Reuters News - Investors fret that Italy may undermine ECB backstop

An illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in the late evening in Frankfurt January 8, 2013.

Credit: Reuters/Kai Pfaffenbach

By Mike Dolan

LONDON | Wed Feb 27, 2013 1:00am EST

(Reuters) - Italy's fractious election results this week have raised investor suspicions that the euro zone's protracted debt crisis has reached a critical juncture.

The European Central Bank's support mechanism for the euro's ailing government debt markets - which has brought six months of relative calm across the region's markets - remains a powerful force in preventing another series of rolling creditor strikes.

ECB chief Mario Draghi's vow from last July to do "whatever it takes" to protect the euro continues to assure many asset managers the zone will not be pushed back to the cliff edge of last summer. And while stocks and bonds in Italy and across the bloc fell sharply on Tuesday, they stayed some distance from crisis peaks.

Yet the clearest signal from Italy's otherwise muddy election was its rejection of ever more austerity in a contracting economy.

The polls showed no single political force with a majority in Italy's two houses of parliament and about half the electorate opposed the prior government's policies of austerity.

Rejection of the sort of additional budget-cutting that any ECB backstop would require casts some doubt on what scope that leaves the central bank if it opts to execute the government bond buying program it calls Outright Monetary Transactions.

"This is a very clear protest against austerity and the implications are potentially profound," said Russell Silbertson, Head of Global Interest Rates at Investec Asset Management.

"The ECB last year made it clear it was willing to help, but only if a country requested that help and agreed to conditions. In other words, the OMT (the ECB's backstop) is a partnership and these anti-austerity votes question that partnership."

Yves Bonzon, Chief Investment Officer at Pictet Wealth Management, doubts this is another "inflection point" in the crisis but remains underweight euro assets and wary of developments.

"The most annoying thing about this outcome is that the ECB might be constrained in launching an OMT program. Without a strong government in Italy, it will have difficulty reaching any memorandum of understanding with European authorities."

Others who had been concerned about the election outcome in Italy see little reason to return yet.

"I sold out of all my Italian bonds in mid January, taking peripheral euro zone exposure to zero, because markets appeared to be pricing in very little risk of anything going wrong," said Mike Riddell, fixed income fund manager at M&G Investments. "I'm not yet a buyer again as things easily have the potential to get a lot worse."

SILVER LINING?

For many euro zone bears then, the main impact of Italy's potential hiatus is to return market pricing to levels better reflecting the region's persistent recession and debt difficulties, with some doubts on the OMT support.

"We've had months of unusual calm in the euro crisis and we feel this is more of a reality check than a brand new phase," said Iain Stealey, portfolio manager in the International Fixed Income Group at JP Morgan Asset Management, adding it was best to steer clear of euro markets until better levels emerged.

"There will be a return of uncertainty and volatility for a few weeks at least and we see no reason why the Italian 10-year (bond yield) will not top 5 percent again," said Stealey, noting the rise in 10-year rates to 4.90 percent on Tuesday was still far short of 2011 crisis peaks of more than 7 percent.

"But people will be very wary of fighting the ECB on this."

While the OMT plan may look less formidable in the face of growing public resistance to its conditions, the central bank had already proven inventive in providing liquidity where necessary, even if it was constrained from following counterparts in the United States, Japan and Britain in outright money printing.

What's more, the recent shrinkage of its balance sheet - due to euro banks paying back some of last year's emergency loans - arguably offers it more scope to loosen again if necessary to indirectly soften the pain of recession and austerity.

"The ECB is the only institution really capable of putting out fires. An ECB rate cut next week now looks likely," said Tristan Cooper, analyst at Fidelity Worldwide Investment.

He thinks there may be less instability in Italy that the results suggest and that significantly higher yields may prove attractive buying opportunities across the euro periphery.

"A new government in Italy, when it is eventually formed, is more likely to be unstable and ineffective than unorthodox and radical," he said. "Fiscal discipline is likely to be broadly preserved even if serious structural reforms are now off the agenda."

Others point to a better global economic environment in 2013 and a belief that the deepest fiscal cuts in the euro zone have already been made. They see any market shakeout as a opportunity to build up strategic positions.

"There is a clear vote in southern Europe against austerity alone," said Giordano Lombardo, Group CIO at Pioneer Investments in Milan, saying momentum was building and the direction was now set toward policies to encourage economic growth.

