Is Shell Withdrawing from the Arctic?

In April, oil tycoons Shell agreed to buy out BG Group, which at the time of the sale were the third-largest energy provider in the UK and one of the 15 biggest businesses in the FTSE 100. The deal went through for a whopping £47 million, and the merger means that Shell will inherit all 5,200 of BG’s staff in more than 20 countries.

However, the crash in global oil prices means that Shell will likely be cutting back on their employee outlay, with the most likely cuts being in the North Sea and Arctic sectors. Indeed, Shell had already committed to cutting 300 jobs in the North Sea prior to the landmark deal. And with investments into Arctic drilling unrewarded as yet, they may look to cut their losses and concentrate their focus elsewhere.

The Downside of Arctic Drilling

As of today, Shell’s bid to locate undersea oil in the Arctic has cost the company $5 billion… and has yet to produce a single drop of oil for all of that investment. Furthermore, oil operations were suspended in late 2012 after the Alaskan rig ran aground. Add to this fierce opposition from environmental campaigners such as Greenpeace, as well as concerns as to who actually owns such oil, should it exist, and the Arctic looks a less attractive prospect by the minute.

Of course, Shell has refused to rule out continued drilling in the region – provided they locate oil reserves. Chief financial officer for the company Simon Henry explained: “If we are to drill this year, see what is in those reservoirs, it will change our thinking one way or another. It’s a bit of a binary outcome – but if the value is there it’s not something you walk away from.”

Reading between the lines demonstrates that if oil isn’t located soon, the group may refocus efforts in other regions of the world. But even if oil is pinpointed, extracting it from the Arctic seabed is an even bigger logistical nightmare. For information on the particular difficulties of the practice, read: What are the Challenges of Drilling for Oil in the Arctic? 

An Alternative Future for Shell

Thanks to the merger with BG, Shell will now more than likely focus on other forms of oil production, such as liquid natural gas (LNG) and deep-water oil exploration. The fact that BG owned significant assets of LNG in Australia, as well as substantial deep-water oil and gas exploration fields near Brazil, only serve to strengthen this hypothesis.

In addition to these methods, Shell have also signalled their attention to pursue gas-to-liquids production. This last bracket covers such the transformation of gas into fuels, chemicals and lubricants.

A heavier emphasis on these types of oil production and refinement will almost definitely lead to a decline in its pursuit of Arctic oil reserves… unless those reserves are located, and soon.