Why Shell Quit Drilling in the Arctic

28 Sep 2015 | Author: | No comments yet »

Shell abandons Arctic oil quest after $7 billion bid yields ‘disappointing’ results.

ANCHORAGE, Alaska — Royal Dutch Shell is giving up on its expensive and controversial push to produce oil in Alaska’s Arctic waters, a decision that darkens the long-term oil prospects of the U.S. and brings relief to environmental groups that had tried desperately to block the project.

Shell’s decision to put its Arctic oil exploration plans in deep freeze will have several knock-on effects for global oil exploration, environmental protests and the future of the company itself. Shell’s exploratory oil well in the Chukchi Sea north of Alaska encountered “indications of oil and gas” but the company said they were “not sufficient to warrant further exploration” — a significant blow for the Anglo-Dutch firm that had hoped to find a multibillion barrel crude reservoir in those remote waters. “Shell continues to see important exploration potential in the basin, and the area is likely to ultimately be of strategic importance to Alaska and the U.S.,” said Marvin Odum, the Houston-based director of Shell Upstream Americas. “However, this is a clearly disappointing exploration outcome for this part of the basin.” Shell said in a statement that it would cease further exploration activity off the coast of Alaska “for the foreseeable future.” “This decision reflects both the Burger J well result, the high costs associated with the project and the challenging and unpredictable federal regulatory environment in offshore Alaska,” the company said. The decision, announced this morning, follows a “disappointing” result at one of its exploratory wells and reflects the low price of oil squeezing budgets at oil companies all over the world. The broader Arctic retreat by energy firms once bullish about polar prospects has now left just two working operations in the region: BP’s Prudhoe Bay field, which feeds the Trans-Alaskan pipeline, and Gazprom’s largely symbolic Prirazlomnoye platform in the Pechora Sea.

Shell pushed forward in hopes of finding a big new source of future revenue and establishing expertise and a presence in the Arctic, which geologists estimate holds a quarter or the world’s undiscovered conventional oil and gas. Shell also will take a financial charge from the decision, since the firm’s Alaska assets have a carrying value of about $3 billion and the company still has an additional $1.1 billion already committed in existing contracts for rigs, ships and other assets. Publicly, Shell blames disappointing exploratory results, high operating costs and strict US environmental regulations for its decision to quit Alaska’s Berger field after about $7bn (£4.6bn) of investment.

The company also held the hopes of the state of Alaska, which has seen oil production and revenues decline sharply in recent years, and the U.S. oil industry, which looked to Alaska’s offshore Arctic as the next source of oil big enough to keep the country among the top three oil producers in the world along with Saudi Arabia and Russia. Shell could pare its potential $4.1 billion write down by putting some of those contracted vessels to work elsewhere or subcontracting them to others. But company sources also accept that Arctic oil polarised debate in a way that damaged the firm. “We were acutely aware of the reputational element to this programme,” one said. The notion of drilling in some of the world’s most pristine and hazardous regions – which, in the case of the Arctic, was only made accessible by retreating ice cover due to climate change – has also become politically toxic, Greenpeace says. “It is undeniable that the protests were a factor in Shell’s decision because the Arctic had become a defining environmental story,” Ben Ayliffe, a Greenpeace Arctic campaigner told the Guardian. “A burgeoning and increasingly vocal movement sprung up across the world. The prospects for Arctic oil were never far from the public spotlight and they began to look increasingly toxic.” Ayliffe added that a strong climate deal was needed at the UN climate summit in Paris later this year to consolidate the current Arctic pull-out. “It is imperative that this victory becomes a long term one for the Arctic itself,” he said.

But Shell’s Chukchi failure is notable because it could have signaled the beginning of a push to unlock billions of barrels of oil from underneath the sea floor in the Artic at a time when scientists say the world needs to drastically reduce emissions of carbon dioxide from fossil fuel consumption in order to prevent catastrophic changes to the earth’s climate. After a series of high profile environmental demonstrations, Hilary Clinton tweeted out against Shell’s plans to drill in Alaska’s Chuckchi Sea last month. Environmental groups, who had staged media campaigns aimed at tarnishing Shell’s reputations and tried unsuccessfully to block Arctic-bound vessels with a string of kayaks, delighted in Shell’s disappointment. “Big oil has sustained an unmitigated defeat,” Greenpeace UK executive director John Sauven said. The issue also forced Shell out of the Prince of Wales’ corporate leaders group on climate change, which it had helped to form, and prompted a rebuke from the head of the International Energy Agency. Shell, which is based in The Hague, Netherlands warned investors yesterday that the disappointing well results would lead to a charge against its earnings for the third quarter.

It didn’t disclose the size of the charge, but it said the accounting value of the project is $3 billion, with another $1.1 billion in commitments to contractors. For Shell, “this was an awfully big swing, and they didn’t even make contact.” Shares in Shell’s A shares tumbled $1.08 in early trading Monday, down 2.28 percent on the news.

Shell said its Alaskan project was valued at about US$3 billion on its balance sheet and that it had a US$1.1 billion in future contractual commitments. But analysts said the overwhelming sentiment from investors would be relief that the company pulled the plug now, rather than after spending billions more pursuing the project.

The firm has set a $40 a tonne internal price on carbon, and lobbied for higher EU carbon prices to fund the development of its carbon capture and storage technologies. Those weak oil prices are forcing oil companies around the world to cancel or delay new exploration projects, especially those in risky or high-cost areas. The Dutch company now produces more gas than oil and was one of the best performing fossil fuels firms in a recent climate performance survey of top corporations. In the past, Shell has largely turned its nose up at wind or solar-powered projects, in favour of first-generation ethanol-based biofuels in Brazil, which have a disputed emissions-reducing potential. But this too could change. “After 2050, we think that solar will be single most dominant energy source in the global energy system and we are working hard to understand where we can play a role in that transition and where opportunities might exist for us,” Norman said.

Shell officials had called the Chukchi basin “a potential game-changer,” a vast untapped reservoir that could add to America’s energy supply for 50 years. 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. Shell did not have other partners asking potentially tough “what if” questions about the prospectivity of the site and the location of the firm’s planned wells. “One of the reasons you have partners is to gut-check your enthusiasm, and anytime somebody does something 100 percent, the risk is they believe their own story too much,” TPH’s Pursell said. Company officials have described the well itself as relatively straightforward — sited in shallow, 140-foot waters about 70 miles from Alaska’s northwest coastline.

A second rig, the Noble Discoverer, was barred from simultaneously boring a second well about 9 miles away because of federal walrus protections that required a 15-mile buffer zone. That 2012 effort was marred by mishaps, including a drifting drillship, air pollution permit violations and the grounding of the company’s contracted Kulluk drilling unit during a botched tow to Seattle. The Arctic is a challenging place for oil exploration, with 20-foot seas, ice, freezing temperatures and storms that can produce hurricane-force winds. When the federal government invited the oil industry to detail what parts of the Chukchi and Beaufort seas should be available for leasing during separate 2016 and 2017 auctions, companies largely ignored the request for information.

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