Shell said it found indications of oil and gas at a well in the Chukchi Sea off Alaska, but not enough to continue. Low oil prices were among many unknowns the company faced.
Royal Dutch’s Shell’s decision to pull back from exploration off Alaska’s North Slope reflects not just the results of a disappointing summer drilling season but also the pressures faced by an oil industry buffeted by low crude prices and increased concern about the environmental risks of developing major new oil fields in the offshore Arctic.
Shell has spent some $7 billion in hopes of finding a big new source of future revenue and establishing expertise in a frontier area that geologists believe holds a significant portion of the world’s undiscovered oil and gas.
That effort sparked a multitude of protests from environmentalists through the summer in Seattle, where a giant drilling rig sat in Elliott Bay. In Portland, activists dangled from a bridge to stop a Shell vessel from departing for the Arctic.
Protesters and Seattle city officials on Monday celebrated the news, and insisted their work to shift the political winds played a part in Shell’s decision.
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Shell announced late Sunday it would end this exploration “for the foreseeable future,” citing the disappointing results of an initial well, the high costs of development and the “challenging and unpredictable federal regulatory environment in offshore Alaska.”
It appears unlikely that Shell would resume the exploration off Alaska before the 2019 expiration of the company’s federal offshore leases in the Beaufort Sea and the 2020 expiration of its Chukchi Sea leases.
The company has slogged through a yearslong regulatory gauntlet in an effort that made Shell a global target of environmentalists. In protest after protest in Seattle and elsewhere, they cited not only the risks of an oil spill in the Arctic’s harsh climate but the need to pull back from offshore Arctic oil development to limit the effects of climate change driven by the combustion of fossil fuels.
The company held the hopes of the state of Alaska, which has seen oil production and revenues decline sharply in recent years. Offshore development also could have given a big boost to maritime support services based in Seattle.
Finding an elephant of a new field off Alaska also would have bolstered the long-term prospects for the U.S. oil industry, helping to keep the country among the top three oil producers in the world along with Saudi Arabia and Russia.
A Shell official said earlier this year that there was a possibility of developing a Chukchi Sea field that could eventually yield 1 million barrels of oil a day — roughly equal to 5 percent of U.S. current consumption.
But Shell, drilling this past summer to 6,800 feet about 80 miles off Alaska’s northwest coast, didn’t find much.
“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.,” Marvin Odum, director of Shell’s operations in the Americas, said in a statement. “However, this is a clearly disappointing exploration outcome for this part of the basin.”
The Seattle connection
Shell’s quest for offshore oil had raised the hopes of leaders of Seattle’s maritime industry for years of business in servicing the fleets that would be working off Alaska. The company’s Arctic drilling fleet was hosted at Terminal 5 under a two-year lease with the Port of Seattle
This year, Shell assembled — under contract — a formidable armada of more than two dozen vessels, including two oil rigs that mobilized in Seattle and other Puget Sound ports, where their presence spurred high-profile protests. After the drill season, it’s unclear whether any of these vessels will stop over in Seattle.
“It’s still too early to understand what the demobilization will look like, and what role Seattle will play — if at all,” said Curtis Smith, a Shell spokesman.
“Obviously, we’re disappointed,” said Paul Queary, spokesman for Foss Maritime, which had a contract with Shell to use Terminal 5. “It was a big project with a lot of back-end potential for us.”
Queary said Foss is waiting to hear whether Shell will use Terminal 5 further.
“We haven’t heard any operational details from Shell about what they’re doing going forward,” he said. “We expect there would be some work done to unwind the project, and we still have our lease.”
The lease with the Port allows Foss to work with partners other than Shell at Terminal 5, but the company has been held back in seeking additional business due to a legal dispute with Seattle officials, Queary said.
In May, Mayor Ed Murray said the Port needed to apply for a new land-use permit to let Terminal 5 be used as a hub for Shell. Siding with environmentalists, he said the existing permit allowed the loading and unloading of cargo but not the long-term moorage and maintenance of drilling equipment.
The Port and Foss appealed the decision and continued to work with Shell until the rigs and support vessels using the Port left for the Arctic in June. Foss expects a hearing examiner to rule on the dispute in the next week, Queary said.
“We’re thrilled. This is super-exciting news,” said Emily Johnston, spokeswoman for 350 Seattle, an environmental organization active in the SHELLNO campaign against Arctic drilling.
