The Economist: A rig too far: Shell in the Arctic

http://www.economist.com/news/business/21669912-shells-retreat-frozen-north-shows-new-realities-big-oil-rig-too-far

That was a big climbdown for a company that had spent seven years since acquiring the Chukchi licenses in 2008 in a highly public, drawn-out battle to drill in the Arctic. The decision boiled down to costs, financial and reputational. Most big oil firms face similar pressures. Some will take a lesson from Shell and put their Arctic plans on hold, though Eni, a big Italian oil firm, is vowing to press ahead with its efforts to drill in the Norwegian Arctic.

As the oil price has fallen by more than half over the past year, the economics of drilling in deep and treacherous waters have worsened considerably. Though Shell had sought to play down the dangers of its Chukchi conquest, observers long ago reckoned it had bitten off more than it could chew. It suffered a slew of mishaps in 2012, culminating on December 31st of that year in a drilling rig breaking loose from its tow lines and running aground.

After that episode, Ben van Beurden, installed as Shell’s chief executive in 2014, could have halted the ill-fated project. But after a “personal journey”, he decided to go ahead. Since then, Shell has portrayed Arctic drilling as somewhat of a mission, saying the prospective hydrocarbon reserves—ten times the total produced so far in the North Sea—are needed to provide energy for a global population expected to rise from 7 billion to 9 billion by 2050.

Analysts say it was more about shoring up Shell’s reserve base, at a time when oil and gas deposits are increasingly held either by national oil companies or by nimble American “frackers”. Last year Shell replaced only 26% of the 1.2 billion barrels of oil equivalent (boe) that it produced. It has told investors that the Arctic was the best long-term bet for filling that gap, expecting it to provide at least 500m boe after 15 years. Now it will need new alternatives. If its £47 billion ($70 billion) takeover of BG Group, a British firm, goes ahead, that is one: it will increase Shell’s oil and gas reserves by a quarter