Exit Ahead – Shell at the end of the Oil Superhighway

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photo GarrettShell’s departure from the Arctic is a very significant event in the global energy picture, writes Energy Post editor-in-chief Karel Beckman. It is another sign that the End of the Oil Age is in sight.

After Volkswagen, a second major European company had to face acute embarrassment this week. Shell did not commit fraud, but they sure made a billion-dollar blooper in the Arctic. Yes, taking risks is part of what business is about, and sometimes wells turn up dry, but there is a lot more to the story than that.

Clearly the disappointing results of a single exploratory well (“Burger J”) in a single basin can’t have been sufficient reason for Shell to suddenly give up on its Arctic venture altogether. “For the foreseeable future”, as the company put it, i.e. indefinitely. In fact, the company did give two additional reasons: “the high costs associated with the project, and the challenging and unpredictable federal regulatory environment in offshore Alaska”.

But neither of these can have come as a surprise. Critics have been warning for a long time that the costs of Alaskan drilling are prohibitive, and the “regulatory environment” in this part of the world will inevitably be unpredictable.

Land of destiny

So why didn’t Shell see coming what everybody else saw? The company could have turned what was an economic miscalculation into a reputational victory if it had exited the Arctic earlier, when people asked for it. Now the proud Dutch-British company, in 2013 the number one in the world on the Fortune 500 list, is not only derided as a poor investor but its image as a responsible, sustainable company has been severely, perhaps irreparably tarnished. Not for nothing was Shell pushed out of the prestigious Prince of Wales’s Corporate Leaders Group on climate change recently, all the more painful as they had been one of the founding members.

There were, needless to say, reasons why Shell gambled so heavily on the Arctic. As I explained in an article earlier this year, for Shell the Arctic represents (or represented) the single largest long-term prospect of finding new oil and gas reserves. This is made very clear by this graph in the company’s Investor Handbook 2014, on page 16:


The Arctic, as this chart makes clear, was for Shell its land of destiny. This has now turned out to be a mirage. So where will the company turn next?


This question is not easy to answer – and it’s a question that not only Shell faces, but other major oil companies as well – both the international and national ones, as I will try to explain.

From the perspective of major oil producers, long-term oil market prospects look pretty bleak. This is not because there is not enough oil around – but because there is too much.

In a new book, “The Price of Oil”, which we featured on our website last week, researchers Roberto F. Aguilera of Curtin University in Australia and Marian Radetzki of Luleå University of Technology in Sweden, explain why the world is headed for an era of oil “superabundance”. A double revolution – the expansion of shale oil across the globe as well as the fracking and horizontal drilling of conventional oil fieds – could add some 39 million barrels per day (mbpd) to global production, i.e. almost 50% of current production, they calculate.

Note, incidentally, that from this perspective the famous Arctic oil and gas treasure chest turns out to be rather modest. The Arctic region is said to contain 15 billion barrels of “recoverable” oil (which is not to say this amount could be economically produced). These new technologies would cough this up in a single year.


The problem for the Shells of this world is that the coming superabundance is not good news at all. On the contrary. First of all, it means lower prices. Even more importantly, producing shale oil and fracking conventional wells are types of activity that “anyone” can do.

Supermajors like Shell, BP and ExxonMobil have a unique sellling point: they are the only ones that have the skills and resources to take on gigantic projects in difficult environments, such as in the Arctic or in the deep sea. But fracking anybody can play at.

No longer will the oil kings of petrostates roll in money, rule empires of corruption, finance fanatics, buy the latest weaponry. They may just hang on to their football clubs

That’s why Shell first missed the shale gas boat in the US and then when they finally got onboard, had to leave again, with nose bloodied. It is only two years ago that then-CEO Peter Voser admitted to the Financial Times that he very much regretted Shell’s $24-billion venture into US shale. The company had to write off over $2 billion at the time on its US shale activities.

Shell was simply unable to survive in this kind of highly competitive market in which small, versatile players set the tone. But that’s the kind of market that is now looming on the horizon on a global scale.

Peak demand

Yet this is only half of the story. The supply side half. There is also the demand side to consider.

In the oil sector it is still a firmly held belief that demand for oil will grow strongly over the next few decades, as emerging countries will see their populations and standards of living increase. ExxonMobil, for example, in its Outlook for Energy: A View to 2040 report, expects oil demand to grow by 30% from 89 mbpd in 2010 to 115 mbpd in 2040.

