By STANLEY REED SEPT. 28, 2015
Protesters on the Willamette River in Portland, Ore., waited as a Royal Dutch Shell icebreaker prepared to leave for Alaska in July. Credit Don Ryan/Associated Press
LONDON — Royal Dutch Shell said Monday that it would stop exploration off the coast of Alaska “for the foreseeable future.”
The decision came after the Burger J well, which the company drilled this summer, produced disappointing results. The company said the well had “found indications of oil and gas, but these are not sufficient to warrant further exploration” of the Burger prospect, a geological structure.
Shell said that the decision reflected not only the disappointing results from the well but “the high costs associated with the project and the challenging and unpredictable federal regulatory environment in offshore Alaska.”
The decision indicates that even though the oil industry believes the Arctic has major resources, the costs, a tricky environment and other risks are so high in the area that the hidden oil and gas will be difficult to develop if oil prices stay low.
Shell’s efforts to drill in Alaska have long seemed quixotic. The company’s decade-long project has been dogged by the opposition of environmental activists, who have said oil and gas production would pose unacceptable risks in the fragile Arctic. Shell also encountered mishaps; in 2012 it drilled two shallow wells, but a drilling ship, the Kulluk, ran aground.
The environmental protests continued this year when the Obama administration gave the green light for the company to resume its efforts. Investors and industry executives questioned the wisdom of Shell’s spending heavily and putting its reputation at risk — especially with oil prices having fallen over the past two years from $110 per barrel to below $50 per barrel.
Stopping drilling in offshore Alaska is a major disappointment for Shell, whose executives thought they had locked up a potentially huge trove of oil there. In July, Ben van Beurden, Shell’s chief executive, said that the area where the company was drilling in the Chukchi Sea, 150 miles offshore, “has the potential to be multiple times larger than the largest prospects in the U.S. Gulf of Mexico.”
At the time, Mr. van Beurden also said that Shell would not learn enough from one well to figure out how much oil and natural gas was in the area unless the results were very disappointing.
Shell’s current foray into the Alaska offshore began under Mr. van Beurden’s predecessors, and he has always been concerned about the project’s costs and risks. Soon after he became chief executive in 2014, he temporarily halted drilling in Alaska because of legal and regulatory issues.
He came around to the view that the potential bonanza was worth the expense and headaches, but now that drilling has produced an unexpectedly poor result, he may have decided to follow his original instincts and call a halt.
“This first dry well seems to have been the trigger for the C.E.O. to pull the plug on their Alaska exploration campaign,” said Oswald Clint, an analyst at Bernstein Research in London.
The Alaska operations have cost billions of dollars. Shell said the value of Alaska drilling on its balance sheet was $3.1 billion and that it had a further $1.1 billion in contractual commitments, probably for items like drilling rigs. The company said it would take write-offs as a result of the decision to halt drilling.
“Shell continues to see important exploration potential” in offshore Alaska, Marvin E. Odum, the company’s head of exploration and production, said in a statement. “However, this is clearly a disappointing outcome.”
In a note to investors, Biraj Borkhataria, an analyst at RBC Capital Markets in London, said that investors were disappointed by the well results but might welcome the decision to suspend drilling in the long run.
“We think the budget for exploration drilling would be better spent elsewhere,” he wrote.
