Shell won't drill offshore in Alaska Arctic this year

WASHINGTON -- Royal Dutch Shell is abandoning hopes of drilling in the Arctic waters off Alaska this year, the latest blow to the company's effort to exploit huge potential in the petroleum-rich but sensitive region.

The decision came as Shell reported a steep drop in earnings and its new CEO announced plans to restructure operations to improve the company's cash flow.

CEO Ben van Beurden cited last week's court ruling that threw offshore Arctic oil leases into question. The 9th U.S. Circuit Court of Appeals agreed with environmental and Alaska Native groups that the federal government had underestimated how much oil drilling would happen when it sold the leases in 2008.

Van Beurden told investors that the ruling raised "substantial obstacles" for Shell's plans in Alaska waters.

"This is a disappointing outcome, but the lack of a clear path forward means that I am not prepared to commit further resources for drilling in Alaska in 2014," he told the investors Thursday. "We will look to relevant agencies and the court to resolve their open legal issues as quickly as possible."

Van Beurden told reporters in London that, in addition to not drilling the Arctic waters in 2014, "we are reviewing our options there."

Shell and others had explored offshore in the Alaska Arctic in the 1980s and early 1990s. But before Shell's recent push there had been little activity in the last two decades and none by Shell.

A series of mishaps doomed its 2012 effort. Those included the grounding of a drilling rig, reports of safety and environmental violations, and fines for breaking air pollution limits. Ken Salazar, the interior secretary at the time, said Shell "screwed up" the historic Arctic effort. The Coast Guard conducted a full marine casualty investigation into the circumstances of the grounding. But its report has not yet been released.

The problems led Shell to drop plans to drill last year, but it had interest in resuming this year if the federal government agreed to issue permits.

Shell has spent almost $6 billion so far on its Arctic offshore effort, the company said Thursday.

"We needed more certainty and didn't get it, making it impossible to justify the commitment of resources needed to explore safely in 2014," Pete Slaiby, Shell's vice president for Alaska, said in an email.

It has yet to extract oil or even drill a single, complete well. While Salazar allowed Shell to start wells in both the Chukchi and Beaufort seas in 2012, the company wasn't allowed to drill into oil-rich geologic zones because its novel oil-spill containment dome failed tests. The entire drilling season was shortened because of a series of equipment problems.

Environmental groups hailed Shell's decision to suspend the effort.

"Shell is finally recognizing what we've been saying all along, that offshore drilling in the Arctic is risky, costly and simply not a good bet from a business perspective," said Jacqueline Savitz, Oceana's vice president for U.S. oceans.

Erik Grafe, the Earthjustice attorney who led the lease challenge, called on the Obama administration to do a new environmental study.

"The Department of the Interior now needs to take a hard look at whether the Chukchi Sea should be open for oil drilling at all, beginning with a full and public environmental impact statement process that addresses the Ninth Circuit decision and does not minimize the risks of oil drilling in this vibrant but vulnerable sea," Grafe said in a statement.

Greenpeace urged other companies that are considering offshore Arctic drilling to learn from Shell's experience and "conclude that this region is too remote, too hostile and too iconic to be worth exploring."

"The decision by Shell's new CEO to suspend Arctic Ocean drilling in 2014 was both sensible and inevitable," Lois Epstein, an engineer and Arctic program director for The Wilderness Society, said in a statement. "The Arctic Ocean has proven to be logistically challenging for drilling and mobilization, and a bottomless pit for investment."

Political leaders faulted the federal government and court rulings and downplayed Shell's own difficulties.

Alaska Republican Sen. Lisa Murkowski said she was disappointed that Shell wouldn't be going ahead this year. She said it was understandable given the uncertainty due to the federal court ruling on its leases.

"Companies willing to invest billions of dollars to develop our country's resources must have confidence that the federal agencies responsible for overseeing their efforts are competent and working in good faith. I'm not convinced that has been the case for Alaska," Murkowski said in a statement.

Alaska Democratic Sen. Mark Begich blamed "judicial overreach" for the situation.

"I'll be talking with Interior Secretary Sally Jewell today, and expect her agency to move quickly to address the court's questions and concerns and do everything possible to get this process back on track," Begich said in a statement.

Gov. Sean Parnell said Shell's decision was understandable, given the recent court ruling.

"Multiple years of federal regulatory delay, litigation delay, and one year of operational issues have created barriers to Alaskans' near-term economic prospects," Parnell said in a statement. "Still, offshore energy development will play an enormous role in Alaska's economic future, and I remain committed to responsibly developing our vast offshore resource basin."

The decision came as the company told investors that its fourth-quarter profits had plummeted, in part because of expensive exploration projects around the world. Van Beurden said project delays in several countries and Nigeria's worsening security situation had contributed to a changing outlook for the Dutch oil company.

He said Shell would reduce its capital spending this year by about $10 billion, increase sales of its assets and attempt to improve its operational performance.

"We are making hard choices in our worldwide portfolio to improve Shell's capital efficiency," he said.

Other oil companies also have reservations about developing in the harsh Arctic environment. In April, ConocoPhillips announced it was abandoning its plans to drill this year in its Devil's Paw prospect about 80 miles off the Alaska coast because of uncertainty over government requirements. Statoil, a Norweigian oil and gas company, announced in September 2012 that it was delaying exploration plans. Spanish oil company Repsol also holds leases offshore.

The Bureau of Ocean Energy Management estimates there are 27 billion barrels of "undiscovered technically recoverable" oil offshore Alaska.

Daily News reporter Lisa Demer contributed to this story from Anchorage.

By Sean Cockerham

Daily News Washington bureau

Sean Cockerham

Sean Cockerham is a former reporter for the Anchorage Daily News. He also covered Alaska issues for McClatchy Newspapers based in Washington, D.C.