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Royal Dutch Shell begins to get the idea about further U.S. exploration

When Shell first entered the U.S. in the early years of the 20th Century, the company was labeled “The Yellow Peril”. History repeats.

Gerson Lehrman Group

January 5, 2011

Analysis by: Michael Lynch

Analyses are solely the work of the authors and have not been edited or endorsed by GLG.


Environmentalists blocked Shell’s drilling plans for the Beaufort and Chukchi seas. Shell had overcome the many obstacles last spring but the MC-252 incident in the Gulf of Mexico resulted in suspension of all offshore activity including the Arctic. Shell paid $2.1 billion for leases in the region and other expenses made the total come to $3.5 billion. This time the company has been denied clean air permits. Shell had planned to use the Frontier Discoverer rig with emission control technology.


The above is an extract from an article by Guy Chazan of The Wall Street Journal reported in the Rigzone Newsletter of January 4. The message from the government is clear. Clean air is more important than crude oil. It may be that the government believes that the nascent boom in obtaining crude oil from oil shale deposits will make it unnecessary to develop reserves in more hostile environments where accidents can cause substantial damage. Today the Bakken shale in Montana, North Dakota and Alberta, Canada looks to be one of many such resources that can be explored over time. It is possible that the long, long decline in domestic land-based crude oil production has been arrested, at least for a while. Still, with 5.5 million bbl/day of domestic production, another 11 million bbl/day must be imported to satisfy current demand. With the trend toward higher prices for imports approaching $100/bbl, American consumers can look forward to higher prices for gasoline, diesel fuel and heating oil. If the American public is satisfied with this situation which reduces the amount of money for other needs, then the policy will prevail. Past experience has been that a point is reached where much of the American public would prefer cheaper fuel to higher environmental standards. What happens this time is, of course, yet to be determined. In the final analysis, Shell may have to write off their $3.5 billion investment. Seeking a return of the $2.1 billion paid for leases will likely be an exercise in futility. Shell has had many reverses of fortune before and somehow, like BP, has managed to be successful. Recent reports that Shell and BP have had and may still be having merger talks should come as no surprise. For decades the motherly arms of Shell have been open for BP. If the U.S. is to become a hostile business environment for both companies, perhaps a merger would allow them both to gracefully exit the U.S. When Shell first entered the U.S. in the early years of the 20th Century, the company was labeled “The Yellow Peril”. History repeats.


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