Will Arctic Approval Mean New Riches For Royal Dutch Shell Plc?

Back in January, Royal Dutch Shell (LSE: RDSB) provoked the ire of environmentalists when it announced its intention to return to drilling for oil in the Arctic — previous exploration in the region was curtailed two years ago after a drilling barge broke away and ran aground, amongst other problems.

Shell’s plans are now a step closer to fruition, after the company was given conditional approval by the US Department of Interior to resume drilling, although permits from the federal government and from the state of Alaska will also be needed.

Safety is paramount

Shell’s previous woes included a failure to provide emergency backup facilities in advance of the commencement of actual drilling, so this time its proposals include the use of two exploration vessels which can also provide that backup if needed.

With Shell’s share price down 20% over the past 12 months to 2,074p, shareholders will be hoping for a boost. But will the Arctic provide it, and is it a good idea anyway?

The environmentalist argument against such exploration is strong, with a Greenpeace spokesperson labeling the venture “risky and ill-conceived“. The Arctic region is one of the few places left in the world that is largely unspoilt, and even a relatively small spill could be disastrous, never mind one on the scale of BP‘s Gulf of Mexico catastrophe.

There’s a lot of oil there

Set against that, the Arctic region is estimated to contain around 20% of the world’s undiscovered oil and gas reserves, and much of it will be cheaper to extract than shale oil or oil in deeper and more inaccessible locations — Shell is proposing to drill in waters only 40 metres deep, initially in the Chukchi Sea off the Alaskan coast. There’s also the argument that someone is going to drill for oil in the Arctic almost for certain — it’s unlikely the Russians will have many qualms about environmental damage — so it’s best if it’s a competent and well-regulated operation.

Shell has significant sunk costs already in its Arctic project, with around $6bn spent on exploration in the region in the days before the oil price plummeted, so it’s surely one of the best placed companies now to carry on the job. And the big oil firms are best placed for a long-term view of oil exploration too, as they have the financial clout to think beyond today’s cheap-oil and into the inevitable price recovery.

Buy Shell?

Shell’s shares are now trading on a P/E of 16 based on 2015 forecasts, which is slightly higher than the long-term FTSE average — but modest for a share offering a potential 5.9% dividend yield. And when we look to 2016 prognostications, which suggest an earnings recovery which would drop the P/E to 12 while keeping the dividend unchanged, the shares look cheap to me.

A FTSE 100 oil company like Shell can provide a cornerstone for a successful blue-chip portfolio, using a simple approach which can bring great long-term rewards.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.