However, this prospect is looking increasingly unlikely. To begin with, tightening climate policies are likely to lead to markedly lower oil demand. The International Energy Agency (IEA), in its latest World Energy Outlook (2014) report, projects that in a business-as-usual scenario (“Current Policies” in IEA lingo) oil demand will indeed be some 116 mbpd in 2040.

Artic Drilling kayaktivists vs Shell Polar Pioneer (photo Backbone Campaign)

Artic Drilling kayaktivists vs Shell Polar Pioneer (photo Backbone Campaign)

However, in its middle scenario (“New Policies”), in which countries will take the climate measures they say they will be taking, oil demand stalls at 104 mbpd, “peaking” around 2020.

In its most ambitious scenario (called “450”), in which countries take the measures that are needed to limit greenhouse gas concentrations to 450 ppm (the 2-degrees scenario), oil consumption will crash to 72 mbpd!

No one who has listened to the Presidents of the US and China recently could be sure this won’t happen. Nor will climate be the only reason for governments to limit oil consumption. Air pollution and traffic jams are another powerful motive to curb automobility. It is hard to imagine that countries like China and India will follow the US or even the European example in habits of car ownership and travelling. It would pretty much choke their countries.

And there is an alternative around these days: electric cars. Volkswagen (number 9 in that same global Fortune 500 list) has demonstrated that the limits of clean oil-based cars have been reached. Battery storage costs are coming down. This represents a huge opportunity for electric cars.

Critics will say EV’s will only slowly grow, which may be true. But even if EV’s will make up only a small part of the total vehicle fleet for the foreseeable future, this will be enough to put a ceiling on oil demand – and thereby wreck oil companies’ profitability. Ask European utilities, which are almost collapsing as a result of just a small amount of renewable energy cutting into their profit margins.


Thus, Shell’s withdrawal from the Arctic is a very significant event. It is another sign that the End of the Oil Superhighway is in sight – in the way that Sheik Yamani, former Saudi Oil Minister, meant. You know his pronouncement: “The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.” 

Gas may be a useful and profitable activity to engage in, but for Royal Dutch Shell it will never be what oil was

No doubt oil will continue to be produced and used for a long time to come. But no longer will it rule supreme. No longer will oil multinationals decide the fate of nations. No longer will countries go to war with each other over oil. No longer will the oil kings of petrostates roll in money, rule empires of corruption, finance fanatics, buy the latest weaponry. They may just hang on to their football clubs.

In their book the Price of Oil, Aguilera and Radetzki make a highly significant point: they show that in the period from the early 1970’s until recently, the price of oil has been extraordinarily high compared to all other metals and minerals. They ascribe this topolitical rather than economic forces”, such as the widespread nationalisations in the 1970s. According to the authors, not depletion of reserves, but “the resource curse, represented by domestic and international conflicts over the oil rent, is probably the most important explanation for the extraordinary oil price developments”. Those days, they add, are about to end. 

Plan B

So where does this leave Shell and its peers? Where do they go next?

Shell does have a plan B. It’s called natural gas. To be sure, gas has a lot going for it. It is very likely to play a significant role in the world’s energy future. But it is not nearly the same as oil.

It’s much more capital-intensive to produce. Not as easy to transport. It faces much more competition than oil ever did. In transport, gas has to compete with oil, biofuels, hydrogen, electric cars. In electricity, gas – a fossil fuel – has to compete with renewables, which are getting cheaper, and a host of other energy sources. In heating, it faces competition from renewables and from modern building methods which increasingly make gas heating superfluous.

In addition, it is highly unlikely that the big Asian markets, China and India, will ever adopt gas in the way they rely on oil. China currently uses gas for less than 4% in its power sector. The IEA in a report earlier this year bluntly stated that “gas will not become the fuel of choice in China’s power sector”. That’s not even counting the rest of its energy use. The same holds true for India. In Europe, gas demand has been going down in recent years.

Gas may be a useful and profitable activity to engage in, but for Royal Dutch Shell it will never be what oil was. In fact, observers may wonder, where will Shell get its gas? In this context, it seems significant that Shell has chosen, earlier this year, to pursue a broad “strategic alliance” with Vladimir Putin’s Gazprom to secure its gas interests. How’s that for “an unpredictable regulatory environment”?

