Shell cuts losses, re-focuses with arctic retreat

OREANDA-NEWS. Shell has decided to cut its losses in the US arctic, following a disappointing result from an exploration well in the Chukchi Sea and a strategic re-think after its move to acquire London-listed BG.

The firm found indications of oil and gas in the Burger J well this summer but not enough to warrant further drilling. "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," the firm said.

The decision is likely to result in a hefty impairment charge. "The balance sheet carrying value of Shell's Alaska position is approximately \\$3bn, with approximately a further \\$1.1bn of future contractual commitments," the company said.

Shell had, up until now, stuck doggedly to its arctic plans despite problems with equipment, strong opposition from environmental campaigners, and legal and regulatory obstacles. The firm sunk a huge amount of cash into the preparations, which explains why it was so reluctant to walk away. Before this year's drilling, Shell had spent around \\$6bn on its Alaskan programme, including the acquisition of leases, but had yet to complete a well. The company's 2012 drilling programme was beset with mishaps, including the Kulluk arctic drilling rig running aground in heavy seas and a containment dome getting damaged during a test. US environment agency the EPA fined Shell \\$1.1bn for breaching pollution limits during its troubled exploration campaign in 2012. Legal and regulatory hurdles prevented the firm from resuming exploration activities until this year.

Shell's plans in Alaska have been under heavy scrutiny since 2012 because of the high costs and the lack of progress. Shell chief executive Ben Van Beurden voiced his frustration last year about the legal and regulatory delays. "We do carry costs and we cannot do this indefinitely," he said.

The pressure on Shell to review its arctic ambitions has increased this year. The potential for a prolonged oil price slump has prompted the firm to maker deeper cuts to capital expenditure than previously anticipated. And a ?47bn (\\$71bn) deal to acquire UK firm BG — announced in April — has triggered a strategic re-think. The acquisition will raise Shell's proven reserves by around 25pc. "It is a large deal and it will, to some extent, also be transformational in the sense that it will allow us to revisit many of the options that we have. We will use this as an opportunity to go through the portfolio and reset the portfolio in areas where we now feel we have more choice and we can take a view on the future in a slightly different way," van Beurden told shareholders at the company's annual general meeting in April. "What that will mean for the Arctic ? I think it is a little premature to answer at this stage. The deal has not completed. But when it does, you have my assurance that we will take a very fundamental review of the entire company."