"Beyond the volatility of the immediate aftermath, that's not necessarily a bad outcome," he said, adding recent ECB balance sheet shrinkage also boosted its potential armory.

(Editing by Ruth Pitchford)

Reuters News - World powers and Iran begin nuclear talks

1 of 4. Participants sit at a table during talks on Iran's nuclear programme in Almaty February 26, 2013.

Credit: Reuters/Stanislav Filippov/Pool

By Fredrik Dahl and Justyna Pawlak

ALMATY | Tue Feb 26, 2013 4:27am EST

(Reuters) - World powers are expected to offer Iranlimited sanctions relief on Tuesday if it agrees to halt its most sensitive nuclear work, in a new attempt to resolve a dispute that threatens to trigger another war in the Middle East.

In their first meeting in eight months - time that Iran has used to expand atomic activity that the West suspects is aimed at developing a bomb capability - the powers hope Iran will engage in serious talks on finding a diplomatic solution.

The negotiations formally got under way in the Kazakh city of Almaty - which follows three inconclusive meetings last year in Istanbul, Baghdad and Moscow - at around 1:30 p.m (0730 GMT).

But with the Islamic Republic's political elite pre-occupied with worsening internal infighting ahead of a June presidential election, few believe the meeting Tuesday and Wednesday in the Kazakh city of Almaty will yield an immediate breakthrough.

At best, diplomats and analysts say, Iran will take the joint offer from the United States, Russia, France, Germany, Britain and China seriously and agree to hold further talks soon on how to implement practical steps to ease the tension.

The powers would like to see "a recognition by our Iranian colleagues that our offer is a serious one ... but it is not the final act in the play," said one diplomat participating in the talks. "I wouldn't predict a decisive breakthrough."

Iran is showing no sign, however, of backing down over a nuclear program it says is for entirely peaceful energy purposes. The program has drawn tough Western sanctions that have greatly reduced its oil exports, an economic lifeline.

A U.N. nuclear watchdog report last week said Iran was for the first time installing advanced centrifuges that would allow it to significantly speed up its enrichment of uranium, which can have both civilian and military purposes.

HIGH STAKES

Tightening Western sanctions on Iran over the last 14 months are hurting Iran's economy, slashing oil revenue and driving the currency down, which in turn has pushed up inflation.

But they are not close to having the crippling effect envisaged by Washington, analysts say, and - so far at least - have not prompted a change in nuclear course by Tehran.

Western officials say the powers' offer - an updated version of one rejected by Iran in the last meeting in June - would include an easing of sanctions of trade in gold and other precious metals if Tehran closes its underground Fordow enrichment plant.

The stakes are high. Israel, assumed to be the only nuclear-armed power in the Middle East, has hinted strongly at possible military action to prevent its foe from obtaining such arms. Iran has threatened to retaliate hard if attacked.

The fact that the meeting takes place in Kazakhstan - which gave up its nuclear arsenal after the collapse of the Soviet Union in the early 1990s - has symbolic resonance.

A U.S. official said the Central Asian state could serve as a "good role model" for the benefits of making "certain choices", in clear reference to Iran's atomic ambitions.

Western officials acknowledge an easing of U.S. and European sanctions on trade in gold represents a relatively modest step. But it could be used as part of barter transactions that might allow Iran to circumvent tight financial sanctions.

Iran so far appears to be showing little interest. Its Foreign Ministry spokesman last week dismissed the reported incentive as insufficient and a senior Iranian lawmaker has ruled out closing Fordow, located close to the holy city of Qom.

Iran says it enriches uranium to a fissile concentration of 20 percent to make fuel for a medical research reactor in the capital Tehran. But it also represents most of the work required to reach weapons-grade material of 90 percent.

A U.S. official said the powers hoped that the Almaty meeting would lead to follow-up talks, either at a political or technical level, before Iran's New Year celebrations in March.

(Reporting by Justyna Pawlak, Fredrik Dahl, Yeganeh Torbati, Editing by Jon Boyle)

Reuters News - Japan seen nominating "deflation basher" as Bank of Japan head: sources

By Leika Kihara and Yuko Yoshikawa

TOKYO | Mon Feb 25, 2013 5:15am EST

(Reuters) - Japan's prime minister is likely to nominate an advocate of aggressive monetary easing - Asian Development Bank President Haruhiko Kuroda - as the next central bank governor to step up his fight to finally rid the country of deflation.