It may be time for Shell to start thinking of new roads altogether.


  1. says

    What would you do?

    Consider the following:

    You get a lease to legally search for oil in the strategic reserve of the USA.
    You drill carefully a very expensive well and you don’t find a significant amount that can return your investments.

    Now there are two options:
    Invest for more more expensive wells or abandon the lease.

    Given the fact that:
    * Oil price is low so new arctic production is far from profitable in the near future.
    * The very likely next president anounces she is opposed to arctic exploration.

    The best solution is then: take your losses and look for assets that have a better return in investment.

    Oil is currently very cheap, and far from a rare commodity.

    • Karel Beckman says

      Hans, that’s all very well but look at the chart from their Investor Handbook. Where does this leave Shell? Arctic to them was a big Prize. What all this shows is that oil is becoming an ordinary commodity that a lot of people will be able to play at. Look at the most recent global shale oil figures put out by the EIA on 24 September. But Shell is not an ordinary company. The major oil players are not ordinary people. But they may have tp become like the rest of us!

  2. Dr. DC Patra says

    Wonderful, insightful analysis of ‘oil’. The story, perhaps, can continue with ‘gas’. The story leaves number of questions in the mind of readers about ‘gas’.

  3. Math Geurts says

    a) supply from shale oil is increasing worldwide and
    b) even more significantly, as a result of the energy transition, oil demand is peaking

    So, it looks like a business decision.

  4. cyril widdershoven says

    Dear all, there are certain signs that this is a normal transition phase in oil and gas’ history. The era of ‘cheap or easy oil’ is over, but people already were acknowledging this to the full. Shell’s decision is not remarkable at present, taking into account the current price settings of crude oil in the market, and the low gas prices. I would like to be very interested in the next years, if prices are again going to be increasing. Low energy prices don’t bode well for energy efficiency. Competiveness of hydrocarbons with regards to alternatives have increased. At same time, most of the world, especially the emerging markets (and Africa!) are still fully focused on hydrocarbons. Their economic growth potential is so high that at current production figures, prices will increase, whatever short-going American financials are indicating.
    The end of oil and gas is not over at all. Demand is increasing, not as spectacular but still going up. At the same time, a growing amount of financial and production figures show that the hype in shale could be hitting soon its ceiling. US production is under pressure, and could go down within the next 12-18 months.
    To argue that the time of IOCs and NOCs is over, I feel this is ‘wishfull thinking”. The fact remains that most of hydrocarbons is in the hands of the same countries as before, including shale. If you are taking into account that renewables (solar especially) could be a threat to the position of oil, this could just mean that the West is going to be confronted by the same bunch of parties as before. Main investments at present in solar are made in OPEC or non-OPEC oil and gas producing countries. Maybe a scenario is very feasible in which we will be importing hydrocarbons and electricity from the same OPEC countries (now maybe O&EPEC).

    Shell’s decision is not a watershed. It is a sane and rational business decision, taking into account oil and gas prices (maybe expecting them to stay low for several years), while also being pressured by the media and NGOs. Alaska’s legal environment is also not really attractive at present and with a possible Democratic new president this could even become worse for IOCs and Independents. Some even have indicated that the decision is a strategic retreat due to the media focus on COP2015 in Paris, Obama’s sudden green focus (while he opened up Alaska’s Artic oil search). My child even indicated “papa, it is clear why… It is becoming winter in Alaska”.
    Just some thoughts, not taking any sides, but time will learn if oil has peaked. I already am hearing this since the 1960s, but oil is far from peaking according to myself. A renewed focus on CO2 issues and putting in place a working ETS would take out coal and promote gas for example!

  5. says

    You’re right Karel, Shell’s departure from the Arctic is a very significant sign.

    The next step for Shell: invest the billions that were earmarked for the Arctic (up to 2030) in renewables.

    The end of the Fossil Age is indeed in sight.

    • says

      Last saturday I drove to a wedding 200 km away, I attended the ceremony and the reception. I did the return trip on one fuel tank.
      Make me an electric car that has a range of 800 km on a full battery and a recharge time of 6 minutes, for an unsubsidised new price of 10000 euros. Then I am your man. Uptil now its like buying a mobile phone in the 70s: A bulky gadget for the rich and famous.

      The emerging middle class in the emerging countries will need fuel for their cars, and lots of it, and electric won’t do for the forseeable future dor the above reasons.

