Shell Pulls Plug on Arctic Drilling Program

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Researched by Industrial Info Resources (Sugar Land, Texas)--In a statement released early Monday morning, Royal Dutch Shell plc (NYSE:RDS-A) (The Hague, Netherlands) announced that it is abandoning its quest for crude oil production in the Arctic.

Shell began drilling its 6,800-foot Burger J exploratory well in the Chukchi Sea north of Alaska on July 30. Monday's statement said, "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. The well will be sealed and abandoned in accordance with U.S. regulations." The statement went on to say that "Shell will now cease further exploration activity in offshore Alaska for the foreseeable future."

The news seems to come with mixed feelings from investors, some of whom hate to see the project abandoned, others who are relieved that more money will not be sunk into it. Shell has invested approximately $7 billion since 2008, when it purchased oil and gas leases in the Chukchi Sea from the U.S. government for $2.1 billion.

In addition to facing stiff opposition from environmentalists and stringent regulations, the project has been plagued with problems. In December 2012, after drilling the top portions of two exploratory wells, Shell was attempting to tow a drilling rig from Alaska to Seattle when severe winter storms contributed to the failure of the engines in the transport vessel, which ultimately led the drilling rig being released and running aground.

While this year Shell had originally planned to drill two exploratory wells during the short window of the Arctic drilling season, the company's plans were put on ice when it came to light that regulations issued by the Fish and Wildlife Service in 2013 forbade active drilling within 15 a 15 mile buffer zone from other drilling. The company had planned to simultaneously drill wells approximately nine miles apart, but found itself unable to proceed with its plans and instead drilled only the Burger J exploratory well. The company was still required to have two rigs in the region in case an emergency necessitated the drilling of a relief well.

Shell said that its decision "reflects both the Burger J well result, the costs associated with the project, and the challenging and unpredictable federal regulatory environment in offshore Alaska."

The total cost to the company remains to be seen. Shell said that the project represented $3 billion on its balance sheet accompanied by a further $1.1 billion in contractual commitments. More about the financial implications will reported on October 29, when Shell plans to present its third-quarter financial results.

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