Shinzo Abe won a big election victory in December promising to revive the fortunes of an economy stuck in the doldrums for most of the past two decades. He has repeatedly called for a more aggressive central bank willing to take radical steps.

The yen fell on the nomination news to a 33-month low and the yield on five-year government bonds hit a record low as markets moved to factor in bolder monetary policy.

"Kuroda is a fan of a weaker yen and of deflation bashing," said Kit Juckes, a strategist at Societe Generale in London.

Sources said the government is likely to nominate Kuroda and two deputies this week for parliamentary approval.

It is also lining up Kikuo Iwata, an academic who advocates unorthodox monetary easing steps, and BOJ Executive Director Hiroshi Nakaso, who now oversees the central bank's international operations, as deputy governors, a source familiar with the process said. Iwata told reporters he had been offered the job and he would accept it.

Like the U.S. Federal Reserve, the Bank of Japan has cut interest rates close to zero. Since then it has adopted unorthodox measures to inject cash into the economy, currently in its fourth recession since 2000, to try to stimulate growth.

But Kuroda has long criticized the BOJ as too slow to expand stimulus, and is expected to push for more radical efforts to achieve a 2 percent inflation target set in January.

"Kuroda's nomination won't change the course that has been dictated by Abe in recent months - that is aggressive monetary policy, but perhaps thanks to the inclusion of Iwata the market will expect more eye-catching bold easing measures," said Masamichi Adachi, senior economist at JPMorgan Securities in Tokyo.

The nominations must be approved by both houses of parliament, which means Abe will need opposition support because his ruling-bloc lacks a majority in the upper house. The incumbents leave March 19.

Officials in the Democratic Party of Japan (DPJ) - whose votes could be enough to confirm nominees - have said the DPJ was likely to support Kuroda, although some members may oppose Iwata on grounds that his reflationary views are too extreme.

Iwata has argued the BOJ is mostly to blame for prolonging deflation by not being aggressive enough in easing policy.

In the absence of DPJ support, the smaller Your Party will be key for the government securing approval for its nominees. However, party head Yoshimi Watanabe - an advocate of unorthodox easing steps - criticized the overall line-up as an ill-considered attempt at "balanced personnel".

"Prime Minister Abe's administration took power promising 'regime change' (at the BOJ) but I don't think this will lead to regime change," Watanabe told reporters.

If approved, the nominations increase the chances that the BOJ will ease monetary policy on April 3-4, the first rate review under the new leadership, say officials with knowledge of the central bank's thinking.

"Monetary easing is pretty much a given. The question is what specifically the BOJ will do," said one official, who spoke on condition of anonymity due to the sensitivity of the matter.

The BOJ has already pledged to pump 101 trillion yen ($1 trillion) into the economy by the end of this year by buying assets and through a lending program and to shift to open-ended purchases from next year.

To underline a more aggressive policy in April, the most likely options include starting the open-ended buying sooner than planned and increasing the amount of monthly asset purchases, the officials said.

Extending government bond purchases to maturities beyond the current three-years or buying more risky assets, such as exchange traded funds, are also options.

A drastic overhaul in the way the BOJ buys assets could take some time to materialize, while foreign bond purchases are also unlikely as Kuroda has ruled it out as an option, they say.

YEN SLIDE

Kuroda, 68, has been considered a strong candidate to replace current BOJ Governor Masaaki Shirakawa because of his extensive experience in international policy and his calls for more aggressive monetary easing that matched the views of Abe.

As Japan's top financial diplomat from 1999 to 2003, he aggressively intervened in the exchange-rate market to weaken the yen to support the country's export-reliant economy.

This time, Kuroda - a fluent English speaker with a masters degree from Oxford - may have to mobilize his international contacts to fend off criticism that Japan's monetary policy is aimed at weakening the yen to help exporters.

Kuroda has called for the BOJ to achieve its 2 percent inflation target in two years by pumping money into the economy through unorthodox steps, such as expanding government bond purchases and buying shares. Inflation in Japan has rarely reached 2 percent since the early 1990s.

There are several hundred trillion yen worth of domestic financial assets that the BOJ could buy to expand its quantitative easing, he said on February 11.

The yen has weakened nearly 20 percent against the dollar since November, when Abe began calling for bolder monetary easing.

