The abandonment by Shell of this years drilling plans in the Arctic is hardly a surprise. The project is complex and has run into one technical problem after another. Shell is rightly prudent when it comes to the risks involved in an area which is both environmentally sensitive and under the intense scrutiny of the world’s media not to mention a set of lobby groups energised by the prospect of taking on one of the world biggest companies.
There will now be another delay adding to the five years and several billions of dollars the company has already devoted to the project.
Shell has decided to take on the environmental lobby and to prove that the Arctic can be drilled and developed safely. That is a big bold move in itself, but the real problem for the Shell board and it’s shareholders – which include most pension funds in the UK and the US – is that the economics of development make sense only if one assumes ever higher oil prices.
Shell has never published a detailed analysis of the economics of Arctic development. The commonly quoted numbers for the resources which could be found – 26bn barrels of oil and 130tn cubic feet of gas – suggest a big prize. But what is the cost of development? And what oil or gas price in the US or the world market is necessary to make the project profitmaking?