With Shell’s Failure, U.S. Arctic Drilling Is Dead

Yves here. A rare bit of good news on the environment front.

By Nick Cunningham is a Vermont-based writer on energy and environmental issues. You can follow him on twitter at @nickcunningham1. Originally published at OilPrice

Arctic Drilling in the U.S. is dead.

After more than eight years of planning and drilling, costing more than $7 billion, Royal Dutch Shell announced that it is shutting down its plans to drill for oil in the Arctic. The bombshell announcement dooms any chance of offshore oil development in the U.S. Arctic for years.

Shell said that it had completed its exploration well that it was drilling this summer, a well drilled at 6,800 feet of depth called the Burger J. Shell was focusing on the Burger prospect, located off the northwest coast of Alaska in the Chukchi Sea, which it thought could hold a massive volume of oil.

On September 28, the company announced that it had “found indications of oil and gas in the Burger J well, but these are not sufficient to warrant further exploration in the Burger prospect. The well will be sealed and abandoned in accordance with U.S. regulations.”

After the disappointing results, Shell will not try again. “Shell will now cease further exploration activity in offshore Alaska for the foreseeable future.” The company cited both the poor results from its highly touted Burger J well, but also the extraordinarily high costs of Arctic drilling, as well as the “unpredictable federal regulatory environment in offshore Alaska.”

Shell will have to take a big write-down, with charges of at least $3 billion, plus another $1.1 billion in contracts it had with rigs and supplies.

Shell’s Arctic campaign was an utter failure. It spent $7 billion over the better part of a decade, including an initial $2.1 billion just to purchase the leases from the U.S. government back in 2008. The campaign was riddled with mishaps, equipment failures, permit violations, and stiff opposition from environmental groups, including the blockading of their icebreaker in a port in Portland, OR this past summer. The FT reports that Shell executives privately admit that the environmental protests damaged the company’s reputation and had a larger impact than they had anticipated.

However, low oil prices were the nail in the coffin for the ill-fated Arctic drilling program. Oil from the Chukchi Sea is far from profitable when oil prices are at $50 per barrel. The costs to drill are exceptional, with unique challenges that aren’t found elsewhere. Drillers have to avoid sea ice. Offshore Alaska occasionally experiences hurricane-force winds (Shell had to briefly pause this summer’s drilling because of bad weather). The drilling season is short, with federal guidelines only allowing drilling for a few months out of the year. Even worse, there is inadequate infrastructure – the closes deep-water port is 1,000 miles away.

All of this made it absolutely crucial that the company found vast volumes of recoverable oil. Even a sizable find wouldn’t be enough; Shell needed billions of barrels of oil. Justifying his decision to move forward to skeptical investors, Shell’s CEO Ben van Beurden said in July that its target in the Arctic “has the potential to be multiple times larger than the largest prospects in the U.S. Gulf of Mexico, so it’s huge.” It could have been 10 times what Shell has cumulatively produced in the North Sea to date.

In the end, it apparently isn’t enough. “[T]his is a clearly disappointing exploration outcome,” Marvin Odum, Director of Shell Upstream Americas, said in a statement. To wary shareholders, the more than $4 billion in potential write-downs might be a price they are willing to pay to get the company out of the loss-making Arctic.

Other companies had been eyeing the Arctic, including Statoil and ConocoPhillips. Both companies also bought leases to offshore tracts, but they had been taking a more cautious approach. They previously put their Arctic work on hold, waiting to see the results of Shell’s efforts. Now that Shell has spent billions of dollars and has come up empty, the chance of them moving forward at any point in the next few years is essentially zero.

“Hopefully, this means that we are done with oil companies gambling with the Arctic Ocean, and we can celebrate the news that the Arctic Ocean will be safe for the foreseeable future,” Lois Epstein of The Wilderness Society, said in response to Shell’s announcement.

To be sure, there are other drilling projects in the Arctic elsewhere around the world. Italian oil company Eni is expected to bring a well online in the Barents Sea in the near future, which could produce around 100,000 barrels per day. Gazprom is also producing from one site in the Arctic. The Prirazlomnoye produced just a few thousand barrels per day in 2014, although Gazprom is slowly ramping up production. Meanwhile, it is looking increasingly likely that Russia’s Rosneft won’t return to exploration in the Arctic until the 2020s. Last year, the Russian firm made a discovery with ExxonMobil, but western sanctions forced Exxon to pull out.

Shell had not expected first oil to come online until 2030 at the earliest. But, at this point, even that looks optimistic. For now, oil development in the U.S. Arctic appears to be dead.

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  1. jgordon

    This is a great post! But as Nicole Foss points out, less access to fossil fuels doesn’t mean less energy; it means no energy. Our current electric grid/civilization simply will not operate without massive quantities of cheap fossil fuels to subsidize it. And when those are gone, we are in for a massive descaling and decomplexification whether anyone likes it or not.

    Nobody goes to drill for oil in the arctic because they like it there. They go because all the stuff that’s economically viable to extract is tapped out or about to be tapped out. If they’ve given up on the arctic, that is a tacit admission that the whole modern industrial civilization thing is at the end of the line. Looking at alternatives isn’t a bad idea at this point.

