Martin Flanagan: Shell pulls out of Alaska drilling

Columnist Martin Flanagan. Picture: Fiona Hanson

The decision came because Shell has failed to find sufficient indications of oil and gas to make the game worth the candle in terms of further exploration.

Shell says it will cease exploration in the region “for the foreseeable future”. And although the company says the well, in Alaska’s Chukchi Sea, was likely to remain of strategic importance, who is to say when in these straitened times for the energy industry it feels emboldened enough to go back to the region?

The withdrawal will not be without negative financial implications for Shell, as it is valued at $3 billion (£2bn) on its balance sheet, along with $1.1bn of future contractual commitments.

The industry was always aware that drilling for oil and gas in areas like the Arctic posed significant operational and logistical challenges, apart from the problematic relations with politicians and environmentalists.

Tellingly, Shell also blamed its quite pivotal decision yesterday on the “challenging and unpredictable regulatory environment”.

Although a strategic knockback for the group – it had high hopes for a field half the size of the Gulf of Mexico – you can see where Shell is coming from.

All the big industry players are subjecting all projects, from the North Sea to furthest Asia, to stringent financial criteria given the plummet in the price of oil.

Shell made no bones about it earlier this year that it was setting out its stall in terms of  exploration and production for a “prolonged downturn”, as it slashed its budget by $7bn and is in the process of cutting 6,500 jobs during 2015.

In that context, the group has decided it is better to take the disappointing finds from the Burger J well in Alaska on the chin rather than throw good money after bad.

Quite simply, the Arctic, mainly for climatic reasons, is one of the most difficult places in the world to go and explore for energy, even without the backdrop of hostility from opponents.

There are clearly less challenging environments globally to make energy investments. While Shell’s decision is major enough to garner all the headlines, the attritional cutbacks lower down the exploration and production food chain will also still go on. Challenging times.