Checking in with the Arctic

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The difficulties and failures of Shell’s exploration into the Arctic in the past year have been well documented. Not only have there been multiple costly delays, but numerous accidents have led to increased exposure of the dangers and risks inherent in attempting to extract from this region. This exposure has resulted in increased outside pressure on Shell from both environmental interest groups, as well as the Obama administration.

Recently, Shell decided to part ways with David Lawrence, the Executive Vice President responsible for the Arctic program. While Mr. Lawrence, a nearly 30-year veteran of the company, is said by Shell to have departed by “mutual consent,” the timing of the departure leaves little to the imagination.[1] It is also a tacit acknowledgement that continued operations in the Arctic will not be as easy as Shell has long claimed. Just a year ago, Lawrence was quoted while speaking on behalf of Shell that Arctic operations would be “relatively easy” due to the low pressure and shallow waters of the targeted area.[2]

So where does Shell go from here? With the weather window currently closed, Shell will rework its plans for the next drilling season. In the eyes of regulators, however, Shell has clearly lost the benefit of the doubt and will be subject to increased oversight from various branches of the Federal government. In fact, the timing of when to return to operations may not be up to Shell executives, but rather may rest with the government. Secretary Salazar, until recently the leader of the Department of Interior, has stated that “Shell will not be allowed to move forward into the Arctic to do any kind of exploration unless they have this integrated plan in place that’s satisfactory to the Department of the Interior.” When asked the justification for this hard line stance, his response was “Shell screwed up in 2012.”[3]

Despite these setbacks, Shell has no plans to withdraw from the region. This is in large part due to the fact that the company cannot afford to. Low natural gas prices and lack of distribution capacity out of Canada have had serious negative consequences for Shell’s Western operations. The return on employed capital for its Upstream America’s division in 2012 was just 1%.[4] Shell has made a heavy, and long term, bet to diversify away from gas and increase its oil ratio in an attempt to increase this return. Given the current state of the energy markets and the incredible amount of capital already invested in the region, Shell believes it must find a way to overcome the obstacles in the Arctic, no matter how high they continue to be stacked.

[1] http://www.forbes.com/sites/christopherhelman/2013/03/26/shell-oil-axes-exec-for-alaska- drilling-fiasco-will-more-heads-roll/

[2] http://gcaptain.com/shell-arctic-drilling-is-easy/

[3] http://switchboard.nrdc.org/blogs/fbeinecke/after_shell_fiasco_oil_compani.html

[4] http://www.forbes.com/sites/christopherhelman/2013/03/26/shell-oil-axes-exec-for-alaska-drilling-fiasco-will-more-heads-roll/

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1 Comment

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One response to “Checking in with the Arctic

  1. max vilmar

    Interesting topic! I have one question: What kind of problems did Shell face with the weather? Ship wreck? Freeze over? Why exactly are they failing in the Arctic?

    It seems like nothing good can come out of this exploration. America’s need for oil is decreasing as we move to alternative energy sources, and as the demand for oil goes down, the oil companies are getting a little more desperate to make profit. This “heavy bet” to explore the arctic for oil could potentially help Shell monetarily, but will it help the world overall? The Arctic is one of the last places on earth untouched by man, with polar bears, walrus, and beluga whales already at risk. Do we need the extra oil underneath their home?

    The environmental impact of this drilling operation must be critically evaluated, and administration should set the highest bar possible for Shell to reach if they are going to keep going with this project.

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