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Shell Takes a 'Gap Year' Break From Oil Exploration in the Arctic, but What of 2014?


The Kulluk and Discoverer drill ships are being towed to Asia for repairs and renovations in a "pause" that may give ground to environmental groups.

Royal Dutch Shell (NYSE:RDS.A) officially announced today to halt plans to drill for oil in Alaska's Arctic seas for the rest of this year. With technical difficulties and treacherous conditions in the Chukchi and Beaufort Seas having threatened operations of the company's two drill ships, the Kulluk and the Discoverer, Shell is sending the vessels to an undisclosed location in Asia for major renovations and repairs. Since winning a license to drill in the notoriously choppy seas in 2005, the company has spent $4.5 billion searching for oil. The news suggests a crisis of confidence on the part of Shell, and is being celebrated by environmental groups that hope to use the company's failure to make strides against future drilling in the pristine Arctic.

Why the Arctic?

Consensus estimates are that about 22% of the world's remaining oil and gas lies underground within the Arctic Circle. Obviously Shell would profit from tapping into those reserves, and there are other companies in the game as well, with ConocoPhillips (NYSE:COP) having reaffirmed its plans to open exploration wells in the Chukchi Sea in 2014. Moreover, Norway has recently boosted its estimates for undiscovered oil in the Arctic, from 16.2 billion barrels to 18.7 billion. That country hasn't opened up new drilling since 1994, but will decide this summer if it will expand into the Arctic itself, with acreage in the Barents Sea.

The problem is, the Arctic seas are rough, the weather is very cold and can turn for the worst very quickly (Shell's Kulluk drill ship had technical problems with equipment for a while, but was finally grounded during a storm when the ship was being towed south for the winter), and there's a lot of scrutiny on offshore drilling right now.

Shell and Republicans

Both Shell and ConocoPhillips are putting off the beginning of exploration in order to wait for more robust and efficient technologies for drilling, cleanup, and rescue, if it be needed. After 2010's Deepwater Horizon (NYSE:RIG) disaster in the Gulf of Mexico, caution is paramount -- to the public, to investors, to the government, and to the environment.

All this being said, Shell and Republican politicians in Alaska are confident that drilling will return to the Chukchi and Beaufort seas. Marvin Odum, the Director of Shell Upstream Americas, has referred to the withdrawal as a pause, saying, "Our decision to pause in 2013 will give us time to ensure the readiness of all our equipment and people."

Republican Senator Lisa Murkowski of Alaska added to the pause rhetoric, saying, "It is only a pause in a multiyear drilling program that will ultimately provide great benefits both to the state of Alaska and the nation as a whole."

To cap it all off, Alaska's governor, Sean Parnell took the long view, saying, "We are at the early stage of a new era of oil exploration in the Arctic, one that will continue for decades in a measured and responsible way."
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