    1. ambrit

      As the recent developments in California, Florida, and others show, the ‘Old Guard’ energy producers are actively trying to stymie the ‘alternate’ energy movement.
      See: http://www.latimes.com/nation/la-na-solar-race-20150209-story.html
      No one is ‘minding the store’ at the governmental level. This story alone is motivation enough to re-regulate major parts of the ‘business’ community. When one reaches the level of corporations, self interest is inherently unenlightened.

    2. human

      I don’t have time to find a link, but, didn’t I read here, in the past week or so, that Tesla’s market cap is about to/has surpassed that of the other US automakers?

      Seems like some are already on the ball.

      1. different clue

        I wonder how much fossil energy subsidy it takes in a “pro-rated” sense to support all aspects of Tesla’s effort from conception forward.

      2. jgordon

        That’s not the problem here. The electric grid can only function if there is a 100% reliable source of energy being fed into it. Renewable do not provide that. And absent that energy source, the grid will start to decay almost immediately. Within only a few months it would be impossible to get it started again even with new fossil fuel reserves. That is the situation.

        Renewables will be viable at the household level or the street level, with appropriate and cheap energy storage technologies (which basically do not exist yet) but they are completely incompatible with large scale energy distribution systems. That is why do not like adding more than a relatively small amount of energy production capacity from renewable energy to a grid. In fact, it’s a matter of survival for them.

        1. optimader

          The electric grid can only function if there is a 100% reliable source of energy being fed into it. Renewable do not provide that
          Restated in long form, the issue of intermittency of renewables (wind/solar) needs to be addressed, or renewable utility grade input penetration is conventionally limited to, IIRC ~20%. (There are smaller scale exceptions). This means conventional power generation has to be installed and available to serve the base-load of the powergrid. Unfortunately if it is installed and available, it also has to be paid for RE: reflected in your utility rates.

          Utility grade Magic Bullet storage schemes are still somewhere over the Rainbow. Sooo, IMO the viable solution exploiting existing technology is implementation of a giganormous interconnected Grid – or what is branded as a SuperGrid, using high voltage DC (HVDC) which has very low line loss over great distances –compared to AC power.

          Basically the theory goes: if you interconnect sufficiently geographically diverse intermittent physical generation locations, a bad analogy being kinda like why SCALE is important to funding a healthcare insurance mutual, the intermittency of an single generation location is blended away.

          HVDC Supergrid technology is mostly in the bag, (no doubt some security redundancy to work out, but it is more a matter of funding implementation not R&D.
          Gee, now where could the funding to do this be reallocated from??? hmmmm

          All that said, we are contemplating a FANTASTIC investment of resources (conventional energy) into wind and solar technology, both of which are maturing w/ steep innovation curves. So how quickly you start scaling up as the technology becomes obsolete? that is a good value maximization multivariable puzzle for a wiser man than me.

          Posted on this before, but it is the reality behind the curtain that will need to be implemented for renewables to achieve utility grade penetration in the high percentages.


        2. Nick

          jgordon, never heard of Smart Grids? The future is now, America is actually at the forefront of the alternative energy revolution.

          1. jgordon

            I was only summarizing the article from Nicole Foss. A detailed exposition about why smart grids aren’t going to happen is in there. It’s very thorough; you could check it out.

        3. pat b

          The electric grid can only function if there is a 100% reliable source of energy being fed into it. Renewable do not provide that. And absent that energy source, the grid will start to decay almost immediately. Within only a few months it would be impossible to get it started again even with new fossil fuel reserves.


          grids function even with power plants tripping offline.

  2. PlutoniumKun

    Its good news, although we may have the Saudi’s most to thank for it – low oil prices have done enormous damage to unconventional and off-shore oil investments. It seems clear that the oil industry is now working on an assumption of low prices for several years at least.

    Interestingly, the Guardian is reporting that it seems there will be a palace coup underway in SA. There is a lot of discontent among the princes – they don’t seem to like the war in Yemen and the ineptness of how Mecca is run. I wonder if this is also part of managed discontent elsewhere at SA overproduction of oil. It would be very difficult I think for SA to pull back without a major loss of face, although their hand may be forced.

    1. Brian M

      Wow. In Saudi Arabia, failed policies lead to calls for change. In the US, the old neocon failures are still pampered as statesmen.

    2. susan the other

      I think we have the Saudis to thank for this too. This is what they meant when they denied they were creating a price war in the oil industry but rather, they were killing credit. The price of Saudi oil is too low for companies using credit, stock sales, and corporate bonds to compete with. Another end to the old crazy days. So is this free market or monopoly? Funny little question.

    3. different clue

      This would be a fine time for motivated movements of millions of environmentalists, Jihad-opponents ( people who would like to see the cannibal head-chopping livereaters against Assad all exterminated), Saudi-resenters, etc. to alter their lifestyles individually, jointly and severally as much as they possibly can to KEEP the downward pressure on oil usage pressing DOWN.

