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Why Shell Is Facing Problems In The Arctic

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Published: Dec 19, 2014 at 11:21 am EST

Royal Dutch Shell Plc. (ADR) (NYSE:RDS.A) is uncertain over its plans to drill in the US Arctic. The final decision regarding the company is expected to come in March, 2015. During this time the company is likely to consider various factors before taking a decision.

How crude oil prices have moved in the last six months seems will be a factor in any decision taken by management. Oil exploration and production (E&P) activities have fallen globally because of the dip in prices.

West Texas Intermediate (WTI), the US benchmark for crude oil was trading at $54.59 per barrel today, while Brent crude, the global benchmark is still below $60 per barrel mark at $59.93. However according to sources these global market fundamentals are considered a minor factor affecting the future outlook of the company in the Arctic. Arctic drilling is usually a long-term endeavor and prices are expected to stabilize over time.

What concerns the company most according to Platts McGraw Hill Financial is the outcome of potential lawsuits over environmental damage.

Shell had originally acquired leases to explore for oil in the Chukchi and Beauford seas in Alaska after receiving approval from the US Bureau of Safety and Environmental Enforcement (BSEE) and had decided to sue environmentalists in order to avoid facing any legal challenges in the future. The BSEE has also been sued for giving the approvals.

Studies by the US Bureau of Ocean Energy Management (BOEM) are currently also underway in order to assess the degree to which the environment might be affected as a result of Shell’s activities in the Arctic. The studies are expected to reveal that Shell’s operations increase the probability of oil spills.

Another issue that the company faces that is the time that the BSEE is taking to come to a decision on whether to allow an extension of five years for Shell’s leases in Arctic waters. Vice President of Shell Peter Slaiby said that BSEE’s approval was vital to Shell before deciding to increase investmentin the region. Currently Shell has spent around $6 billion and has more exposure to the region compared to any other company.

The leases that Shell owns in the Chukchi Sea are set to expire in 2020 while the leases in the Beufort sea are set to expire in 2017. If the approvals come in late then it is less likely for Shell to go ahead with its plans.

Chevron Corporation (NYSE:CVX) has decided to indefinitely suspend its program for operations in the Beufort sea. Its decision came due to the strict regulatory requirements to undertake operations there. Drilling programs recently were also put on hold by ConocoPhillips (NYSE:COP) and Statoil ASA (ADR) (NYSE:STO).

Exxon Mobil Corporation (NYSE:XOM) along with its subsidiary Imperial Oil Limited (USA) (NYSEMKT: IMO) and BP plc. ADR (NYSE:BP) however are undertaking plans to meet the regulatory requirements. Their first well is expected to be drilled in 2020.

Shell itself is to be blamed for much of the problems in the Arctic. A spokesperson for Alaska Wilderness League said, “Given the mishaps by Shell in 2012, Shell’s competency is a major factor in what happens in 2015.”

The stock price for Shell was up about 2%% at $67.92 as of 11:05 am EST.

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