As Prices Drop, Oil Industry Retreats From Drilling Projects

29 Sep 2015 | Author: | No comments yet »

Shell pulls the plug on Arctic exploration.

ANCHORAGE, Alaska — Royal Dutch Shell has abandoned its long quest to become the first company to produce oil in Alaska’s Arctic waters, darkening the nation’s long-term oil prospects and delighting environmental groups that tried to block the project.The company cited disappointing results from a well drilled during the 2015 open water season in the waters north of the Bering Strait off Alaska’s northwest coast.

After years of effort, Shell is leaving the region “for the foreseeable future” because it failed to find enough oil to make further drilling worthwhile. The withdrawal came six weeks after the final US clearance and three months after Shell was still defending the project, a rapid change of heart for such a large company that shows it is preparing for a prolonged period of low oil prices while trying to close its $70 billion takeover of rival BG. The first, a scientific study on the effects of fuel combustion, showed that if we burned all the fossil fuels in the world, roughly 10 trillion tons of carbon would be released, causing global temperatures to soar.

The company also cited the “challenging and unpredictable federal regulatory environment in offshore Alaska.” Shell in February 2008 was by far the most robust bidder for Chukchi Sea leases and its departure means no company has plans on the books to drill there. Lisa Murkowski urges the administration to developing a legitimate, predictable and sensible regulatory system that will encourage oil companies to invest in Alaska, both onshore and off. Bill Walker says Royal Dutch Shell’s decision to stop exploratory drilling in the Arctic shows the state needs to drive its own destiny through oil and gas development. Alaska’s junior senator, Republican Dan Sullivan, said environmental groups are cheering the news, but he says it’s a sad day for Alaska and working Americans. The Democrat says the U.S. should “seize the moment” and use its chairmanship of the Arctic Council to develop and agreement to end offshore drill among all Arctic nations.

The company has spent $7 billion on its Alaska drilling program.uhg Walker says he’s contacted the White House to set up meetings about the impact of Shell’s decision on the state. The same day that the fossil fuel study came out, Goldman Sachs warned that the oil market is “even more oversupplied than we had expected”, and that the oil surplus is likely to continue in 2016. But Shell’s failure is notable because it was the only active drilling project in the sea, which Shell officials had called “a potential game-changer,” a vast untapped reservoir that could add to America’s energy supply for 50 years. Alaska’s budget relies heavily on oil revenue, but production from the once-prodigious North Slope now barely fills a quarter of the trans-Alaska pipeline. Charles Ebinger, senior fellow for the Brookings Institution Energy Security and Climate Initiative, said in an interview that a successful well by Shell would have been “a terribly big deal” because it would have attracted others to the region.

A Shell source said the company had found US regulation very prescriptive and in some cases contradictory, making it difficult to navigate the regulatory process. “The entire episode has been a very costly error for the company both financially and reputationally,” said analysts at Deutsche Bank, who estimate the Shell’s Arctic exploration project could cost the company about $9 billion. Though countries are pushing for cleaner energy sources, analysts predict that the world will need another 10 million barrels a day between 2030 and 2040 to meet growing demand, especially in developing countries, Ebinger said. Environmentalists, who have criticized Shell’s drilling plans in an area that is home to populations of whales, walrus and polar bears, claimed victory.

Critics of the Obama administration’s decision are correct in their assertion that the Arctic is a particularly dangerous place to drill: the area’s ecosystems are very delicate, and it would be extremely difficult to respond to oil spills there. — Iona Energy Co. (US) Limited, a Canadian company operating in Scotland, and U.S.-based North American Civil Recoveries Arbitrage were high bidders for one tract each at $61,000 and $400, respectively.

Environmental groups, which had staged media campaigns aimed at tarnishing Shell’s reputation and tried unsuccessfully to block Arctic-bound vessels, reveled in Shell’s disappointment. Shell, which is based in The Hague, Netherlands, warned investors that the disappointing well results would lead to a charge against its earnings for the third quarter. It did not disclose the size of the charge but said the accounting value of the project is $3 billion, with another $1.1 billion in commitments to contractors. Fatih Birol, executive director of the International Energy Agency, warned more than two years ago that to keep global warming below 2C, two-thirds of proven fossil fuel reserves would have to stay in the ground.

This warning, combined with Goldman’s assessment of the oil glut, makes it clear that it is far wiser to use the lower-cost oil we are already producing than to waste capital exploring for new, expensive resources. This is the process by which investment in carbon-intensive assets entrenches dependence on fossil fuels, commits economies to higher emissions, and makes emission-reducing policies and practices much harder to enact. In fact, nearly half of all new offshore oil production expected by 2030 would be unnecessary if we are planning to meet global climate protection goals. The strength of carbon lock-in measures the degree to which new machinery, infrastructure and even political institutions must be put in place for the development of a new fossil fuel resource. Of course, no one sets out to lose money on oil, but with the prospect of more stringent climate policies that could limit future oil field development, producers may be looking to stake out their territory now.

In other words, not only will these new sources of oil increase carbon emissions in the short term, but, in the longer term, they will make it harder, and more expensive, to scale down oil production to help stabilize the climate.

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