Shell puts 2014 Arctic drilling plans on ice after legal challenge

WASHINGTON — Shell executives said Thursday the company was dropping its plans to resume Arctic drilling this summer, the latest setback in its costly eight-year quest to find oil under remote waters north of Alaska.

Royal Dutch Shell CEO Ben van Beurden cast the move as a temporary setback driven by legal uncertainties after a federal appeals court ruling last week. But the freeze comes as the new chief executive promises to pare underperforming assets and as an onshore American oil boom undermines some of the arguments for oil exploration in the Arctic frontier.

After devoting nearly $6 billion into a new generation of Arctic drilling, Shell has just two half-finished wells in the Chukchi and Beaufort seas to show for the effort. The company drilled the two “top holes” in 2012, but was barred from boring into potential oil-bearing zones because a unique oil spill containment system had not arrived nearby.

Reaction: Shell’s delay ignites calls for deep freeze on Arctic drilling

Van Beurden said he was “frustrated” by the 9th Circuit Court of Appeals’ Jan. 22 ruling that U.S. regulators wrongly relied on an arbitrary estimate about the amount of oil that could be recovered in their environmental analysis of a 2008 auction of Chukchi Sea leases.

“The obstacles that were introduced by that decision certainly make it impossible to justify the commitments of cost, equipment and people that are needed to drill safely in Alaska this year,” van Beurden said. “We have to wait for the courts and the U.S administration to resolve this legal issue. Given all of this, we will not drill in Alaska in 2014, and we are reviewing our options.”

Arctic battle

Litigation over the 2008 lease sale — at which Shell spent some $2 billion buying Chukchi Sea drilling rights — has held up the company’s Arctic ambitions before. The Interior Department was ordered to redo its environmental analysis in 2010 after a federal court found deficiencies with the review. The Interior Department issued a new environmental impact statement a year later, paving the way for Shell’s exploration in 2012.

But Shell’s 2012 venture into the Beaufort and Chukchi seas was marred by mishaps, including air pollution problems and embarrassing equipment failures, even before its floating Kulluk conical drilling rig ran aground near an Alaskan island on Dec. 31.

Van Beurden acknowledged the challenges of drilling in the remote Arctic waters, which are clogged with ice most of the year and more than 1,000 miles from the nearest Coast Guard station.

The legal uncertainties, he said, “adds another level of complexity which . . . makes it impossible to justify going ahead with this very, very complicated, very expensive program in 2014.”

Scrutinizing Shell’s portfolio

Van Beurden declined to speculate on the future but stressed Shell would “have to really reflect what our options are.”

It is unclear whether Shell’s Arctic program would survive the executive’s plan to “rigorously scrutinize” the company’s portfolio and prove its capital discipline to shareholders. Shell is already selling off U.S. shale assets and dropped plans for a major Gulf Coast gas facility.

Van Beurden said other “hard choices” are on the horizon.

“We haven’t always made the right capital choices,” confessed van Beurden, who took over as Shell’s chief executive a month ago. “We need to be careful not to over invest at too early a stage,” including in “sensitive environments like the Arctic and oil sands.”

“Frankly, I think we got a little bit ahead of ourselves in some of these sensitive plays,” he added.

Risks and rewards

For oil companies looking to shore up their balance sheet and book new reserves, the Arctic offers huge potential, with an estimated jackpot of 412 billion barrels of oil equivalent lurking at the top of the globe. U.S. Arctic waters are estimated to contain 27 billion barrels of oil and 132 trillion cubic feet of natural gas.

So far, Shell has been the leader in U.S. Arctic waters, decades after the last sustained drilling in the region. But ConocoPhillips and Statoil also hold drilling leases in the U.S. Arctic.

But with a new oil and gas drilling boom onshore in North America, some energy experts and financial analysts have cast doubt on the merits of risky, expensive drilling into the U.S. Arctic frontier.

Environmentalists say Arctic drilling is too risky for marine life and the subsistence culture of Alaska natives who live in the area. Cold, icy conditions also mean it could take far longer than in the much warmer Gulf for any spilled crude oil to naturally break up in the water.

Shell’s move also removes some heat from the politically sensitive issue of Arctic drilling during a mid-term election year. If the Obama administration’s Interior Department had denied Shell’s bid to drill this summer, it might have put some vulnerable Democrats in a tough spot.

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