The Fuse

Despite Shell’s Setback, Arctic Drilling Remains Likely in Longer Term

by R. Kress | September 29, 2015

After years of regulatory battles, environmental advocacy protests and more than $7 billion of investment, Royal Dutch Shell is abandoning its costly efforts to extract oil from Alaska’s Arctic waters.

Monday’s announcement cited high costs and a “challenging and unpredictable federal regulatory environment” as the reasons why Shell will stop offshore oil exploration in Alaska “for the foreseeable future.”

Despite initial indications that the area would prove fruitful for oil and gas extraction, Shell found the amounts there to be “not sufficient to warrant further exploration.”

Shell had already drilled the Burger J exploration well to a depth of 6800 feet over the summer in the Chukchi Sea, some 80 miles off the coast of Alaska. However, despite initial indications that the area would prove fruitful for oil and gas extraction, Shell found the amounts there to be “not sufficient to warrant further exploration.” The company will now seal the well and abandon the project. However, in a move that foreshadows further efforts for oil exploration in the area in the future, the company released a statement saying that “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.”

The move is being hailed by environmental advocacy groups—many of whom banded together to organize protests in Portland, Oregon and Seattle, Washington over the summer to block the Shell oil rigs from reaching their arctic destination. Environmental groups slammed the project as the Chukchi Sea is home to endangered wildlife including polar bears, walruses and seals—making the possibility of an oil spill in the area particularly disastrous. Add to that the Department of the Interior’s grim estimate that this Shell project had a 75-percent chance of resulting in a major oil spill.

But environmental concerns aside, what implications does Shell’s decision have on the U.S. domestic energy supply?

The area of the Chukchi and Beaufort seas surrounding Shell’s now-defunct Burger J exploration well could hold some 26 billion barrels of recoverable oil, according to the U.S. Geological Survey. That massive quantity could have added a significant oil supply, building on the momentum established by the shale oil boom. In March 2015, the National Petroleum Council (NPC) released a widely cited report arguing that responsible development of Arctic oil resources will play a critical role in meeting future oil demand, and is necessary to solidify America’s status as one of the world’s largest oil and gas producers in the long term. The NPC, which is part of the Department of Energy, advocates for immediate exploration into the region.

“The Arctic is an essential piece of our energy equation and vital to keeping America’s status as a world leader in energy,” Erik Milito, director of Upstream and Industry Operations for the American Petroleum Institute (API) told The Fuse in a written statement.

Regarding the NPC study, Milito argues it’s up to the government and regulators to ensure that the oil resources of the Arctic do not go untapped.

“Arctic oil and natural gas represent incredible potential for American energy security, jobs and revenue for the government.”

“Arctic oil and natural gas represent incredible potential for American energy security, jobs and revenue for the government,” Milito said. “The long lead times for exploration and development work, coupled with the time required for government approvals mean we must start working now to realize the benefits of Arctic energy in decades to come. Predictable rules and regularly scheduled lease sales are needed to attract investment in U.S. Arctic energy development.”

While some groups call for immediate expansion of oil exploration in the Arctic to bolster America’s energy mix, environmental advocates say Monday’s news is a reminder that there’s no time like the present to reduce reliance on fossil fuels.

“Arctic drilling is an inherently dangerous activity. Our hope is that this is a reminder to stay out of the Arctic,” Miyoko Sakashita, Oceans Director and Senior Counsel for the Center for Biological Diversity told The Fuse. “Looking at renewables and clean energy now versus kicking it down the road is of paramount importance.”

Sakashita’s views are not shared by industry. In fact, given the size and scope of resources that exist in the Arctic, many see oil and gas extraction in the region as more a matter of “when” than “if.” The NPC report points to the fact that most Arctic oil is “undiscovered and offshore, in relatively shallow water depths of less than 100 meters,” and the fact that extraction technology is available today and has been in development for decades. There’s also the matter of timing. The many challenges of Arctic drilling are only augmented by low oil prices.

arctic v shale

Despite the scope of the resources, environmentalists remain optimistic. Sakashita underscored the role of this summer’s protests in keeping the issue of Arctic drilling in the public eye—a fact that she says may have contributed to Shell’s cessation of efforts in the Arctic, as opposed to continuing indefinitely to pursue future options.

“[The protests] certainly created a lot of pressure on the regulators to keep Shell to its plan and to monitor it,” Sakashita said. “[The protests] made sure everyone’s eyes were on Shell to make sure it didn’t continue on forever. I think they’re partially responsible for why Shell is deciding to abandon this well and not go back any time soon.”

Shell has long maintained that if it failed to find oil in the Arctic its summer that it would abandon the project—even at great cost. Ultimately, Shell estimates that the cost of doing so will be around $3 billion—with an additional $1.1 billion in future contractual commitments that will now go unfulfilled. The move is likely to have a major impact on the company’s third quarter earnings report that comes out October 29th.