Shell's profit warning linked to cost of drilling in Arctic waters

Sources say financial writedowns come from costs associated with the Alaskan drilling operation

The Guardian, Terry Macalister, Friday 17 January 2014

Shell made no mention of mishaps in the Arctic but admitted that its American
exploration business had made a loss. Photograph: Carl Court/AFP/Getty Images

The costs of a trouble-prone drilling programme in Arctic waters off Alaska have contributed to Shell being forced to issue a shock profit warning which has shaken investor confidence.

Shares in the Anglo-Dutch oil group slumped in early trading after its newly-installed chief executive admitted that fourth quarter earnings would be around 70% lower than the same period last year.

"Our 2013 performance was not what I expected from Shell," Ben van Beurden said. "Our focus will be on improving Shell's financial results, achieving better capital efficiency and on continuing to strengthen our operational performance and project delivery."

Shell made no mention of mishaps in the Arctic but admitted that its American exploration business had made a loss. And sources said that financial writedowns had come from dry wells and costs associated with the Alaskan operation.

The group was only able to engage in a vastly reduced Arctic drilling programme in the Chukchi sea rather than the wider scheme in the Beaufort sea after equipment failures and a rig grounding during 2012 which continue to cost it money.

Shell is estimated to have spent $5bn (£3m) in the region over recent years without any tangible result so far and it is struggling to convince safety regulators that it should be allowed to drill in the Chukchi this summer.

The company also blamed higher exploration costs, security problems in Nigeria and heavier than expected maintenance work on its liquefied natural gas business, as well as a high dollar, for its lower profits.

Fourth quarter earnings on a current cost of supplies basis are now expected to be around $2.2bn while the annual result will be $16.8bn compared with $27.2bn before. The results are due to be released on 30 January.

Peter Hutton, an oil analyst at RNC Capital Markets, said the figures were disappointing, but he questioned whether the new chief executive was just throwing out all the bad costs that he could blame on his predecessor, Peter Voser, who left at the end of the year. "We think the [stock] market should become more sanguine as it reflects on these adjustments and recognises that Shell is taking a last opportunity for a bit of a bath."

Earlier this week Shell was reported to be preparing to make significant cutbacks to its operations in the UK North sea, and van Beurden is expected to announce a string of divestment targets at the end of this month.

New Year's Eve grounding of its drill rig the Kulluk.

Related Articles:

The word is out: Shell 'screwed up' in 2012