The cheaper yen has helped improve profits at Japanese exporters, notably carmakers like Mazda Motor Corp, which raised its operating profit outlook for the year ending in March by 80 percent.

Shirakawa's last rate review will be on March 6-7. The BOJ meets twice in April, once on April 3-4 and then on April 26.

Abe has stressed the need for the new governor to have international contacts, suggesting he prefers someone with experience in financial diplomacy, like Kuroda who, as president of the 67-member ADB rubs shoulders with policymakers around the world.

In nominating a BOJ governor, the premier usually respects the views of the finance minister and the ministry's bureaucrats because they work closely with the central bank on economic policy.

The finance ministry lobbied for former financial bureaucrat Toshiro Muto, but was likely turned down by Abe and his aides who saw him as lacking international contacts and less willing to experiment with untried monetary easing steps.

(Additional reporting by Antoni Slodkowski, Tetsushi Kajimoto and Kaori Kaneko.; Editing by Dean Yates and Neil Fullick)

BBC News - Italy dominates ECB government bond holdings

The European Central Bank has revealed that Italian government bonds make up nearly half of its holdings under a bond-buying plan.

Mario Draghi, ECB president, has pledged to do "whatever it takes" to save the euro

Italian bonds with a book value of 99bn euros (£86bn; $131bn) account for the biggest holding under the now ended Securities Market Programme.

The plan, which lasted from 2010-2012, was intended to ease the debt crisis by reducing government borrowing costs.

The ECB replaced it with a similar, yet bolder, scheme last September.

Spanish bonds, with a face value of 43.7bn euros, make up the second biggest holding, said a statement.

The central bank also holds Greek bonds with a book value of 30.8bn euros, Portuguese bonds worth 21.6bn euros, and Irish bonds 13.6bn euros.

This is the first time the ECB has released previously confidential figures as part of efforts to increase transparency.

The ECB stopped the bond-buying scheme last year, replacing it with another similar programme - the Outright Monetary Transaction (OMT) - as part of a pledge by ECB President Mario Draghi to do "whatever it takes" to prevent the break-up of the 17-member euro area.

The OMT, unlike its predecessor, has no size limit and will only buy debt of short-term maturity, three years or less.

It is to be carried out in conjunction with the European Financial Stability Facility or European Stability Mechanism programmes and countries need to request a bailout before they are triggered.

Reuters News - Fed minutes send warning on durability of bond buying

Federal Reserve Chairman Ben Bernanke waits before a meeting of the G20 Finance Ministers in Moscow February 15, 2013.

Credit: Reuters/Sergei Karpukhin

By Alister Bull and Pedro da Costa

WASHINGTON | Wed Feb 20, 2013 10:37pm EST

(Reuters) - A number of Federal Reserve officials think the central bank might have to slow or stop buying bonds before seeing the pickup in hiring the program is designed to deliver, according to minutes of the central bank's policy meeting last month.

The Fed opted in January to keep buying bonds at an $85 billion monthly pace until the labor market outlook improved substantially, but the minutes on Wednesday showed anxiety over the strategy's risks - news that sent stocks sharply lower.

The S&P 500 .SPX suffered its steepest daily percentage decline since mid-November as investors mulled divisions between Fed doves, who want do as much as possible to spur growth, versus colleagues who see merit in a more cautious approach.

"A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the (policy-setting) committee to taper or end its purchases beforeit judged that a substantial improvement in the outlook for the labor market had occurred," the minutes said.

The U.S. economy braked sharply in the final quarter of 2012, but investors expect it will rebound this year and Fed officials voiced confidence last month that, despite a pause, "the economy remained on a moderate growth path."

The dollar rose after the minutes were released, gold prices hit their lowest level since July and Treasury debt prices advanced, helped by the weaker tone in Wall Street stocks.

"The minutes ... portray a Fed whose thinking on the conduct of monetary policy is constantly evolving and shows a committee that is far less unified than at any other time in the past few years," Millan Mulraine at TD Securities wrote in a client note.

The minutes said "many" officials voiced concern over the potential costs of further asset purchases, but the hawkish tone of the policymakers who actually said the policy might need to be scaled back was balanced somewhat by a warning about the dangers of ending the bond-buying program prematurely.

"Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant," the Fed said.

