arctic

One of the more regrettable conclusions from 2013 is that the Arctic cannot and will not be preserved and kept pristine from the process of economic development. The resource base is too substantial, the opportunity too tempting. As in the Garden of Eden the apple cannot be left untouched. Development is starting and will continue. The next question is whether it can be managed properly. 

Congratulations to Ben van Beurden, the new chief executive of Shell. We are moving into a period when gas is the dominant fuel and Mr van Beurden has great experience in that area, particularly in liquefied natural gas. He is also Dutch which is a good reminder that despite everything Shell has not lost its nationality, after all. The candidates who lost will all soon find alternative jobs. Shell is now the great training ground and there is a shortage of talent at the top level in the international energy business. Mr van Beurden meantime will have to focus on Shell’s big problems, of which I will focus on three. 

Drilling barge the Kulluck Getty Images

Shell's drilling barge the Kulluk. Getty Images

There are two important lessons from the mounting problems facing Shell as a result of the series of accidents that have afflicted its drilling programme in the Arctic.

The first is that major companies must have the capacity to call a halt and to break the inexorable internal momentum that so often makes it impossible to stop projects once they have started. The ability to reconsider is a great sign of strength not weakness.

The second is that a company such as Shell which prides itself (rightly) on its environmental performance is only as good as its weakest contractor. 

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?