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Shell arctic oil rig in Alaska
Stuart Hampton

Shell Exits the Arctic

by Stuart Hampton | Dun & Bradstreet Editor

September 28, 2015 | No Comments »

Shell arctic oil rig in AlaskaAs many an explorer, oil or otherwise, has discovered, the Arctic is a cruel and unforgiving place. Royal Dutch Shell has just announced that it will halt exploration activities in the Arctic after spending several years of legal and operational preparations and more than $7 billion.

Its activities ended abruptly when its major well off Alaska (the Burger J well in the Chukchi Sea) failed to find any significant quantities of oil or natural gas that would be commercially viable.

The idea of exploring for oil in the Arctic has agitated environmentalists for years, but Shell was undeterred. The company had waited for several years to get regulatory clearance to drill in the Beaufort and Chukchi seas and fought its way through a series of operational setbacks.

It began top-hole drilling on two probes in 2012 but ran into a number of equipment problems and inspection failures, dramatically highlighted by the Kulluk rig running aground off an Alaska island at the end of the year after slipping its tow lines in a storm.

The Noble Discoverer dragged its anchor in July 2013 and nearly ran aground on the Alaska coast. Four months later it was damaged by an explosion and fire while in port in the Aleutian Islands. Shell abandoned its work in the Arctic and withdrew.

In May 2015 it came back with a newer and bigger rig, the 400-foot-long, 355-foot-tall Polar Pioneer. A few weeks later the slightly smaller Noble Discoverer rig (the same one that suffered a series of mishaps in 2013) joined it.

But the biggest headwind it faced was the global slump in oil prices (down 50% in the past year), which made the expensive job of accessing oil from the Arctic increasingly problematic.

However, if the hydrocarbon resources in the Arctic are 10 times greater than the oil and gas produced so far in the North Sea, as some earlier Shell statements claimed, then the investment could still have been justified from a long-term perspective.

But Shell came up empty on its major Arctic well.

Like its peers, Shell is being forced to curb exploration spending after the price of oil slumped amid a global oversupply, starving the majors of the investment capital for high-risk/high-return exploration and production projects.

The decision to leave the Arctic empty-handed was a hard one for the Anglo-Dutch company, which first found oil and gas in the region in the late 1980s. Shell has decided to cease further offshore activity in the region for the foreseeable future.

With $7 billion already invested in an Arctic expedition that was essentially a “dry hole,” Shell expects to take additional financial charges related to these operations, which carry a value of $3 billion on its balance sheet. It also has related contractual commitments of $1.1 billion.

Not digging itself a deeper financial hole in the Arctic must come as cold comfort to the company and its shareholders.

British editorial veteran Stuart Hampton has been covering oil and gas companies for Hoover’s since the Neogene-Quaternary period. Well, actually, since the early 1990s. For the best overview of the oil industry and its history he recommends Daniel Yergin’s “The Prize.” You can also follow Stuart on Twitter.

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Photo courtesy of the US Department of Defense

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