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Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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Can Shell Afford To Drill In The Arctic?

How can Shell possibly finance the purchase of BG?

Royal Dutch Shell is set to report its first quarter earnings, and by all accounts, it will be a doozy. Analysts predict a 60 percent decline in earnings from a year earlier, including a massive 7 percent fall in production.

But the price tag for BG will be $70 billion, a colossal sum in a period of low oil prices. Shell has already said that it would undertake a major divestment campaign to rid itself of assets it does not see as integral to its future. Purchasing BG is a sign that Shell sees itself as a company that will be increasingly a producer of LNG and offshore oil. Related: Why The US Should Worry About Oil Sector Jobs

Shell will build up LNG production in Australia and East Africa, and oil production off the coast of Brazil. It has already divested itself of some assets in Nigeria and the North Sea.

Still, there is an elephant in the room that Shell has not yet explained. That is its ill-fated campaign in the U.S. Arctic. Shell has done all it can to keep its options open for the summer of 2015, moving rigs into place and securing the almost all of the necessary regulatory approvals. But it hasn’t fully committed on a return to drilling. Related: HSBC Advises Clients To Get Out Of Fossil Fuels

Environmental group Oceana has opposed Shell’s Arctic campaign from the start. It and other organizations have sued the federal government in hopes of nullifying Shell’s Arctic leases. Now it is turning to the Securities and Exchange Commission (SEC), arguing in a petition that Shell is putting its shareholders at risk with its campaign in the Arctic. Having already spent more than $6 billion, Shell has stated that it will spend another $1 billion on drilling several wells in the Chukchi Sea. But Oceana argues that the company’s financial health is at risk should there be an oil spill, which would lead to unknown costs.

BP is still reeling from its Deepwater Horizon disaster five years after it took place. If a similar event took place in the Arctic, it would be much more difficult to clean up, Oceana argues in its petition to the SEC. Shell has not spelled out those risks. “As we learned from Shell’s experience in 2012, the Arctic Ocean is remote and unforgiving,” Andrew Sharpless, Oceana’s CEO, said in a statement. “Companies like Shell cannot run from the reality that proposed oil drilling creates enormous risks for the ocean and for the company. Related: Oil, The Fed And The Ugly Truth About Capital Markets

That becomes all the more important with its proposed purchase of BG, which comes with a $70 billion price tag.

That begs the question of whether or not Shell will decide on its own to scrap its Arctic campaign. If its future is in LNG, perhaps the company will conclude that the Arctic is not worth the risk.

By Charles Kennedy of Oilprice.com

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