Shell stops Arctic activity after 'disappointing' tests

  • 28 September 2015
  • From the section Business
Media captionShell says it had not found enough oil and gas in the region to warrant further exploration, says the BBC's business editor Kamal Ahmed

Royal Dutch Shell has stopped Arctic oil and gas exploration off the coast of Alaska after "disappointing" results from a key well in the Chukchi Sea.

In a surprise announcement, the company said it would end exploration off Alaska "for the foreseeable future".

Shell said it did not find sufficient amounts of oil and gas in the Burger J well to warrant further exploration.

The company has spent about $7bn (£4.5bn) on Arctic offshore development in the Chukchi and Beaufort seas.

"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," said Marvin Odum, president of Shell USA.

"However, this is a clearly disappointing exploration outcome for this part of the basin."

'Risky endeavour'

Lord Browne, former BP boss and government adviser, told the BBC that the Arctic "is a very risky place [to explore] and very expensive to develop, so there are probably easier places to go".

Indeed some analysts suggested Shell might give up on the Arctic completely.

"It is possible that Shell might almost be relieved as they can stop exploration for a legitimate operational reason, rather than being seen to bow to environmental pressure," Stuart Elliott from energy information group Platts told the BBC.

"With the oil price around $50 a barrel, it was a risky endeavour with no guarantee of success.

"You could argue that this has been bad for Shell's reputation and it wouldn't be a big surprise if they abandoned Arctic drilling altogether."

Analysis: Kamal Ahmed, BBC business correspondent

Shell's investors were regular recipients of long and detailed presentations on the potential for the region.

So, what changed?

Certainly, the first findings from the Burger J exploration well 150 miles off the Alaskan coast were not promising.

Second, although President Barack Obama had given the necessary permissions for drilling to start again following the problems of rig fires in 2012, Mrs Clinton's tweet revealed that political risks were still substantial.

Mr van Beurden also has plenty of other issues weighing on his in-tray.

Read more on Shell from Kamal

Shell is not the only company to explore for oil offshore in the Arctic region - Italian energy group Eni could soon start producing oil from a field in the Barents Sea within weeks.

There is also one field in operation in the Russian Arctic owned by Gazprom Neft, the oil arm of Russian energy giant Gazprom. Last year, a joint drilling project between Rosneft and Exxon was stopped due to sanctions placed on Russia.

A number of additional exploration permits have also been issued by Moscow, but none have yet been taken up due to the current low price of oil, which has halved in the past year.

'Unmitigated defeat'

The US Geological Survey estimates that the Arctic holds about 30% of the world's undiscovered natural gas, as well as 13% of its oil.

According to Shell, this amounts to around 400 billion barrels of oil equivalent, 10 times the total oil and gas produced in the North Sea to date.

Image copyright Getty Images
Image caption Shell has come under a lot of pressure from environmental groups to stop drilling

However, environmental groups oppose Arctic offshore drilling, saying it will pollute and damage a natural wilderness largely untouched by human activity. They also argue that fossil fuels such as oil and gas must be left in the ground if the world is to avoid dangerous climate change.

Over the summer, protesters in kayaks unsuccessfully tried to block Arctic-bound Shell vessels in Seattle and Portland, Oregon.

"Big oil has sustained an unmitigated defeat," said Greenpeace UK executive director John Sauven.

"The Save the Arctic movement has exacted a huge reputational price from Shell for its Arctic drilling programme, and as the company went another year without striking oil, that price finally became too high."

Shell had continued to explore for oil despite the slump in the price of oil. Other oil and gas majors have shelved expensive exploration projects but, having invested billions of dollars in its Arctic project, Shell persisted, believing that Arctic oil would be competitive in the longer term.

This is why the announcement came as such a surprise.

Shell said it would take financial charges as a result of halting exploration, which it would disclose during its third quarter results. The company has existing contracts for rigs, ships and other assets.

More on this story

Related Internet links

The BBC is not responsible for the content of external Internet sites