Court Ruling Puts Extractives on Notice: Royal Dutch Shell plc (RDS.A)

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Today, a Dutch court delivered a judgment finding Royal Dutch Shell plc (ADR) (NYSE:RDS.A)'s 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.

Royal Dutch Shell plc (ADR) (NYSE:RDS-A)

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 .

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