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Shell Scrutinizing 'Options' for Alaska Offshore Portfolio

Royal Dutch Shell plc has shelved plans to drill in Alaska's offshore this year and is reviewing options for the business unit, CEO Ben van Beurden told shareholders on Tuesday.

Shell's multi-year exploration program in the Beaufort and Chukchi seas was paused in 2013 to prepare for the next drilling season. The initial drilling effort proved far from successful, plagued by incidents that resulted from equipment and personnel failures, for instance, the grounding of Mobile Offshore Drilling Unit Kulluk on the eastern coast of Sitkalidak Island, AK, in late December 2012 (see Daily GPI, April 4). Shell in January scratched this summer's Alaska exploration plans (see Daily GPI, Jan. 30).

Shell has taken heat since it launched the Alaska offshore effort in 2008, but the most recent blow from a ruling in January by the Ninth Circuit Court of Appeals may be the most damaging. The appeals court ruled that the Chukchi Sea Lease Sale 193 in 2008, in which Shell secured the most bids, may have used inadequate information regarding available resources and on environmental risks (see Daily GPI, Jan. 23;  Feb. 8, 2008). The ruling reinstated a 2008 ruling against the government by several conservation groups and Alaska stakeholders.

Given that Shell has ongoing exploration efforts in Canada, Kazakhstan, Greenland, Norway and Russia, it may be time to rethink Alaska's offshore, van Beurden said.

"The Arctic will be an important source of oil and gas for future energy demand, and it is a long-term investment opportunity for your company," the CEO told shareholders. In Alaska, Shell has "added additional people and resources to the venture, we've updated our plans with what we've learned from 2012, and we've worked closely with the U.S. Department of Interior and other government agencies.

"However, we are frustrated by the decision in January this year by the Ninth Circuit Court of Appeals in a six-year-old lawsuit against the government. The obstacles introduced by that decision make it impossible to justify the commitment of cost, equipment and people needed to drill safely in Alaska this year. We will have to wait for the courts and the U.S. administration to resolve this legal issue."

Given all the obstacles that it faces in Alaska, Shell has put aside drilling plans this year "and we are reviewing our options here," said van Beurden.

"Our strategy overall remains robust, but 2014 will be a year where we are changing emphasis. Our financial performance can improve here. We need to further improve on our capital efficiency and we need to continue to work hard on project delivery." In 2014, "improving the profitability in oil products and Americas Upstream is a particular priority for us. We want to enhance our capital efficiency, which will involve moderating the pace of growth investment, more asset sales, and hard decisions on new options..."

Shell has about $80 billion of capital employed combined in its oil products and North Americas resources plays, "and the financial performance there is frankly not acceptable," said van Beurden. "These two businesses have been the largest drag on Shell's profitability in 2013. We are restructuring both of these portfolios...and we are going to be much more selective on growth opportunities here. This will be a multi-year program to address these issues. Shell has a rich opportunity set, which we have built up over the last few years. This is a good position to be in. But we are capital constrained.”

There are some areas where the assets "are simply not competitive or large enough, or where there is only limited growth potential, or where we would simply invest our growth dollars elsewhere with greater benefit. We will go ahead with the most attractive investments on behalf of our shareholders.

To date this year Shell has announced $4.5 billion of asset sales, with more to come. For 2014 and 2015 combined, Shell expects to sell around $15 billion worth of its portfolio. The CEO has said on more than one occasion that the U.S. onshore projects aren't meeting expectations; Shell has written down more than $2 billion related to the assets since last year (see Daily GPI, April 30; Aug. 2, 2013).

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