Yahoo Finance Shell’s Alaska pullout a sign of the times
It’s a surprise move that has environmentalists jumping for joy. Royal Dutch Shell (RDS-A) has abandoned its controversial offshore drilling operation in the Arctic Ocean near Alaska, only a month after it received approval from the Obama administration to do so.
In a statement, Shell says the oilfield in the Chukchi Sea failed to yield a significant discovery, costs were high, and the “unpredictable” U.S. regulatory environment were all reasons for ending the drilling project. Shell has placed a balance sheet value of $3 billion on its Alaska position.
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Needless to say, pulling out of Alaska is a big deal. “It's going to be a big financial hit at least on an accounting basis, there's going to be a big write down where essentially Shell is going to have to admit in a very formal way in their financial reports that this was wasted money,” Yahoo Finance’s Mike Santoli says in the attached video. “It's going to be something of a gut check for the management here to say ‘you know we tried, it just didn't seem worth it in the end,’ though it's hard to say if the market was already assigning any real long term value to the production that might have come out of this region.”
Shell’s move in Alaska raises larger questions for the big exploration and production companies as to whether remote drilling locations like the Arctic have long-term viability, given all the variables like cost, regulatory hurdles, and of course, the price of oil. “It just completely changes the cost benefit analysis: is it worth it to spend all this capital and go through the very difficult regulatory hurdles in order to pull oil and gas out of this region?” Santoli asks.
And it doesn’t look like the situation with low oil prices is going to change anytime soon. “If you look far out in the curve, you look in the very distant [crude oil] futures, it's still suggesting that oil prices will remain relatively depressed,” he says. “It means that these [oil companies] can't bank on a quick rebound that's going to put a lot of these projects back into the black.”
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