A Major Setback for Shell

After more than $5 billion of investment into its beleaguered oil campaign off the northern coast of Alaska, Royal Dutch Shell (NYSE: RDS-A  ) has decided to shelve the project for now.

Specifically, the company said it would "pause" its drilling activities for the year in Alaska's Beaufort and Chukchi Seas in order "to prepare equipment and plans for a resumption of activity at a later stage." It did not provide any information on when it would resume drilling in the region.

The Hague-based company was initially optimistic about exploring in Alaska, spurred on by data from the U.S. Geological Survey that estimated the Arctic accounts for roughly one-fifth of global undiscovered oil and gas reserves. By Shell's own estimates, the Chukchi and Beaufort seas could contain some 25 billion barrels of crude oil.

Implications for other oil companies
Shell's decision to halt its Alaska drilling campaign could also have major consequences for other energy producers with Arctic ambitions. Greenpeace's executive director, John Sauven, concluded that the company's move to pause its operations in the region means that "Arctic investment lies in tatters."

There is some truth to this. ConocoPhillips (NYSE: COP  ) recently cancelled plans to drill in the Chukchi Sea due to regulatory uncertainty, while Statoil (NYSE: STO  ) announced last year that it would postpone drilling in the American Arctic until 2015.

ExxonMobil (NYSE: XOM  ) , however, seems undeterred. Earlier this year, it agreed to expand a strategic cooperation agreement with Russia's OAO Rosneft by adding seven more licenses to develop hydrocarbon resources in Russia's Arctic Shelf. Exxon even said that it plans to invest $200 million to develop a research center in Russia to support exploration in the region.

Game over for Shell in Alaska?
Some of Shell's largest shareholders have suggested the company should cut its losses and abandon the project indefinitely, arguing that the environmental and regulatory risks outweigh the potential returns.

But Shell has fired back, saying that it views the project in a favorable light from a much longer-term perspective. Given that the company doesn't expect commercial production from its Alaska assets to commence before 2025, another year's delay is insignificant, Shell said in a statement.

The company's head of U.S. operations, Marvin Odum, said: "We've made progress in Alaska, but this is a long-term programme that we are pursuing in a safe and measured way." He also added that the decision to halt operations will give the company time to ensure that its equipment and personnel are ready to resume drilling.

Though nothing can be done about the capital Shell has already sunk into the project, the company's decision to move forward at a more measured pace seems to reflect dedication to a longer-term strategy. Perhaps waiting to resume operations for several years, or at least until regulatory and environmental uncertainties are cleared up, is actually the best way for the company to remedy an unlucky situation.

While Shell has had a rough time in Alaska, companies with operations focused on certain U.S. shale oil and gas plays may be less exposed to hurdles facing Arctic explorers, such as regulatory uncertainty, harsh weather, and lack of infrastructure. One company worth a closer look is Chesapeake Energy, which is reporting staggering growth in oil production from its Eagle Ford and Greater Anadarko Basin operations. As the company transitions away from natural gas, will it manage to meet its oil production target and boost cash flow? Or will it languish under the weight of its heavy debt load? To answer that question and to learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy, and as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.


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  • Report this Comment On June 17, 2013, at 10:28 PM, JoeZZZ wrote:

    Curious, looks like the first thing the new head of Shell Arctic (Ann Pickard) has done is to go on a sabbatical!! Probably an enforced pause until Voser retires in 2014, in order to avoid any more embarrassments.

  • Report this Comment On June 25, 2013, at 9:55 AM, spinindog wrote:

    Such is the nature of exploration. However, it usually works out that when you get tangled in a thicket, and think about turning back, a clear path will present itself if you only keep pushing.

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