      • Karel Beckman says

        Hans, you are completely missing the point. As I wrote in my article, electric cars will grow gradually, eating away at the profit margins of the oil companies, just as wind and solar have been eating away at the profit margins of the conventional power generators. It is nonsense to assume a quick change from oil to electric. The system is huge and it will take decades. But as it is happening, it will put a ceiling on oil demand growth. By the way, I was speaking to a Shell executive the other day arguing this point and he just nodded his head. They know they are in a fix.

        • says

          mr Beckman, this is wishfull thinking. The future cannot be predicted.
          Next: wind and solar eating away profic margins of electricity companies.??????
          Maybe, I advise these companies to be paid for standy and regulation of intermittent sources. If nobody pays, pull the switch (and we all die)
          Say, you are a proud manufacturer and give warrenty on your products. Of course this warrenty ends as soon as customers start modifying your products. But the electricity companies have to accept that energy is dumped on the grid and they keep responsible for the right voltage. Totally absurd.

      • says

        The upper limit of chemical energy storage is 700Wh/kg.
        So, a car will never be able to drive more than 5km at 1 kg of batteries.
        Next: in my opinion it is a mistake to (re)load batteries. They should be replaced on the way (by robots)
        Electric driving is in it’s infancy and only suitable for in town traffic.
        Gasoline is very hard to beat:-)

  6. Allan Hoffma says

    Karel’s piece on Shell Oil’s retreat from the artic reminds me of a discussion I had in the late 1990s with the chief strategic planner for Texaco. I had been invited to brief Texaco planners on renewable energy technologies and did so for over six hours. During a break in the proceedings, over coffee, the chief planner said something to me I’ve always remembered: “We’ve been an energy company for a long time and we intend to be an energy company well into the next century. But we cannot continue to be just a black oil company.” Karel is saying that Shell finally sees that future coming, just as Texaco did many years ago.

  7. Karel Beckman says

    Thanks for all your comments so far.
    Sure Shell’s decision is a “rational” business decision (although I might add that it is coming very late and I would not be too pleased as shareholder at the waste of money), but even a business decision can be significant in the wider picture.
    I did not say oil would peak, I am saying oil demand is peaking. I would like to make the comparison between what is happening now with companies like RWE. A relatively small amount of renewables hit into their profit margins.
    That’s what I think will happen in the oil sector. Companies like Shell need very high profit margins, that’s what their shareholders demand. China and the US are going in a new direction – the importance of oil geopolitically and economically will wither away.
    But we will see how it goes: I have been wrong before!
    Which, by the way, leaves gas: that could still become a saviour for Shell, if they can make the BG takeover to work. But I doubt that we will ever get to a An Age of Gas like we had for Coal and Oil.

  8. says

    complete nonsense.
    Oil will be needed for centuries.
    Our complete transportation system runs on oil and there is not the smallest indication this will change in the next decades.

    • Allan Hoffman says

      I take issue with David Dirkse’s position. Sure, liquid fuels with high energy density will be required for some forms of transportation, e.g. In aviation and many military applications. But as the world begins to get serious about addressing global warming and climate change there will be new policies introduced to reduce use of petroleum and its carbon emissions. Personal transportation vehicles will be increasingly electrified and biofuels will replace traditional petroleum as an energy source. Admittedly this will take time as there are many vested interests in our current energy system, but the trend is clear and the latter part of the 21st century should see major changes from the world Dirkse foresees.

      • says

        Thank you for your honest reply.
        Some remarks:
        1. there is never sufficient biomass to power aviation
        2. in a decarbonized economy biomass will be needed as resource for the chemical industry
        3. enerergy transition is fysics , not policies
        4. the limit for battery power density is 700Wh/kg so a car can never drive more then 6km on 1kg.
        5. we do not know the climate at all. It may cool or get warmer, nobody knows
        6. it looks that CO2 is neglectable as a greenhouse gas
        7. more likely water vapour is the main issue in temperature
        8. new variables show up all the time who need incorporation in climate models which fail so far
        9. AGW is religion
        10 the main purpose of religion is a firewall against fear.
        11. environmental institutions have replaced the church and have replaced hell and pests by climate change.
        12. don’t have yourself brainwashed .

        • says

          AGW has become the new state-religion because it suits beaurocrats. They now may raise taxes and take control without being held accountable because the objective (saving the planet) is such a morally high objective.

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