By Karolin Schaps
LONDON (Reuters) - Royal Dutch Shell (L:RDSa) has abandoned its Arctic search for oil after failing to find enough crude, a move that will appease environmental campaigners and shareholders who said its project was too expensive and risky.
The withdrawal came six weeks after the final U.S. clearance and three months after Shell was still defending the project, a rapid change of heart for such a large company that showed it is preparing for a prolonged period of low oil prices while trying to close its $70 billion takeover of rival BG (L:BG).
Shell has spent about $7 billion on exploration in the waters off Alaska so far and said it could take a hit of up to $4.1 billion for pulling out of the treacherous Chukchi Sea, where icebergs can be as large as New York's Manhattan island.
The unsuccessful campaign is Shell's second major setback in the Arctic after it interrupted exploration for three years in 2012 when an enormous drilling rig broke free and ran aground.
Environmental campaigners and shareholders have also pressured Shell to drop Arctic drilling. Some are worried an oil spill would harm protected species while others are concerned about the cost after oil prices more than halved in a year.
Shell said the decision to withdraw from the area reflected poor results from its Burger J exploratory well, the project's high costs and the unpredictable federal regulatory environment in the area off the U.S. state of Alaska.
A Shell source said the company had found U.S. regulation very prescriptive and in some cases contradictory, making it difficult to navigate the regulatory process.
President Barack Obama's administration dealt a blow to Shell in June, ruling that laws protecting walrus and polar bears prevented Shell from drilling two rigs simultaneously at close range.
"The entire episode has been a very costly error for the company both financially and reputationally," said analysts at Deutsche Bank (XETRA:DBKGn), who estimate the Shell's Arctic exploration project could cost the company about $9 billion.
ARCTIC CASUALTIES
Environmentalists, who have criticised Shell's drilling plans in an area that is home to populations of whales, walrus and polar bears, claimed victory. In July, activists tried to stop an icebreaker key to Shell's drilling plans from leaving port by dangling from a bridge.
Annie Leonard, head of Greenpeace USA, said Shell's decision was "proof positive that drilling in the Arctic is too costly to be effective and a bad bet for other energy companies."
The decision is also the latest in a series of setbacks for projects in the Arctic to find oil and gas deposits estimated at 20 percent of the world's undiscovered resources.
Earlier this year, Norway's Statoil (OL:STL) postponed its Arctic Johan Castberg project again and in 2012 Russia's Gazprom (MCX:GAZP), together with Total (PA:TOTF) and Statoil, scrapped the Shtokman gas project in the Arctic Barents Sea.
"Arctic exploration has been a clear casualty of the oil price slump," said Peter Kiernan, oil and gas analyst at the Economist Intelligence Unit.
Oil firms have dropped costly offshore projects worldwide as weak oil prices have eaten into budgets. These include BP's (L:BP) decision to review investment plans for the deepwater Mad Dog 2 project in the Gulf of Mexico and Husky Energy's delay to an extension of its West White Rose field off Canada.
"Alaska been a bone of contention for many investors thus today's update is a positive," said Bernstein analysts, who rate Shell's stock as outperform.
Senator Lisa Murkowski, an Alaskan Republican, said she was disappointed by the decision. The U.S. Interior Department "placed significant limits on this season's activities, which resulted in a drilling rig sitting idle," she said.
Shell's London-listed shares moved up in early trading but later fell more than 2.8 percent.
Shell said its Alaskan project was valued at about $3 billion on its balance sheet and that it had a $1.1 billion in future contractual commitments. It said it would give an update on the cost of writedowns with third-quarter results.