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BG Deal May Leave Shell’s Arctic Ambitions In Limbo

BG Deal May Leave Shell’s Arctic Ambitions In Limbo

Royal Dutch Shell’s purchase of BG will turn the combined company into a natural gas behemoth. But one casualty of the merger could be one of Shell’s iconic drilling campaigns: the Arctic.

The Arctic is thought to hold 13 percent of the world’s undiscovered oil reserves, and 30 percent of its undiscovered natural gas reserves, according to the U.S. Geological Survey. That makes the Arctic “one of the last energy frontiers,” as Shell put it. Sitting off the coast of Alaska could be around 30 billion barrels of oil.

Shell prided itself on going where no one else was willing. In some of its literature, Shell trumpets its experience in Norway and off the Russian coast on the sub-Arctic island of Sakhalin. It also plays up its experience with new drilling rigs, ice monitoring capabilities, and extensive and innovative oil spill response plans. All of this would give Shell the technical ability to safely produce Arctic oil. Related: Is Saudi Arabia Setting The World Up For Major Oil Price Spike?

But drilling in the Arctic was never an easy task to pull off. Several years and billions of dollars spent, Shell is no closer to extracting oil from the icy waters of the Chukchi Sea. Its drill ship ran aground at the end of 2012 when Shell tried to move it out of Alaskan waters, and its Arctic campaign has been on hold ever since.

Still, the company persisted. On March 31, Shell cleared a legal hurdle with the Interior Department, and on April 10 Interior initiated the review process for summer drilling. Shell already started moving rigs to Alaska in order to be prepared in case it decides to move forward. Greenpeace boarded Shells ships bound for the Arctic, promising to unfurl banners in protest, but have since vacated the ship. Related: The Inconvenient Truth About A Green Revolution

All signs point to a returned drilling campaign in the Chukchi Sea.

But, the Arctic may be downgraded on the list of priorities now that Shell has moved to spend $70 billion to take over a major liquefied natural gas (LNG) player. Shell’s CEO Ben van Beurden said that the combined Shell-BG will need to sell off $30 billion in assets over the next three years in order to right-size the company, according to Alaska Public Radio. “We plan to undertake a portfolio review to assess which assets should stay in the enlarged group, and which positions would be better owned by others,” van Beurden said at a conference on April 8. The Arctic could possibly get the ax. Related: Latest EIA Predictions Should Be Taken With More Than A Pinch Of Salt

The point of buying BG was to make a big play on LNG over the long-term. Shell will become one of the most important LNG exporters in the world if the deal goes through. With LNG prices down due to an onslaught of new supply – JKM prices in Asia are less than half of what they were a year ago – LNG is not exactly in a boom market right now. But Shell thinks that natural gas is the future, and LNG will be around for the long haul. LNG may even provide steady and more profitable returns than oil.

As Alaska Public Radio reported, the BG purchase could come at the expense of oil. Shell’s CFO confirmed that the company will spend less on conventional drilling.

That would make sense. Now that Shell has to come up with $70 billion to take over another major producer, spending billions more on the Arctic, with its harsh conditions and unfriendly press, would seem to be a steep and unnecessary price. Shell is trying to transform itself into a natural gas giant, and sees its future more in gas than oil. The Arctic fits awkwardly into that vision. “So yes, you will see some changes in the priorities that we have communicated or implied in recent times as well,” van Beurden said. That sounds a lot like it is reconsidering its ambitious plans for the Arctic.

By Nick Cunningham Of Oilprice.com

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