In addition, some analysts pointed out that the minutes of the central bank's previous meeting in December said several officials thought bond purchases might need to slow or halt well before year end. In their view, the absence of a calendar reference in the latest minutes arguably made them more dovish.

The evidence of deep internal divisions will heighten investor interest in Fed Chairman Ben Bernanke's biannual testimony on monetary policy to two congressional committees next week.

Most analysts still believe the core voting members of the Federal Open Market Committee, led by Bernanke, firmly back the asset purchase policy.

LOOKING FOR NEW TOOLS

In a policy shift late last year, the Fed committed to keeping interest rates near zero until the unemployment rate drops to 6.5 percent, as long as inflation is not forecast to go above 2.5 percent over a one- to two-year horizon.

One policymaker suggested the central bank could lower the unemployment guidepost to 6 percent to provide additional stimulus to the economy.

A number of the officials on the 19-strong committee also floated another suggestion - that the Fed hold on to the bonds it has bought for longer than currently planned to deliver more monetary stimulus, either to supplement or replace the bond purchases.

The Fed has more than tripled the size of its balance sheet since 2008 to around $3 trillion through purchases of bonds designed to hold down the cost of long-term borrowing and spur a stronger recovery.

The Fed has said it will reduce the size of its balance sheet when the time comes to tighten monetary policy. The central bank will use its March meeting to review the language it has used in its post-meeting statements pertaining to the possible costs of unconventional policy, the minutes said.

In an interview with Reuters on Tuesday, Atlanta Federal Reserve Bank President Dennis Lockhart said the Fed's ultra-loose policy stance is still justified.

"I would not say at this point that, in any respect, the costs, which are largely longer-term and speculative, outweigh the benefits of maintaining a highly accommodative climate," he said.

(Reporting by Alister Bull and Pedro da Costa; Editing by Neil Stempleman and Tim Ahmann)

BBC News - Japan trade deficit hits record as yen weakens

Japan's monthly trade deficit hit a record in January after its recent aggressive monetary policy stance weakened its currency sharply.

US Dollar v Japanese Yen

LAST UPDATED AT 20 FEB 2013, 09:26 GMT

$1 buys	change	%
93.3650	- -0.21	- -0.22

Exports rose in January, the first jump in eight months, as its goods became more affordable to foreign buyers.

However, a weak currency also pushed up its import bill resulting in a monthly trade deficit of 1.6tn yen ($17.1bn; £11.1bn), a 10% jump from a year ago.

Japan's deficit has also been impacted by an increase in fuel imports.

The world's third-largest economy has seen a rise in fuel imports, as most of Japan's nuclear reactors continue to remain closed.

Japan's imports rose 7.3% in January, from a year earlier. One of the biggest jumps was in the import of liquefied petroleum gas (LPG), which surged more than 28%.

Meanwhile, exports rose 6.4%, driven up mainly by shipments of manufactured goods, the customs and tariff bureau said.

Exports boost?

Japan's exports, one of the key drivers of its economic growth, have been hurt by a variety of factors.

Demand from the eurozone, of Japan's biggest markets, has been hurt by the region's ongoing debt crisis.

A territorial dispute with China has hit sales of Japanese goods to the country, Japan's biggest trading partner, over the past few months.

However, the latest data indicated that things may be starting to change.

Japan's shipments to China rose by 3% in January from a year earlier, the first rise since May.

At the same time, exports to the US, the world's biggest economy, also jumped 10.9%, further adding to hopes of a recovery in the sector.

Meanwhile, the pace of decline in exports to the European Union also slowed during the month.

There are hopes that as shipments to key markets recover and the yen continues to remain weak, Japan's export sector may see a sustained recovery.

The yen has dipped nearly 15% against the US dollar since November.

A weak currency helps boost profits of exporters when they repatriate their foreign earnings back home, giving them a much bigger pile of cash to invest at the end of the financial year.

BBC News - German economy to return to growth, says Bundesbank

Germany will avoid recession and return to growth in the first quarter of 2013, the country's central bank has said.

German economic growth is key to a recovery in the eurozone

The Bundesbank's monthly report for February forecast that the rest of 2013 will see a gradual pick-up in activity in Europe's biggest economy.

If the economy shrank again in the current quarter, Germany would technically be in recession, defined as two quarters of contraction.

The economy shrank by 0.6% in the last three months of 2012.

