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

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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.

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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."

Greenpeace and Other Environmental Groups

On the other hand, Greenpeace is taking this "pause" as a victory on the path to an oil rig-free Arctic Circle.

In an official media response to the news, Greenpeace USA's Executive Director, Phil Radford, had this to say:

This is the first thing Shell's done right in Alaska -- calling it quits. Shell was supposed to be the best of the best, but the long list of mishaps and near-disasters is a clear indication even the "best" companies can't succeed in Arctic drilling. Secretary Salazar and President Obama gave drilling a chance; now the responsible decision is to make Arctic drilling off limits, forever.

He cites the difficulty of working in the Arctic as a reason for Shell's newly announced gap year, but later goes on to address the world's dependency on fossil fuels and how detrimental that is to the environment.

With so much upside potential in the Arctic, it seems unlikely that pressure from environmentalists played a major part in the decision to halt drilling. Rather, the sheer difficulty and hazards of doing so proved to be, for now, too great.

From another environment group, Oceana, the senior Pacific counsel Michael LeVine has said, "The decisions to allow Shell to operate in the Arctic Ocean clearly were premature…The company is not prepared and has absolutely no one but itself to blame for its failures." Echoing that sentiment, Lois Epstein, Arctic program director for the Wilderness Society stated, "Shell's managers have not been straight with the American public, and possibly even with its own investors, on how difficult its Arctic Ocean operations have been this past year."

What Can We Expect After 2013?

Despite their differences, both sides can agree on one thing: Drilling for oil in the Arctic Circle is really hard to do. That being said, with a potential 18.7 billion barrels of oil in the Arctic seas, not to mention all the natural gas, it seems like Shell and its brethren will fight hard to find a way to safely drill for oil in the area. Will Shell's "gap year" give environmental groups a chance to make their case against Arctic drilling and influence legislation? Or will the ships go to Asia and come back in 2014 for business as usual? With the world's current dependence on fossil fuels, plus ConocoPhillips' plans to begin exploration in 2014, it seems as though the latter is more likely.

Follow me on Twitter: @JoshWolonick and @Minyanville
No positions in stocks mentioned.
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