Shell faces $6b loss as it pulls out of the Arctic

The unsuccessful drilling campaign in the Arctic waters off Alaska (above) is Shell's second major setback in the area after it interrupted exploration there for three years in 2012 when an enormous drilling rig broke free and grounded.
The unsuccessful drilling campaign in the Arctic waters off Alaska (above) is Shell's second major setback in the area after it interrupted exploration there for three years in 2012 when an enormous drilling rig broke free and grounded.PHOTO: AGENCE FRANCE-PRESSE

LONDON (REUTERS, BLOOMBERG) - Oil company Royal Dutch Shell is pulling out of exploration in the Arctic waters off Alaska for the foreseeable future and could take a hit of up to US$4.1 billion (S$5.9 billion) after failing to find enough oil.

The unsuccessful drilling campaign is Shell's second major setback in the area after it interrupted exploration there for three years in 2012 when an enormous drilling rig broke free and grounded.

The company, which has spent about US$7 billion on exploration in the Arctic, said its decision to withdraw reflects the project's high costs and the unpredictable regulatory environment in the area. "Shell has found indications of oil and gas in the Burger J well but these are not sufficient to warrant further exploration in the Burger prospect," it said in a statement yesterday.

Shell continues to see potential in the region and the decision not to explore further in Alaskan waters "reflects the Burger J well result, the high costs associated with the project, and the challenging and unpredictable federal regulatory environment in offshore Alaska", according to the statement.

Shell said it expects it will take financial charges related to the decision. Its balance sheet carries a value of about US$3 billion for its Alaska position, with additional future contractual commitments of about US$1.1 billion, the energy explorer based in The Hague in the Netherlands said in the statement.

"This could be negative for third-quarter earnings because of potential impairment charges," said Mr Ahmed Ben Salem, a Paris-based analyst with Oddo & Cie.

"On the other hand, in a US$50 oil-price environment it's not so bad to abandon that search because it's expensive. Shell has enough resources already to take focus on in this environment."

Shell won approval for its Arctic plans in May after the United States Interior Department found drilling in the Chukchi Sea would have no major environmental impact.

Most large oil companies have cut back on spending and put some exploration projects on hold since crude prices more than halved from last year's peak.

Shell said it still thought the Arctic region, which is estimated by the US Geological Survey to hold about 30 per cent of the world's undiscovered natural gas and 13 per cent of its oil, would be significant.

A version of this article appeared in the print edition of The Straits Times on September 29, 2015, with the headline 'Shell faces $6b loss as it pulls out of the Arctic'. Print Edition | Subscribe