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The Risks Of Investing In Royal Dutch Shell Plc

Today I am highlighting what you need to know before investing in Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US).

Aggressive project sales crimp growth picture

Shell delighted investors in recent days by announcing yet another colossal discovery in the black gold-rich Norphlet formation in the Gulf of Mexico, an area in which the firm has already made three significant finds. The latest exploration well, labelled Rydberg, is estimated to house resources of 100 million barrels of oil equivalent.

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Shell has established itself as a major operator in the area, and this latest news will go some way to vindicating its strategy of focusing on Shellenhanced capital efficiency, including more selectivity on project choices and $15 billion of divestments in 2014-15″. Still, the scale of the oil giant’s streamlining scheme covering both upstream and downstream operations has forced many to question the impact on earnings potential in coming years.

The likelihood of a depressed oil price during the next few years, caused by waves of new supply outpacing demand growth, looks set to lessen the impact of reduced volumes on the top line. But as the world economy gains traction in coming years, a backdrop of rising oil consumption could very well expose Shell’s divestment scheme as being over-aggressive and significantly dampen the firm’s revenues profile.

With oil exploration and production also proving a hit-and-miss business more often than not, Shell’s slimmer portfolio of assets could leave the company horribly exposed should potential payloads and project timings disappoint.

Legal battle ready to roll

Like its industry rival BP, Shell also faces the prospect of being dragged through the courts — and having to incur huge legal penalties — as a result of a major oil catastrophe.

Some 11,000 villagers from the Nigerian village of Bodo are taking action against the business after thefts from the Bomu-Bonny pipeline caused two large oil spills in 2008. Shell had initially offered to compensate claimants to the tune of £30m back in 2011, an offer which it repeated after an initial hearing at the UK High Court in June.

The plaintiffs had been seeking closer to £300m due to the environmental impact of the spills as well as financial implications for local businesses, and again rejected the offer out of hand. Although the court ruled last month that Shell cannot be held accountable under Nigerian law for the damage caused by the thefts, the oil giant may be forced to pay compensation for failing to implement reasonable measures to prevent such criminal activity.

The case is due to be heard in May next year, and Shell could face stiff financial penalties whether settled in or out of court.

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Royston Wild has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.

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