Shell Ceases Arctic Drilling: it was bound to happen

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Nagesh K Ojha


(David Ryder/Getty Images) ShellNo flotilla participants float near the Polar Pioneer oil drilling rig during demonstrations in May against the presence of the first of two Royal Dutch Shell oil rigs in the Port of Seattle.

In spite of the conditional approval by the Obama administration or may say the green light from the Bureau of Ocean Energy Management to the Anglo-Dutch company Shell to drill off Alaska’s Arctic shore, it decided to cease exploration in Arctic waters for the same.

In this context, it is useful to recall a news piece (AP) of Shell plc where the largest oil company of Europe had to stop drilling in Alaska in 2014. It is said that the decision was taken due to steep decline in earnings. So, the first step was to reduce investments. However, it is also true that the announcement came just a month after when Shell decided to scrape a multibillion-dollar project to develop a natural gas-to-diesel facility in Louisiana. Though, in some corners, it was seen as a victory of continuous environmental campaigns and pressure on the establishment.

It is also worthwhile to recall some high table changes in the company. Twenty-one months back from today, Mr. Ben Van Beurden took the steering from outgoing Peter Voser as the CEO of Royal Dutch Shell plc. It looks normal and simple change in a company. He is a veteran in Shell and has spent more than three decades to serve the company. In fact, he was a signal of institutional change. And this changed gesture came with the policy stated by Mr. Ben where capital spending had to be cut down by around $10 billion and would have to sell assets for required restructuring and making company more efficient. He was interested in setting ‘an agenda for sharper performance and rigorous capital discipline.’ He said that ‘Shell would cut last year’s total capital spend of $46 billion to around $37 billion this year and step up the pace of asset sales over the next two years to $15 billion’. He further added that ‘we are making hard choices in our world-wide portfolio to improve Shell’s capital efficiency’.

US Coast Guard

Photo: US Coast Guard

A little more than two weeks later he issued a profit warning. It was the sign to clear the decks. He was ready to set a new course for the company and stakeholders. He clearly indicated that LNG projects such as in Gulf of Mexico and Brazil would get priority. It seems that Ben has a priority and focuses more on offshore natural gas projects along with cutting spending. His mind and vision was clear when he said that “our ambitious growth drive in recent years has yielded a step change in Shell’s portfolio and options, with more growth to come…but at the same time we have lost some momentum in operational delivery, and we can sharpen up in a number of areas.”  However, his priorities could be seen as:

  • ‘Improved financial performance, including restructuring in some areas of the company’.
  • Enhancing capital efficiency, with hard choices on new projects, reduced growth investment, and more asset sales’.
  • Continued strong delivery of new projects, and integration of recent acquisitions’.

Photo The Guardian

The Transocean Polar Pioneer, a semi-submersible drilling unit leased by Shell, was used to explore Arctic deposits. Photograph: Daniella Beccaria/AP

Furthermore, since North American natural gas prices and associated crude markers remain low, and industry refining margins were under pressure, he was concerned about the focused region. And most importantly, when it was happened the oil prices remain high globally.

As far as drilling for oil in Alaska is concerned, he highlighted the rulings of a court as ‘substantial obstacles to Shell’s plans for drilling in offshore Alaska’. It raises serious concerns over exploiting oil and gas in the region. He clearly stated that “this is a disappointing outcome, but the lack of a clear path forward means that I am not prepared to commit further resources for drilling in Alaska in 2014. We will look to relevant agencies and the court to resolve their open legal issues as quickly as possible”. His decisions were appreciated by the shareholders and shares were up 2% at 26.27 Euros in Amsterdam trading. It was probably the most appropriate reciprocity from shareholders to its new chief executive when he said that 2014 would be ‘a year where we are changing emphasis, to improve our returns and cash flow performance.’

 U.S. Coast Guard

Photo: US Coast Guard

However, on the other hand, it should also be noted that Mr. Ben admitted the fact that exploration drive in the Chukchi and Beaufort seas that has cost $5billion so far, was ‘under review’ vis-à-vis campaigns of green groups. He said that ‘we are making hard choices in our worldwide portfolio to improve Shell’s capital efficiency’. Last year, it had become clear that Group spending was to be slashed in 2014 by 20% to $37billion. “The decision to shelve drilling off Alaska came alongside a $200m write-off of expenses connected with the Kulluk drilling rig, which ran aground in 2012.

Moreover, the moves to halt high-cost operations off Alaska would be welcomed by the environmentalists; as later on we found that the Greenpeace campaigner Charlie Kronick stated: ‘the company has spent huge amounts of time and money on a project that has delivered nothing apart from bad publicity and a reputation for incompetence. The only wise decision at this point is for Mr. Van Beurden to cut his company’s losses and scrap any future plans to drill in the remote Arctic Ocean.’ While Savitz, Jacqueline who had taken legal action to try to stop the drilling, stated that ‘Shell is finally recognizing what we’ve been saying all along: that offshore drilling in the Arctic is risky, costly and simply not a good bet from a business perspective.’

Therefore, this announcement to cease the operation should not be seen in isolation.

Following is Shell’s media release:

Shell updates on Alaska exploration

28 Sep 2015

  • Shell today provides an update on the Burger J exploration well, located in Alaska’s Chukchi Sea. The Burger J well is approximately 150 miles from Barrow, Alaska, in about 150 feet of water. Shell safely drilled the well to a total depth of 6800 feet this summer in a basin that demonstrates many of the key attributes of a major petroleum basin. For an area equivalent to half the size of the Gulf of Mexico, this basin remains substantially under-explored.

Shell has found indications of oil and gas in the Burger J well, but these are not sufficient to warrant further exploration in the Burger prospect. The well will be sealed and abandoned in accordance with U.S. regulations.

“The Shell Alaska team has operated safely and exceptionally well in every aspect of this year’s exploration program,” said Marvin Odum, Director, Shell Upstream Americas. “Shell continues to see important exploration potential in the basin, and the area is likely to ultimately be of strategic importance to Alaska and the US. However, this is a clearly disappointing exploration outcome for this part of the basin.”

Shell will now cease further exploration activity in offshore Alaska for the foreseeable future. This decision reflects both the Burger J well result, the high costs associated with the project, and the challenging and unpredictable federal regulatory environment in offshore Alaska.

The company expects to take financial charges as a result of this announcement. The balance sheet carrying value of Shell’s Alaska position is approximately $3.0 billion, with approximately a further $1.1 billion of future contractual commitments. An update will be provided with the third quarter 2015 results.

Shell holds a 100% working interest in 275 Outer Continental Shelf blocks in the Chukchi Sea.

Operations will continue to safely de-mobilize people and equipment from the Chukchi Sea.

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