Royal Dutch Shell recently announced it will be abandoning its search for Arctic oil “for the foreseeable future” after spending about US$7 billion exploring the Chukchi and Beaufort seas. The Anglo-Dutch energy giant’s decision caps a year long foray off Alaska’s shores that once was considered full of promise, but was questioned by investors, environmental groups and religious and political figures. The company is blaming high costs and disappointing results from an exploration well, which failed to yield commercial quantities of oil and natural gas. The Arctic is likely the biggest untapped area for petroleum on Earth, but at a time of record low oil prices and strong objections to the environmental effects, it no longer seems feasible. Shell’s efforts is among the most expensive failed ventures for the industry.
OPEC members control 72% of proved oil reserves, and for many years the largely unexplored Arctic looked to be the last great prize. The portion of that sea where Shell was exploring this summer, is estimated to hold 29 billion barrels of oil and gas, according to the U.S. Bureau of Ocean Energy Management, equivalent to more than three years of U.S. oil demand. Only seven years ago, Shell and other companies, together paid US$2.7 billion for leases for the fields off Alaska. The price of oil at the time climbed to nearly US$150 a barrel, and the accelerated reduction of ice that once choked the Arctic Ocean seemed to make exploration easier.
However, doing anything in the unforgiving Arctic climate is a challenge and the difficulties of drilling for oil and gas are daunting. The Arctic seas are clogged with icebergs, while intensifying storms have threatened ships and oil rigs even during the summer. Shell was one of the only companies with a strong enough balance sheet, that could afford to take a chance and actually go out there and drill.
Shell is claiming the well results were the major driver in their decision to pull out, as the exploratory well drilled found oil and gas, but not in commercial quantities that would justify additional exploration. It was assumed that the well would potentially hold 4.3 billion barrels of oil, but they didn’t find that, instead only indications of oil and gas, which raises questions of whether there are huge amounts of reserves in the Arctic. “We drilled a well and it was dry, so for the foreseeable future we are pulling out… the amount of oil found wasn’t actually of commercial levels. This was why we pulled out, rather than oil prices,” stated a Shell spokesperson.
In an interview earlier this month, Shell USA President Marvin Odum said the company looks at projected prices at least a decade ahead. Yet most analysts believe that even if the drilling results had been modest, they need higher oil prices to economically extract oil out of the very high cost Arctic region. Shell obtained its licenses to explore the Chukchi Sea in 2008 and pushed ahead with the project when oil prices were more than US$100 a barrel. In Alaska there are few roads and airports and the cost of getting equipment and people into the region are huge. At a time when crude oil is about US$45 to $50 a barrel, it is simply not worth it.
However, Shell’s decision was also a result of what it called a challenging and unpredictable regulatory environment, in which a stricter set of provisions have been introduced for Arctic drilling. In the aftermath of the Deepwater Horizon disaster in the Gulf of Mexico, federal regulators are preparing to issue Arctic-specific regulations, notably the expensive requirement that two drilling rigs be on hand in case one is destroyed in a blowout. The idea is that the backup rig can drill a relief well and douse the fire immediately, yet oil companies questioned whether the rule was necessary as there’s no such rule for the cold, treacherous waters off the East Coast.
Environmental groups on the other hand were ecstatic, with Greenpeace’s international executive director describing Shell’s announcement as a “defining day” for the Arctic.
They have urged a ban, saying it risks one of Earth’s last pristine landscapes and is contributing to climate change. Fatih Birol, incoming executive director of the International Energy Agency (IEA), has addressed the issue of climate change stating “that two-thirds of the emissions causing climate change come from the energy sector. I was very clear from the beginning that our aim should be how to transform the energy sector.”
President Obama visited Alaska in August this year, with the intention of highlighting the effects of climate change and to demonstrate that the world must act to reduce greenhouse emissions. At the same time his administration approved the major Arctic oil projects. Acknowledging his approval of Shell’s drilling plans, Obama argued that he wants the nation to move beyond fossil fuels, but while we are still dependent on oil and gas, it would be better to produce domestically than to import.
It is a balancing act between concern for the environment and pressure at the state level to expand oil and gas drilling in Alaska. Shell’s dry hole in the Chukchi Sea may be disappointing to shareholders, but it’s potentially devastating to Alaska. Alaska’s oil bounty has long kept state taxes low and has created employment for people working in and around the local energy industry. The petroleum industry funds upward of 90% of state government, and the declining oil production and low prices have left Alaska with a billion-dollar budget gap.
Shell’s decision won’t have a huge impact on an industry that’s used to spending lots of time and money in the pursuit of oil. The global demand for oil and gas is expected to remain high for the foreseeable future and so companies are making investments on this scale with a 10, 20, and 30-year horizon. For the time being, analysts say oil and gas companies are likely to avoid risky exploration on “the frontier” in favour of established sources like the Alberta oil sands and the Mideast.
