Environmentalists Cheer as Oil Drilling on U.S. Arctic Coast Put on Ice

Shell's troubles may indicate that the difficulties outweigh the potential economic benefits.

Jan 30, 2014 at 4:29PM

AMSTERDAM (AP) -- Oil companies' rush to find reserves off Alaska's Arctic shores suffered a setback on Thursday after Shell said it would suspend its operations in the region -- and possibly withdraw for good.

Royal Dutch Shell PLC is the main company to have purchased leases for oilfields off Alaska's Arctic shores, but its attempts to drill have been halting due to technical and legal hurdles.

While other companies are still seeking to exploit deep-water Arctic fields nearby in Canada, Shell's troubles may indicate that the difficulties outweigh the potential economic benefits.

"We will not drill in Alaska in 2014, and we are reviewing our options there," Shell CEO Ben van Beurden told reporters in London.

Shell received a negative federal court decision last week. Environmentalists are still challenging whether the government's 2008 decision to open the area to exploration was correctly granted in the first place: It is covered by sea ice for much of the year.

Asked whether Thursday's retreat means the project is finished, Van Beurden said that depends in part on how the ongoing lawsuit proceeds.

Environmental activists cried victory.

"Shell's Arctic failure is being watched closely by other oil companies, who must now conclude that this region is too remote, too hostile and too iconic to be worth exploring," Greenpeace International Arctic oil campaigner Charlie Kronick said in a reaction.

Jacqueline Savitz, the U.S. chief of the Oceana conservationist group, said Shell's retreat shows that offshore drilling in the Arctic is "simply not a good bet from a business perspective."

Shell's troubles in Alaska are only the most visible in a series of setbacks for the company in the U.S., and Van Beurden hinted he won't prioritize investments there in the future.

While oil prices remain high globally, "North America natural gas prices and associated crude markers remain low, and industry refining margins are under pressure" Van Beurden said.

Last month, Shell said it was scrapping a $20 billion dollar project to develop an onshore natural gas-to-diesel facility in Louisiana.

Van Beurden's predecessor, Peter Voser, spent billions building up the company's portfolio of U.S. shale properties to $26 billion, only to write $2 billion off their value last summer.

"Yes, we went into North America in a big way. You could argue that we went a little bit too far too soon. But we are where we are," Van Beurden said.

He described the North American shale market as "a different game, a very efficient market, and the sort of pressures you have there are therefore fundamentally different from what you would have in places like Russia, Argentina."

Still, Shell's Arctic misadventures stand out.

After purchasing licenses for $2.1 billion in the Chukchi sea off Alaska's coast in 2008, Shell began preliminary drilling in the summer of 2012.

But it was unable to get far after difficulties deploying an oil containment system it had on standby in the event of a spill. Then was forced to retreat because of approaching winter ice.

Then one of its rigs was damaged while being transported on Dec. 31, 2012, and no drilling took place in 2013.

CFO Simon Henry said Thursday Shell wrote around $1 billion off the value of its Alaskan business in 2013.

"The group's exploration near the North Pole cost billions of dollars and generated reams of negative press, yet not a single drop of oil has been pumped" said Garry White, Chief Investment Correspondent at British brokerage Charles Stanley.

"Like the mining sector, capital discipline has been lacking at the major oil groups and there is pressure from shareholders to cut back investment to improve cash flows," he said. "Shell appears to be listening."

Van Beurden said Shell will cut spending by $9 billion this year and is targeting $15 billion in asset sales.

Investors generally cheered the company's plans.

Van Beurden's strategy "is pretty much what we believe the market wanted to hear," said Investec analyst Neill Morton in a note.

But Morton predicted further writedowns of Shell's North American shale assets.

Shell's reported fourth-quarter net profit of $1.78 billion (130 billion euros), down 74% on the $6.73 billion reported a year earlier. The big fall was due to higher production costs, lower production, and worse refining margins. The swing was also exaggerated by one-off items during the two periods. Production was down 5% to 3.25 million barrels per day.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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