Shell abandons contentious Arctic exploration after poor results

Royal Dutch Shell has abandoned a contentious Arctic drilling campaign off the coast of Alaska and is preparing to take billions of dollars in write-down after its exploration efforts failed to make a significant discovery.

The decision, which has been welcomed by environmental campaigners, reflected the high costs of the project and the “unpredictable” US regulatory environment, Shell said.

The collapse in oil prices since last June, from more than $115 a barrel to less than $50 now, has called into question the viability of challenging, high-cost production in areas such as the Arctic. Dozens of projects have already been put on hold.

Shell, when it embarked on its summer drilling campaign in the Chukchi Sea, had said that the time and expense were justified by the size of the prize if exploration was successful. Its Burger prospect is in an area that has been estimated by the US as potentially holding 4.3bn barrels of recoverable oil.

However, the company said in a statement on Monday that while it had found “indications” of oil and gas, “these are not sufficient to warrant further exploration” in the area.

“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,” it said.

It is expected to take financial charges as a result.

Shell put the balance sheet value of its Alaska position at about $3bn, with a further $1.1bn of future contractual commitments. It is thought the group will aim to bring down the $1.1bn charge by farming out the rigs and ships it has hired, and will provide an update with third-quarter results.

The company has spent about $7bn on offshore Arctic development in the Chukchi and Beaufort Seas since 2007, or about 20 per cent of its exploration budget.

“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,” said Marvin Odum, director of Shell Upstream Americas.

Environmental groups have opposed Shell’s drilling programme both because of the risk of a spill in the vulnerable waters of the Arctic and because of the potential implications for climate change of opening up new sources of oil for long-term production.

In a gloomy sub-$50 oil market, Shell’s retreat means there is little likelihood of any western oil major pressing ahead with further exploration in the polar region any time soon.

While Eni, the Italian energy group, is about to bring online its 100,000 barrels a day Goliat project in the Barents Sea, that field was discovered more than a decade ago and had billions of dollars spent on bringing it to production before oil prices plunged.