallow portion of the well, not containing hydrocarbons.

The ACS has now been classified by the American Bureau of Shipping and certified by the USCG. Following certification, the ACS dome was successfully deployed for BSEE officials. Shell did not seek to drill after ice came into the Chukchi Sea. Rather, Shell was looking to identify the actual ice incursion date. Weather predictions of any kind, done months or weeks in advance offer a range of possibilities. In August 2012, the Chukchi Sea ice projections showed that ice incursion had a strong possibility of occurring after 1 November. By its nature, weather and ice forecasting is a fluid activity and becomes more certain as the lead time is reduced. Therefore, as the date approached, the window of possibilities coalesced around 1 November.

Shell unveiled a 6% fall in profits for 2012 in January. To what extent did Shell’s investment in the Arctic contribute to that result?

The drop in profits was due to a number of factors, predominantly the Upstream Americas business due to lower Henry Hub prices through our onshore gas unit and reduced heavy oil margins due to the high discount for Western Canadian heavy crudes compared to West Texas Intermediate and Brent. In our Alaska programme, we spent about $1 billion in 2012, however most of this was capitalised as we did productive work (drilling top holes) and did not go through the Profit and Loss accounts.

The US Review of Shell’s 2012 Alaska offshore oil and gas exploration programme levels some criticisms at Shell. Which of those criticisms does Shell not accept, and why?

Shell endeavours to incorporate lessons learned in the course of all its operations. Identification and implementation of lessons learnt is a continuous process. The report identified seven key principles and prerequisites for safe and responsible offshore exploration drilling in the Alaskan Arctic—five apply to industry and two relate to government oversight.

1.All phases of an offshore Arctic programme—including preparations, drilling, maritime and emergency response operations—must be integrated and subject to strong operator management and government oversight.

2.Arctic offshore operations must be well-planned, fully ready and have clear objectives in advance of the drilling season.

3.Operators must maintain strong, direct management and oversight of their contractors.

4.Operators must understand and plan for the variability and challenges of Alaskan conditions.

5.Respect for and coordination with local communities.

6.Continued strong coordination across government agencies is essential.

7.Industry and government must develop an Arctic-specific model for offshore oil and gas exploration in Alaska.

Two specific recommended undertakings for Shell were made: 1) Shell should develop and submit to the DOI a comprehensive and integrated operational plan describing in detail its future drilling programme. 2) Shell should commission and complete a full third-party audit of its management systems.

Shell is in continuous contact with the DOI and will incorporate improvements as appropriate.

It is also important to note that the report indicated that Shell performed well with respect to: (1) safely drilling two top holes without any significant injuries to workers or spills, (2) employing a weather forecasting and ice management system that enabled it to respond effectively to changing sea conditions, and (3) coordination with Alaska Native communities and subsistence hunters.

What steps are Shell taking to address the findings and recommendations of that US review?

Shell is in discussions with the Department of Interior about the findings and recommendations to fully understand appropriate next steps. We are also closely engaged on the Department of the Interior’s initiative to develop Arctic operating regulations.

Which of these are Shell legally bound to take before it re-commences operations in the Arctic?

While Shell does not believe the recommendations are legally required, DOI is currently reviewing its regulatory regime for offshore Alaska and Shell will comply with any additional legal requirements as well as its own internal standards and commitments.

What is Shell’s view on the Arctic Council’s agreement on “cooperation on marine oil pollution, preparedness and response in the Arctic”?

The Arctic Council is well placed to convene and discuss issues of interest and concern to all Arctic nations. Any agreements, reports, instruments and other materials produced by the Arctic Council should be based on robustly peer-reviewed science.

Shell is committed to safe and responsible development of the Arctic region and believes it can contribute expertise and technical experience to these discussions. Shell supports joint industry projects on oil spill response research and technology, which can further help to inform the development of the next phase of Arctic Council activities around oil spill response (OSR).

To what extent does Shell support resource sharing and mutual aid agreements between oil companies operating in the Arctic as a way of ensuring that adequate emergency response resources are available, and what actions are planned as a result?

Shell supports industry resource sharing and collaboration (as well as collaboration between other Arctic stakeholders such as indigenous communities, academia, governments and regulators) to enhance emergency response capabilities in Arctic and sub-Arctic regions. Today, Shell is one of nine industry members involved in the largest pan-industry project dedicated to Arctic spill response research and development in the world, known as the Joint Industry Programme (JIP) on Arctic Oil Spill Research that is sponsored by the International Association of Oil and Gas Producers (OGP)

Shell is open to opportunities to share assets, provided a fair and equitable sharing of costs and risk can be achieved without negatively impacting Shell’s project performance and delivery objectives. By sharing costs and finding operational synergies, we think that everyone will benefit from additional emergency response assets and personnel. With appropriate commercial arrangements in place, we envision this system (as well as other OSR aspects) could be available to a consortium of offshore operators—much like the current operating agreement for a similar system in the Gulf of Mexico.

2 July 2013

Prepared 26th July 2013