Shell Delays Plan to Drill Offshore Alaska

(Dow Jones Newswires), Feb. 3, 2011

Shell said it is postponing a controversial plan to drill for oil in the arctic waters off Alaska's shores by a year, after failing to win the necessary permits from U.S. regulators.

Shares in Shell fell 3% in London trading on Thursday as it unveiled disappointing fourth-quarter results that came in well below analysts' forecasts. Shell Chief Executive Peter Voser admitted he was "not satisfied" with the results.

Shell reported net profit of $6.8 billion in the quarter. But stripping out gains and losses from inventories, non-operating and one-off items--the number investors focus on--its result was $4.1 billion, well below forecasts.

Shell blamed low natural gas prices in the U.S. and problems in its refining division, where some of its big refineries closed down for maintenance. The rising price of crude oil has also squeezed profit margins in its refining and marketing business.

There was some good news, however, with oil and gas production rising by 5%. The company is still on track to increase output by 11% over the 2009-2012 period, as big, long-term projects begin to come on stream--such as two huge natural gas developments in Qatar. Shell "is indeed delivering on its promises," analysts at Petrocam wrote.

Shell said it was continuing to count the cost of the Gulf oil spill, which threw many of its investment plans into disarray. The Obama administration imposed a drilling moratorium in the wake of the April 20 explosion of the Deepwater Horizon rig, and though it was lifted in the fall, drilling in the Gulf of Mexico has been slow to resume.

Shell said it took a $70 million charge last year to cover the cost of oil rigs idled by the drilling halt. That, combined with other charges and production losses in the aftermath of the spill added up to an earnings loss of $260 million in 2010 and 10,000 barrels a day of lost production. The company was forced to postpone $700 million of capital investment, and expects a production shortfall of 50,000 barrels a day this year, Chief Financial Officer Simon Henry said.

The moratorium also held up Shell's long-delayed plans to drill for oil offshore in Alaska. The company has invested $3.5 billion in an exploration program in Alaska's Beaufort and Chukchi seas, but the plans have been entangled in legal challenges by environmental groups fearing the effects of a big oil exploration campaign on the fragile arctic.

Late last year, Shell was dealt a fresh setback when the state Environmental Appeals Board invalidated its air-quality permits for drilling in Alaskan waters. Shell says this is the only permit it is now missing, and it has all the other 34 required.

Voser said that, due to the uncertainties over permitting, Shell has decided to postpone its drilling program for a year to 2012. He stressed that offshore Alaska, which is believed to contain reserves of up to 25 billion barrels of oil, "remains an interesting area for us in the longer term."

Concern about allowing oil companies into the arctic wilderness has grown since the Deepwater Horizon accident, with many environmentalists arguing that oil spills in such remote areas would be much harder to contain and clean up than in the relatively accessible Gulf of Mexico.

The report of the presidential commission investigating the Deepwater Horizon disaster, published last month, said more scientific research needed to be done on the ecosystems of the arctic, including annual stock assessments for marine mammals, fish and birds that use the Beaufort and Chukchi Seas. That could then be used to measure the impact of oil and gas development on the region.

But Shell was encouraged that the commission said the need for additional research "should not be used as a de facto moratorium on activity in the Arctic."

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