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No Shell Arctic Oil Until 2030’s

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By: MICHEAL KAUFMANPublished: May 26, 2015 

Royal Dutch Shell Plc’s (ADR) (NYSE:RDS.A) head of oil and gas production in Americas, Marvin Odum has told the Financial Times (FT) in an interview that the company’s Arctic drilling operations would take at least a decade to extract oil reserves, which would then be sent to production.

The leading executives dealing with this particular exploration project stated that there are enormous difficulties that the company is facing during the process of securing environmental approvals. Amid strong opposition from environmental groups, to obtain the needed approvals is taking longer than the expected time.

Mr. Odum told FT that following the arctic drilling phase, a hefty amount of infrastructural investment would have to be spent to move on to the production phase. He asserted that this kind of infrastructural investment would only prove to be worthwhile, if substantial amount of reserves are discovered in the Chukchi Sea off Alaska.

The company faces severe challenges with regards to its long delayed Arctic drilling plans. There is much noise created amongst the investors, general public and environmental activists, who believe that the Shell’s project poses huge environmental risks, due to the Arctic’s volatile climatic situation.

Activists including Oceana Environmental Group and Abrams Environmental Law Clinic are protesting outside Shell’s major offices on a regular basis. They raise voice against the environmental damage that could be caused by this project through emissions, as well as any unforeseen mishap resulting in an oil spill.

The activists were even present at Shell’s annual shareholders meeting this month, wearing polar bear costumes and chanting against the project. They have highlighted the BP Plc’s (ADR) (NYSE:BP) five year old oil spill in the Gulf of Mexico, which was a serious mishap. According to the opposition, if a similar incident occurs in the Arctic, it will be even more difficult to carry out the cleanup operations, due to the extreme climatic conditions. They argue that the effects of BP’s oil spill can still be witnessed in that particular region, and if any such incident happens in the Arctic, it would be impossible for Shell to clean up and bring the ocean back to its original state.

Nevertheless, despite all these challenges and oppositions, Shell’s CEO, Ben Van Beurden made it clear at the annual shareholder meeting that he is committed to go ahead with the Arctic drilling project. Mr. Beurden argued that fossil fuels’ demand is on the rise and the company needs to accelerate production to meet the increasing demand 30-40 years from today.

From the oil producers’ point of view, the Arctic is considered to be one of the greatest oil and gas exploration frontiers, and as the global climatic change is diminishing the ice cover, the region is demonstrating better accessibility for explorers.

It is estimated that about 30 billion of the total 90 billion barrels of oil suggested by US Geological Survey, to be present in the Arctic, are held by the region off the northern coast of Alaska. However, although Shell is eager to get into the Arctic scene as soon as possible, other oil companies including Statoil ASA (ADR) (NYSE:STO) and Chevron Corporation (NYSE:CVX) have delayed or cancelled their Arctic plans amid being hit by plunging crude oil prices, since last summer.

According to some analysts, the cost of production in the Arctic might be much higher than others. The producers might even have to compete against cheap Middle Eastern oil, or even the US shale, costs of which are falling as producers accommodate themselves to the lower oil prices.

However, Mr. Odum states that Shell is eyeing on the size of the prize that they might find in the Arctic, and claims that it will be completely worth it. He added that Arctic possesses a world class potential for being the key resource with staggering high volumes.

Shell has taken the regulatory authorities in confidence through its risk mitigation plans that were never thought of before. Mr. Beurden even assured the stakeholders that the company has thought down to the worst case scenarios, and devised crisis action plans accordingly.

Even the US President, Barak Obama, according to FT, has spoken in favor of Shell earlier this month, praising the company for providing assurances, which were never seen before, with regards to the Arctic’s clean up in the case of a spill.

In response to Mr. Obama’s praise, Shell’s executive vice president for the Arctic, Ann Pickard has said that if the US government really wants the Arctic to be as big a producing region as the Gulf of Mexico, the government should not only have a dialogue with the opposing parties, but also help the process to move forward at a faster pace with lesser hurdles.

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