      For now our governments are still under Class Enemy Occupation, so there is very little we can do through government . . . especially government in America. It might be different in Europe. So the people comprising the above-mentioned groups will have to do what they can personally and socially through their purchase and use behavior regarding oil to strangle their own demand for it down as hard as they can. In that way the prospect of drilling in-around the Arctic may perhaps be exterminated rather than merely delayed.

      One hopes ( without overtly requesting) that from time to time there may appear a posting so pointedly-focused on the subject of petro-use reduction that an outpouring of useful comments and pointers to links on how to use less oil may be inspired to appear.

      Every dollar is a bullet on the field of economic combat.
      I am not my keeper’s brother.
      No one owes the rich a living.

  3. change agent

    We’ll have to redouble our efforts in Florida to keep the wolves away from increasing pressure to drill near shore off our beaches, including new options near Cuba.

    1. different clue

      Well, no one is going to stop Cuba from selling leases on the Cuba side of the border. Would it not be the height of irony if European drillers were to operate a whole bunch of “Deepwater Horizons” in Cuba’s Gulf Stream Waters only to have them blow out and carry all that oil all the way to Europe? Only not in tankers? ha ha ha . . .

  4. TomDority

    8 Billion in mis-allocated investment…..not much of a loss to anybody. At least the money was used for investment in tangible work and the investors should take a loss as they earned their risk premium. 8 BILLION could have been used for research and development in other useful endeavors such as sustainability and ways to reduce energy use per unit of production. I would be much more amiable to investments in research and development supported by the government for alternative energy and public work projects as opposed to Wall Street’s investment in asset price inflation strategy that does not contribute any tangible benefit to mankind and is supported by government (global citizens, QE and etc)

  5. abc

    The Governor of Alaska said that with the failure of Arctic drilling, they now need to drill in the Arctic National Wildlife Refuge. State government needs the money and Alaskan’s need their yearly oil money check from the state. Without it, how will my Alaskan friend be able to afford to fly to Hawaii for vacation?

    1. different clue

      Yes, I heard that. The answer is to keep delaying ANWAR drilling politically as long as possible while working socially and culturally on driving oil demand down Down DOWN so as to eventually crush the prospect of ANWAR drilling economically as well.

  6. rjs

    the Aleyska pipeline may also have to be shut down…it’s now running less than one-quarter full and not generating enough heat to keep the oil in it liquid during Alaskan winters…

    1. abynormal

      800 miles of product producing it’s own environmental self-destruction…greed always trumps common sense.
      The Alaskan Pipeline is a model for sustainable development. It was designed with economic efficiency as well as environmental safety in mind. However, it may not be the cheapest method of shipping oil. It has an estimated energy intensity of 280 BTU/ton-m. Transporting oil over the ocean has an energy efficiency between 60-100 BTU/ton-m (Argonne National Laboratory, 4.9, p. 5). It may not be the most efficient method, but it is one of the safest ways environmentally. If this oil is seen as part of the problem of saturating the atmosphere with carbon, then the pipeline is not a good model for sustainable development. However, the pipeline is the most sustainable method of transporting the oil. The environmentally conscious fashion in which the pipeline was designed is a good paradigm for future development.
      The Alaskan Pipeline: A Necessary Obstruction?

      “Things joined by profit, when pressed by misfortune and danger, will cast each other aside.” Zhuangzi

  7. TomDority

    Of course, Shell may have found massive reserves but, economic extraction at current cost is not feasible so, they may have decided to keep results in back pocket, pay off contracts so as to capture new contracts when cost structures become feasible. Who knows as the report does not put numbers to what they did find and that information may be proprietary. I just don’t know

    1. optimader

      It will be stated as reserves by Shell if it is viable as that goes directly to company valuation. As I recall Exxon had a major shtstorm w/ the SEC about claiming tarsands as proven reserves a few years back.

      What’s Your Oil Company Worth?

      By Robert Rapier on November 20, 2014

      PDF Printable PDF

      Understanding the Standard Measure

      There are a number of important metrics that go into determining a fair value for an oil and gas company. Near the top of the list is the value of its oil and gas reserves. There are plenty of other considerations — such as quality of management, geographical locations of the reserves, level of debt, and success at replacing reserves — but without a good metric for comparing the proved reserves of different companies we would be flying blind.

      The Securities and Exchange Commission (SEC) requires oil and gas companies to estimate the year-end value of their proved reserves in the annual 10-K filing. Recall that proved reserves can be either proved developed (PD) or proved undeveloped (PUD) — and both are used in this yearly calculation. PD means the resource can be produced with existing or minimal investment, while PUD may be booked as “proved reserves” if the development plan for those reserves provides for drilling within five years……………….

    1. Vatch

      I’m afraid you’re correct. When the price of petroleum rises sufficiently, it will be cost effective for them to return. The same is true of Conoco Phillips.

    2. different clue

      Well . . . ” time” gives us time to degrade and attrit the demand-for-oil in the world, if we can. Enough to keep the price of difficult oil forever unprofitable, if we can.

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