Shell to Cease Oil Exploration in Alaskan Arctic After Disappointing Drilling …

28 Sep 2015 | Author: | No comments yet »

Royal Dutch Shell Abandons Disappointing Offshore Alaskan Well.

Royal Dutch Shell announced early Monday morning it will suspend Arctic drilling indefinitely, after finding insufficient oil and gas in one of its exploratory wells. Shell’s plans have also been hampered by environmental protests, with campaigners pointing out that any spills in the fragile region would be especially damaging, and that opening up new long-term wells only extends oil dependency. Shell said it expects to take financial charges related to the Alaskan operations, which carry a value of about $3 billion on its balance sheet with additional contractual commitments of about $1.1 billion. The oil giant said the decision to abandon the $7 billion exploration project also reflected the high costs of the project and “challenging and unpredictable” regulatory environment. Though the company had high hopes for its exploration program in the Arctic, it maintained it was likely to walk away if it failed to find oil this summer, even though such a decision would be costly.

The shares fell as much as 1.4 percent. “This could be negative for third-quarter earnings because of potential impairment charges,” Ahmed Ben Salem, a Paris-based analyst with Oddo & Cie, said by phone. “On the other hand, in a $50 oil-price environment it’s not so bad to abandon that search because it’s expensive. The balance sheet value of Shell’s Alaska position is approximately $3.0 billion, with approximately a further $1.1 billion of future contractual commitments, the company said. It is expected to repurpose some of the contracts it has already paid for to other projects to help mitigate the financial impact, but the blow could be significant. Investors and industry executives questioned the wisdom of Shell’s spending heavily and putting its reputation at risk — especially with oil prices having fallen over the past two years from $110 per barrel to below $50 per barrel. Shell and its peers are also curbing spending after the price of oil slumped about 50 percent in the past year amid a global oversupply. “This is a clearly disappointing exploration outcome,” Marvin Odum, director of Shell’s Upstream Americas unit, said in a statement.

Stopping drilling in offshore Alaska is a major disappointment for Shell, whose executives thought they had locked up a potentially huge trove of oil there. Shell obtained its licenses to explore the Chukchi Sea in 2008 and pushed ahead with the project when oil prices were historically high—more than $100 a barrel. Gulf of Mexico.” At the time, Mr. van Beurden also said that Shell would not learn enough from one well to figure out how much oil and natural gas was in the area unless the results were very disappointing. Shell’s current foray into the Alaska offshore began under Mr. van Beurden’s predecessors, and he has always been concerned about the project’s costs and risks.

Soon after he became chief executive in 2014, he temporarily halted drilling in Alaska because of legal and regulatory issues. “The Alaskan exploration campaign was initiated by previous Shell C.E.O.s and couldn’t be reined back by the current C.E.O. for safety, government and committed capex reasons,” Oswald Clint, an analyst at Bernstein Research, wrote on Monday in a note to clients.”It’s clear today that there will be no more exploration in Alaska which has been a bone of contention for many investors.” The Alaska operations have cost billions of dollars. In May, Shell’s shareholders questioned why they should support a drilling program that could pollute waters and contaminate seafood. “Big Oil has sustained an unmitigated defeat,” Greenpeace U.K. Executive Director John Sauven said by e-mail. “The Save the Arctic movement has exacted a huge reputational price from Shell for its Arctic drilling program. And as the company went another year without striking oil, that price finally became too high.” Exxon Mobil Corp., BP Plc and other producers have discovered more than 10 billion barrels of oil in North American Arctic seas since the early 1970s.

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