"As it currently looks, a plus in economic output can be expected in the first quarter of this year," the Bundesbank said.

The report continued: "For the rest of this year, the economy is expected to pick up gradually, even if the external economic environment will provide no trigger for a sharp surge in demand."

Although Germany's economy has held up better than most of those in the eurozone, its recent slowdown has fuelled worries about Europe's recovery.

The purchasing power of German consumers and industry is seen as key to the recovery of the region.

Germany's gross domestic product slowed throughout 2012. GDP grew by 0.5% in the first quarter of 2012, and then by 0.3% in the second quarter and 0.2% in the third quarter.

With a contraction of 0.6% in the final three months of last year, the economy expanded by just 0.7% in 2012, compared with 3% in 2011.

The 17-nation eurozone fell deeper into recession at the end of 2012.

The European Central Bank has forecast that the eurozone will shrink 0.3% in 2013, and only start to recover later in the year.

Reuters News - Arctic draws oil money with stability, shallow seas

1 of 3. A T-shirt of a Greenpeace environmental activist is seen next to gas pumps at a Shell gas station in Prague in this May 10, 2012 file photo.

Credit: Reuters/David W Cerny/Files

By Yereth Rosen and Gwladys Fouche

ANCHORAGE/OSLO | Tue Feb 12, 2013 8:37am EST

(Reuters) - It may not be this year, but Royal Dutch/Shell and other oil companies will be back to drill in northern Alaska's seas, drawn by political stability and shallow waters.

Weary of Middle Eastern turbulence, alarmed by Argentina's nationalization of Spanish group Repsol's assets, and shocked by the Islamist siege of an Algerian gas plant, companies are looking to unexploited parts of the Arctic.

Drilling in the cold, remote waters is technologically difficult and expensive but dwindling reserves elsewhere have forced oil firms to look deeper offshore, which is also costly.

Alaskan seas so shallow a walrus can hunt on the bottom are now looking competitive and the prize is an estimated 13 percent of the world's undiscovered oil and 30 percent of its gas.

"A lot of these (oil) companies want to go somewhere with less political risk," said Emily Stromquist of global political risk research and consulting firm Eurasia Group.

Exxon Mobil is at the centre of a dispute in Iraq, oil is regularly stolen from Shell's Nigeria pipelines by armed gangs, and BP and Statoil are reviewing operations in Algeria and Libya after a deadly Sahara gas plant siege.

The offshore Arctic has no such risks. Border disputes between the eight politically stable Arctic Council are peaceful. Its very isolation offers a security of sorts.

"The Arctic is so inhospitable, you are not going to get maritime threats," added Fraser Bomford, an intelligence analyst at security firm AKE Group. "It is not near land where there are lawless areas, like the Gulf of Guinea or the Gulf of Aden."

UNTAPPED

Nevertheless, storms and daytime temperatures averaging minus 30 degrees centigrade on the northern coast in January make it a challenging place to operate.

Shell has suffered a series of setbacks since it bought the Beaufort and Chukchi Sea leases in 2005. In the latest of these, three out of four engines on a brand new tug failed in near hurricane conditions on New Year's Eve 2012, allowing the Kulluk rig to break free from its towline and run aground.

The company has yet to decide whether to drill in 2013, and on Monday sent the Kulluk to Asia for repairs. But Chief Executive Peter Voser was adamant last week that Shell, and others, would be back.

The Beaufort and Chukchi Seas alone contain some 23 billion barrels of recoverable oil, according to the U.S. Bureau of Ocean Energy Management (BOEM).

Leaving aside associated gas - which may be hard to bring to market given the weak outlook for U.S. gas prices - that's twice the contents of Shell's producing oil and gas wells, which are emptying at a rate of 1.2 billion boe a year.

Shell first drilled in the Arctic at 150 feet in 1982 when the offshore industry was still proud of reaching the 400 feet depths of the North Sea. It abandoned the area in the late 1990s as oil prices slumped.

The deepest offshore wells now start at over 5,000 feet and are twice as costly as established parts of the North Sea and shallow offshore finds on the scale promised by Shell's Arctic licenses are long gone elsewhere.

Some 77 billion boe of oil and gas are set to be developed in deepwater zones between now and 2020 at a cost of $650 billion, according to research by Macquarie Equities Research - an indication of industry confidence in profitability.