Johnston believes demonstrations in Seattle, including an Elliott Bay kayak blockage in May, were a factor in Shell’s decision to abandon its Arctic endeavors.
The demonstrations forced Shell to worry about its reputation and focused more scrutiny on the permitting process for Arctic drilling, she said.
“Everybody knew this project was under the microscope and was only going to get more so,” said Johnston. “What happened here in Seattle helped galvanize the nation against Arctic drilling and educate the public about how this project was different from other drilling projects.”
She added: “Shell didn’t find the gusher they wanted. If they had, this might have taken longer. But this was about a change in the political winds, basically.”
If drilling equipment returns to Seattle, environmentalists likely will mark its arrival with some type of celebration, Johnston said. But Shell may steer clear.
“They don’t really like the attention they get in Seattle,” Johnston said.
Murray agreed that the protests made a difference.
“I am pleased that Shell has ceased their Arctic drilling operations,” he said. “The people of Seattle stood up to oppose the use of our city as a base for expanded Arctic drilling, and with today’s announcement, it is time to move forward. I am committed to working with the Port and the broader maritime industry to build a clean economy of the future that provides high-paying jobs in this critical sector and preserves our environment.”
The fossil-fuel debate
Drilling exploratory wells that find little or no oil, known as “dry holes” in the industry, is common, especially in formations that have not been explored much in the past.
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 under the Arctic sea floor 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 Earth’s climate.
Shell first drilled in the offshore Arctic in the 1980s and late 1990s, and back then the company did find gas in the Burger field, according to Ann Pickard, Shell’s executive vice president for the Arctic. But she said that gas, at the time, was clearly not economically viable, so the company focused on other development efforts, such as fields in the Gulf of Mexico.
Those early Arctic efforts did find enough promising signs to convince the company to launch this new round of exploration. In an interview with The Seattle Times in May, Pickard said that finding a dry hole — or nothing but gas — could end the exploration effort. But she said the plan was to drill four to six exploration wells over a period of years.
“We have got some big unknowns there. So I can’t tell people that I’m going to deliver results in 2015,” Pickard said.
In its news release announcing the decision to end exploration, Shell acknowledged that the Chukchi basin remains substantially underexplored and that it has important potential. But the statement said the signs of oil and gas found by Shell were “not sufficient” to warrant further exploration.
Shell’s summer drilling came at a time of low oil prices well below what industry officials have said would be necessary to profitably produce oil in the offshore Arctic. And many oil companies already had opted not to explore in the region despite the potential for major new finds.
“What the companies do in the current price environment, they are all cutting back on exploration and high-grading their projects in terms of return and risk,” said Cindy Giglio, a senior analyst with IHS Energy.
Giglio said many oil companies have determined that the lower oil prices are not just a short-term blip but could stretch out over years. Shell had not shared in that view, but Giglio viewed its decision to pull out of offshore Alaska as a sign that Shell, as well, is preparing for a prolonged slump in oil prices.
Shell, based in The Hague, Netherlands, warned investors Sunday 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 said the accounting value of the project is $3 billion, with an additional $1.1 billion in commitments to contractors. The company took charges of $2.1 billion in 2013 and $1.9 billion in 2014 also as a result of disappointing drilling results in the U.S.
In afternoon trading in London, Shell’s share price was down 2.7 percent at 1,515 pence in a weak overall market. Shell’s share price has fallen by roughly a third over the past year as oil prices have dropped by half, to about $45 a barrel.
The U.S. Geological Survey estimates U.S. Arctic waters in the Chukchi and Beaufort seas contain 26 billion barrels or more of recoverable oil in total. 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.
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,” opening an area that U.S. officials say contains 15 billion barrels of oil.
Though countries are pushing for cleaner energy sources, analysts predict that the world will need an additional 10 million barrels a day between 2030 and 2040 to meet growing demand, especially in developing countries, Ebinger said.
“Areas like the Arctic are one of the areas that, if we’re going to be able to do this, we need to examine,” he said.
But Miyoko Sakashita, oceans program director for the Center for Biological Diversity, urged Shell not to try again. “Polar bears, Alaska’s Arctic and our climate just caught a huge break,” Sakashita said. “Here’s hoping Shell leaves the Arctic forever.”