Shell hit by a $4.1 billion charge after it ceases Arctic drilling

The company said it had found “indications” of oil and gas in its Burger J well in Alaska’s Chukchi Sea, but that they were not sufficient to warrant further exploration. 

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The Independent Online

Royal Dutch Shell will cease its campaign to produce oil in Alaska taking a charge of up to $4.1 billion (£2.7 billion) as a key exploration well comes up dry. This brings the total cost of the company unsuccessful drive into the region to more than $10 billion.

The company said it had found “indications” of oil and gas in its Burger J well in Alaska’s Chukchi Sea about 150 miles from the coastal city of Barrow, but that they were not sufficient to warrant further exploration. The well will now be sealed and abandoned.

“This is a clearly disappointing exploration outcome,” said Shell Upstream Americas director Martin Odum.

A Shell spokesman added: “Shell will now cease further exploration activity in offshore Alaska for the foreseeable future. This decision reflects both the Burger J well result, the high costs associated with the project and the challenging and unpredictable federal regulatory environment in offshore Alaska.”

Shares in Shell fell by 8.5 p, or 0.55 per cent, to 1,540 p.

Shell warned that it have to take a financial charge as a result of the ending its Alaskan campaign. It could not give an exact figure but said its “Alaska position” is worth about $3bn and that it has about $1.1bn of “future contractual commitments”. The latest charge comes on top of the $7 billion Shell has already spent in Alaska, bringing the total cost to about $11 billion.

Oil companies believe the Arctic could be one of the world’s great untapped sources of oil and Shell chief executive Ben van Beurden said in July that the area his company has just abandoned “has the potential to be multiple times larger than the largest prospects in the US Gulf of Mexico”.

However, because of the Arctic conditions any reserves that were located would be difficult and expensive to extract – at a time when oil companies are looking to curb spending after a 50 per cent slump in the oil price in the past year – to $48.26 a barrel – that shows little sign of rebounding over the next few years.

Shell’s decision to end its Alaskan ambitions brings to an end a difficult chapter, which has included a number of incidents. These include a fire on the Nobel Discoverer rig and the failure to have a spill-response barge on site before drilling rigs reached oil-bearing zones. But the most high-profile incident was the grounding of its kulluk drill barge off Sitkalidak Island in the Gulf of Alaska on 31 December 2012. The US government blocked Shell from any activities in Alaska following that incident but the company but last month Shell was granted permission by the US authorities to begin exploratory drilling for oil and gas beneath the Arctic seabed.

It will also come as a relief to environmental campaigners, who have strongly opposed Shell’s plans to drill in the Arctic, saying that an oil spill could cause huge damage because of the difficulty of cleaning it up.