Shell’s recent announcement that it plans to acquire leading LNG player BG Group for $70B comes at a time when most energy companies are coming under pressure to cut capital expenditures amid falling oil prices. As of now, there’s been no indication from Shell that the BG merger or capital spending cuts will impact its plans to spend about $1 billion drilling in the Arctic this summer.
Shell has already spent over $5 billion on the Arctic, which includes paying over $2 billion to the U.S. Federal government to obtain its Chukchi Arctic leases. Thus far, the company has little to show for its efforts. In 2012, Shell performed exploratory drilling but had to stop because it did not have required spill containment equipment on hand. In December that year, Shell’s drill rig broke loose from its towline and ran aground. Environment groups, which have raised many legal challenges to Shell’s Arctic plans over the years, blamed the accident on the company’s alleged inadequate assessment and management of risks.
In a new effort to challenge Shell’s summer plans, on April 28, 2015, an environmental group, Oceana, and the environmental law clinic at the University of Chicago Law School, sent a request to the U.S. Securities and Exchange Commission (SEC) asking the SEC to open a formal investigation into disclosures by Shell concerning the company’s activities in the US Arctic.
Publicly traded companies are required to disclose financial risks in detail. In its request, Oceana claims that the Arctic environment is so hostile—and cleaning up a spill so difficult—that Shell faces multibillion-dollar risks that Shell failed to adequately disclose. For its part, Shell maintains its disclosures comply with all the relevant reporting requirements.
The recent SEC challenge of Shell’s Arctic plans comes just as the United States assumes the two-year chairmanship of the Arctic Council, which was created to promote cooperation, coordination and interaction among the Arctic States. What is certain to be a focus of the US energy industry under US leadership of the Arctic Council is the development of US Arctic oil and natural gas resources.
A recently released report from the National Petroleum Council (NPC), Arctic Potential: Realizing the Promise of U.S. Arctic Oil and Gas Resources, concluded that prudently developing US Arctic resources would enhance America’s position as a global energy leader and sustain domestic supplies as production of US shale gas and oil decline in the coming years. While current US production meets 57% of domestic demand, without the Arctic, US crude oil production will decline to meet only 49% of oil demand by 2040.
The Arctic holds not just oil but also massive amounts of gas that could support numerous LNG projects. In fact, the world’s northern most LNG project, SnØhvit LNG, is supplied from the SnØhvit gas field located in Norway’s Barents Sea. Given the l0 to 30-year time frame that is needed to develop any significant offshore oil or gas Arctic opportunity, the US industry is pushing now so that US production will be sustained in the decades to come.
Another reason for the push during the US chairmanship of the Arctic Council is that other countries, most notably Russia and China, are already moving forward with development and research in the Arctic. Thus, it appears that the Battle for the Arctic is already underway and likely to heat up in the coming months if Shell’s summer Arctic drilling plans move forward.
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