Shell’s decision to abandon its controversial efforts to drill in the Arctic Ocean casts doubt on the future of offshore oil exploration in the American Arctic.
Oil and gas companies from around the world were closely watching Shell’s pioneering efforts to see whether drilling would succeed in the remote and harsh environment off the northern coast of Alaska.
The result was a disaster – a loss of billions of dollars and a decision by Shell to cut its losses and quit.
Marvin Odum, director of Shell’s U.S. operations, called it “clearly a disappointing exploration outcome.”
Shell bet more than $7 billion that its Burger Prospect in the Arctic Ocean would turn into a world-class, multi-billion-barrel discovery. Even as the company endured the oil price collapse and global protests from environmental groups, it pushed forward with the Arctic drilling.
But the results of its exploration well this summer were not promising, and the company said Monday it was ending drilling efforts off the Alaskan coast “for the foreseeable future.”
$7 billion The amount of money Shell spent seeking oil in the Arctic Ocean
The Obama administration has scheduled more Arctic Ocean drilling lease sales, one next year in the Chukchi Sea and another in the Beaufort Sea in 2017. But Shell’s bad experience and the low oil prices raise the prospect of those sales being delayed or even canceled.
And even if the Interior Department goes ahead with the lease sales, scant interest from industry is expected.
“I think the interest will be limited, very limited,” said Guy Caruso, former head of the U.S. Energy Information Administration.
Caruso said he expects Shell’s experience to reinforce the “wait-and-see attitude” other major oil and gas companies have shown toward the U.S. Arctic. ConocoPhillips and Statoil also purchased leases in the U.S. Arctic Ocean but have suspended their exploration plans indefinitely.
Drilling in the Arctic Ocean is expensive. There’s little infrastructure within hundreds of miles and a short summer drilling window before the ice closes in for the winter. Companies face new federal regulations meant to prevent a spill and protect marine mammals, as well as the controversy that comes with operating in an environmentally sensitive region.
The well will be sealed and abandoned.
The drilling is an issue in the presidential race, with Democratic frontrunner Hillary Clinton saying the “the Arctic is a unique treasure. Given what we know, it’s not worth the risk of drilling.”
Shell said it “found indications of oil and gas” in its exploration well, but not enough to justify the cost of further drilling and the federal regulations the company called challenging and unpredictable. Shell drilled the well 6,800 feet below the ocean floor, about 150 miles from Barrow, Alaska.
“The well will be sealed and abandoned,” according to Shell.
Shell downplayed how much current low oil prices played into its decision. Such efforts are based on a long-term payoff. But the low prices are shrinking energy companies’ exploration budgets and risky Arctic projects must compete with other global oil opportunities.
Offshore Arctic drilling does not look like a great commercial opportunity with low oil prices, said Kenneth Medlock, senior director at the Center for Energy Studies at Rice University.
“It doesn’t mean that it won’t ever look like a great opportunity, just not any time soon,” Medlock said.
He expects the Russians will move faster with oil and gas development on their side of the Arctic because of an intense need for money. But the Russians are hindered by sanctions limiting how much Western oil companies can cooperate with Russian firms on Arctic projects.
“The Russians need Exxon or Total or somebody with access to the technology, and especially the cash,” said Caruso, who is senior energy advisor at the Center for Strategic and International Studies.
Shell suggested that someday the Arctic waters off Alaska’s coast could again see drilling rigs.
“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. However, this is a clearly disappointing exploration outcome for this part of the basin,” said Shell USA president Odum.