Thursday, January 30, 2014

Shell Concedes, Not Ready to Drill in Arctic Ocean

Shell announced today it would not be drilling in the Arctic Ocean in 2014. The story at The Guardian:

Besides the problem of running out of money, Shell essentially admits it is not ready to operate in the Arctic Ocean. Instead of taking charge of its own planning, it had relied on a U.S. Department of the Interior review which it now concedes was incomplete, following a court ruling to that effect last week. It is too late now to create a credible plan for operations in 2014, with new CEO Ben van Beurden referring to “the lack of a clear path forward” as a reason not to risk further equipment damage and losses in a haphazard operation in the Arctic Ocean.

Even if there were no operational risks, the financial risks are enough to give pause, and this is what stock markets were focusing on in their reaction to the announcement this morning. So far Shell has spent $5 billion for a few weeks of Arctic exploration. It failed to discover any oil, but even stating it that way is misleading. With operational difficulties, it barely got started. Given current world oil prices, and already looking at a tab worth billions, it is surely too much money to put at risk for a share of what geologists are hoping is a modest extension of the oilfields found onshore in Alaska.

All these obstacles are temporary in nature. After allowing a few years for oil prices to rise and engineers to design new equipment, Shell will probably decide it is ready for Arctic offshore drilling. Even then it will be a calculated risk. Despite the costs, in the oil business there is never a guarantee of actually finding oil.