And at $35-$40, an Arctic barrel's cost can be on a par with those deepwater barrels, according to Lars Lindholt, a researcher at Statistics Norway. International Energy Agency (IEA) figures also show Arctic and deepwater costs overlap.

PUSHING THE BOUNDARIES

However, the Arctic price tag has yet to be tested where Shell is working, and where it has spent $5 billion since 2005 without a barrel to show for it. While onshore Alaskan development and work in milder Norwegian seas has defied the cold and remoteness for decades, Shell's plans push the boundaries much further.

Daytime temperatures are colder than a similar latitude in Norway and storms and currents cause ice surges called "ivus" that push and throw car-sized ice blocks inland. One once crushed a dwelling, killing its inhabitants.

A 2012 report by the think tank Chatham House analyzed storm tracks dating back to 1950s that suggest climate change - while opening up the seas - may be worsening the Arctic weather, producing more storms like the "Blizzicane" that struck western Alaska in 2011.

Melting permafrost is damaging pipelines and coastal infrastructure ashore, and the retreating ice could result in larger icebergs, more coastal erosion, and bigger waves on a more open sea, the report says.

Experts say offloading oil to tankers from the Chukchi and Beaufort Seas looks unfeasible, even during the July-to-October season in which Shell wants to work. Shell says it has completed pipeline projects in Russia, Canada and Norway in "similar" conditions, yet no subsea pipeline of the length required has been attempted in the area it targets despite an established onshore industry close by with some modest offshore development.

Then there are the kit requirements. While a North Sea platform will typically operate with just three or four supply and support vessels, most Arctic regulations require a back-up rig and as many as a dozen response vessels.

Rigs need expensive hydraulic fluids to cope with the temperatures. They also need to be winterized to protect people and pipes, and supplies have to move huge distances. Rigs of all types are in short supply.

Support vessels are also hard to come by. Russia's Yamal liquefied-natural-gas (LNG) project in the Kara Sea alone will need up to 16 ice-capable LNG vessels plus several ice breakers.

Nevertheless, Chatham House estimates Arctic investments, mostly in offshore oil and gas extraction, could total $100 billion over the next decade.

Statoil on Tuesday said it will develop an Arctic field and onshore oil hub in Norway at a cost of up to $16.3 billion and recently approved $10 billion for its Aasta Hansteen project.

Italy's Eni is meanwhile spending $6.7 billion on Goliat in the Barents Sea north of Norway, and Novatek and Total may put $20 billion into Yamal LNG. Rosneft and ExxonMobil also plan Kara Sea work, and Norway will sell 72 blocks in the Barents Sea this summer. Elsewhere in the north Alaska offshore, ConocoPhillips, Statoil, Eni, Repsol and Total also have Chukchi and/or Beaufort leases and plans to drill in 2014 and 2015.

SPILL FEAR

An oil spill is everybody's worst fear.

"For the past 20-30 years, drilling technology has improved by leaps and bounds but oil spill response remained at fairly basic levels," said Knut Oerbeck-Nilssen of Det Norske Veritas, a firm that certifies oil and shipping equipment. "You will see lots of shovels on the beaches and oil collection on water."

Ports are distant, communication patchy, and workers tire fast in the cold and dark. The environment is fragile.

"While particular risk events - such as an oil-spill - are not necessarily more likely in the Arctic than in other extreme environments, the potential environmental consequences, difficulty and cost of clean-up may be significantly greater," the Chatham House report said.

Shell says it is taking every precaution. Its 2011 response plan for a spill in the Beaufort shows nine support vessels.

Alaska's Governor Sean Parnell has spoken out in support of Shell's plans despite the Kulluk grounding.

"Many wells have been safely drilled in the Arctic Outer Continental Shelf (OCS)," he said. "We believe it is strongly in the state's and the nation's interest that we continue to responsibly explore the vast hydrocarbons known to be available in the shallow waters of the Arctic OCS."

Some locals are less sure.

"It might not be wise to conclude that oil operations can be conducted safely in the offshore Arctic just because we have learned, more or less, how to function on land," said Willie Hensley, an Inupiat Eskimo and longtime Alaska Native leader.

"It's a big gamble to try to operate with the wind, water and ice. It's like going to the casino. You think your next doggone spin might do it. And so it is out there."

(Additional reporting and writing by Braden Reddall, Balazs Koranyi and Andrew Callus; editing by Anna Willard)