Sector News

Shell ends bid to drill in Norway's frontier areas

April 7, 2016

Royal Dutch Shell PLC. backed out from a bid to explore for oil and gas in frontier areas off Norway on Monday, as it deals with weak prices for crude and shifts focus after a recent merger with BG Group PLC, the oil company said.

The Anglo-Dutch firm’s move represents a setback for Norway’s nascent Arctic oil and gas ambitions and illustrates how the company is repositioning following its roughly $50 billion takeover of BG earlier this year.

That deal closed in February and is intended to restructure the company strategically with an intensified focus on fast-growing liquefied natural gas markets and large deepwater developments.
For now, costly and uncertain Arctic exploration doesn’t seem to fit in the new portfolio. On top of that, the sharp slide in oil prices over the past two years has made relatively expensive oil and gas exploration in Arctic frontier waters less attractive.

“The market situation is very challenging,” said Andy Brown, head of oil and gas production at Shell.

The company, which applied for several oil exploration licenses in December, had already indicated it would reduce exploration in frontier areas for a period after the February merger with BG, Mr. Brown added.

It is the latest blow to controversial moves to explore for oil and gas in virgin Arctic waters, where projects from the U.S. to Russia have faced delays and cancellations. Shell already scrapped one major push to find Arctic oil reserves offshore Alaska last year after sinking $7 billion on an exploration push that resulted in one of the industry’s most expensive dry holes.

Slumping oil prices, environmental protests and sanctions against Russia have all served to dampen the industry’s enthusiasm for the largely unexplored region. Other giant companies like ExxonMobil Corp., Chevron Corp. and Norway’s Statoil ASA have shelved Arctic projects since oil prices began their long descent almost two years ago.

In Norway, Italian oil company Eni SpA and Statoi’s efforts to get oil pumping from the Barents Sea have faced numerous setbacks, delays and cost overruns.

Oil prices have collapsed over the past two years, bringing the cost of a barrel down below $30 a barrel in early 2016, from above $100 between 2011 and 2014. Brent crude traded Tuesday at around $37 a barrel.

The Norwegian government this summer expects to award its first new acreage since 1994, in its 23rd licensing round in the arctic, based on applications from 26 oil and gas companies. Exploration drilling is expected to start in 2017.

“Shell has notified us that its decision [to pull the application] is based on short-term cash flow concerns and consolidation after the BG acquisition,” said Tord Lien, Norway minister of petroleum and energy. “Shell is a competent and strong company that I’d like to see competing for new acreage on the Norwegian shelf,” he added.

The Anglo-Dutch oil firm, one of the world’s largest, had applied for several licenses in Norway’s southeastern Barents Sea, a previously disputed arctic area bordering Russia. The company said in December that it had relevant experience from operations in Alaska, Sakhalin in Russia and Greenland.

“The situation requires that we prioritize global activities that will yield revenues earlier than what a discovery in the Barents Sea would have done,” said Tor Arnesen, head of Shell’s Norwegian operations.

Shell has said it expects to spend $33 billion this year in capital investment, but according to analysts at Bernstein, that number could be reduced to $28 billion, as a result of reduced spending on exploration, cost reductions and project delays.

By Kjetil Malkenes Hovland

Source: MarketWatch

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