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March 2014

Vol. 19, No. 12 Week of March 23, 2014

Shell CEO sees Alaska challenges, potential; hard decisions needed

In an investor presentation on March 13, accompanying Shell’s publication of its 2013 annual report, Ben Van Beurden, the company’s new CEO, characterized Shell’s Alaska Arctic program as one of some major initiatives designed for the company’s potential future growth, but where the current pause in activity demonstrates the company exerting discipline in its capital spending on programs that are still in their relative infancy.

“There’s a clear capital ceiling in the company and so we need to take some hard choices, and this means looking more closely at our options at an earlier stage and asking ourselves ‘are these indeed the projects? Are these projects really a good fit for Shell?’” Van Beurden said.

Along with “no drilling this year in Alaska,” Van Beurden cited a U.S. gas to liquids plant and liquefied natural gas development in the Asia Pacific region as projects on pause, where hard decisions are needed.

Court decision

Shell’s annual report contains a section on its Alaska exploration program, citing a 9th Circuit Court of Appeals decision faulting the Interior Department environmental analysis for the 2008 Chukchi Sea lease sale as the prime reason for a continuing delay in moving ahead with drilling in Alaska’s Arctic offshore. In January the court upheld an appeal against the validity of the lease sale and remanded the case to the federal District Court in Alaska. On March 17 the District Court ordered the parties in the case to submit a report by March 31, to indicate how they wish to proceed in the light of the 9th Circuit opinion.

Shell drilled top-hole sections of two exploration wells, one in the Beaufort Sea and one in the Chukchi, in 2012. The company wants to continue drilling in Chukchi Sea leases that it purchased in the 2008 lease sale, but the court decision in January has put the legal status of the leases into question. Damage to the Kulluk drilling rig when the rig ran aground in the Gulf of Alaska after the 2012 drilling season has stymied Shell’s drilling efforts in the Beaufort Sea.

“A 9th Circuit Court decision against the Department of the Interior in January 2014 raises obstacles to our plans for drilling offshore Alaska,” Shell’s annual report says. “As a result, we have decided to suspend our exploration program for Alaska for 2014. We look to relevant agencies and the court to resolve their open legal issues as quickly as possible, and review our options going forward.”

Next step

The report says that if the regulatory and legal issues are sufficiently resolved, the next step for the company would be to review the readiness of its Alaska drilling fleet and the timeline for securing the required permits for the drilling. The report also acknowledges that issues relating to meeting the requirements of Environmental Protection Agency permits during the 2012 drilling season, and problems with moving the Kulluk drilling rig out of Alaska at the end of that season, had caused a pause in the company’s drilling activities in the Chukchi and Beaufort seas in 2013.

—Alan Bailey






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