Canadian Manufacturing

Shell to stop Alaska offshore drilling, cut spending across board

Decision to stop Alaska drilling made after court ruling put "significant obstacles" in way, CEO said



AMSTERDAM, Netherlands—Shell, Europe’s largest oil company, will stop drilling for oil in Alaska this year as it cuts back on investments and tries to reverse a steep drop in earnings.

Incoming CEO Ben van Beurden said Royal Dutch Shell PLC will cut capital spending by around $10-billion this year and sell assets to become more efficient.

He said Shell won’t drill for oil off Alaska’s coast in 2014 following a court ruling that put “significant obstacles” in the way of exploiting resources in the Arctic.

“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,” Van Beurden said.

He added the company would look to resolve the legal issues “as quickly as possible.”

Van Beurden took the helm from outgoing CEO Peter Voser on Jan. 1 and issued a profit warning a little more than two weeks later.

Many analysts took that as a signal Van Beurden was ready to clear the decks and set a new course for the business.

Future investments, he said this week, would be “dominated” by liquefied natural gas (LNG) projects in places such as the Gulf of Mexico and Brazil.

Van Beurden’s plan “(i)s pretty much what we believe the market wanted to hear,” said Investec analyst Neill Morton in a note.

“After Shell’s growth drive of recent years, it is ‘changing emphasis’ in 2014 ‘to improve our returns’.”

Morton predicted further writedowns in the value of Shell’s North American shales assets.

Shell purchased nearly $7-billion worth of shale assets in the United States on Voser’s watch, only to write down their value by $2-billion last summer.

A more detailed look at the fourth quarter earnings figures showed net profit was US$1.78-billion, down 74 per cent on the US$6.73-billion reported a year earlier.

The big fall was due to higher production costs, lower production, and worse refining margins.

The swing was also exaggerated by one-off items during the two periods.

Shell said production was down five per cent to 3.25 million barrels per day, with two percentage points of the fall due to wells shut in Nigeria for security reasons.

The rest was due to maintenance and “asset replacement activities”—old fields fading faster than new projects came online.

Van Beurden said his main focus will be on cutting spending elsewhere to focus on offshore natural gas projects.

“Our ambitious growth drive in recent years has yielded a step change in Shell’s portfolio and options, with more growth to come,” he said. “But at the same time we have lost some momentum in operational delivery, and we can sharpen up in a number of areas.”

Van Beurden hinted that the company may de-emphasize investment in Nigeria, where security concerns have weighed on production.

He also said North America is point of concern for the company.

While oil prices remain high globally, “North America natural gas prices and associated crude markers remain low, and industry refining margins are under pressure.”

The Alaska announcement comes just a month after Shell said it was scrapping a multi-billion dollar project to develop a natural gas-to-diesel facility in Louisiana.

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