Shell move away from Arctic dims oil prospects, delights environmentalists

Royal Dutch Shell has abandoned its long quest to become the first company to produce oil in Alaska's Arctic waters, darkening the nation's long-term oil prospects and delighting environmental groups that tried to block the project.

After years of effort, Shell is leaving the region "for the foreseeable future" because it failed to find enough oil to make further drilling worthwhile.

The company has spent more than US$7 billion on the effort, slogged through a regulatory gauntlet and fought environmental groups that feared a spill in the harsh climate would be difficult to clean up and devastating to polar bears, walruses, seals and other wildlife.

Shell persisted in hopes of finding a big new source of oil revenue and establishing expertise and a presence in the Arctic, which geologists estimate holds a quarter of the world's undiscovered conventional oil and gas.

The drilling project also held the hopes of Alaska, which has seen oil production and revenues decline sharply in recent years, and the US 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.

But Shell drilled to 6,800 feet about 80 miles offshore in the Chukchi Sea off Alaska's northwest coast and just 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 US," Marvin Odum, director of Shell's operations in the Americas, said in a statement issued late Sunday. "However, this is a clearly disappointing exploration outcome for this part of the basin."

Known in the industry as turning up a "dry hole," it's common for exploratory drilling to find little to no oil, especially in formations that have not been explored much in the past.

But Shell's failure is notable because it was the only active drilling project in the sea, which Shell officials had called "a potential game-changer," a vast untapped reservoir that could add to America's energy supply for 50 years.

As recently as March, a US Energy Department advisory council called for an immediate expansion of oil exploration in the American Arctic to avoid an increased reliance on imported oil in the future, in part because it would take more than a decade for oil in the Arctic to be discovered, developed and brought to market.

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" because it would have attracted others to the region.

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. The world now consumes 93.6 million barrels of oil every day.

Regions 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.

The US Geological Survey estimates that American Arctic waters in the Chukchi and Beaufort seas contain 26 billion barrels or more of recoverable oil.

The Arctic's vast oil and gas potential is exactly what worries scientists, who warn against tapping new sources of fossil fuels at a time when 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.

Environmental groups, which had staged media campaigns aimed at tarnishing Shell's reputation and tried unsuccessfully to block Arctic-bound vessels, revelled in Shell's disappointment.

"Big oil has sustained an unmitigated defeat," Greenpeace UK Executive Director John Sauven said.

Shell, which is based in The Hague, Netherlands, warned investors that the disappointing well results would lead to a charge against its earnings for the third quarter. It did not disclose the size of the charge but said the accounting value of the project is US$3 billion, with another US$1.1 billion in commitments to contractors. The company took charges of US$2.1 billion in 2013 and US$1.9 billion in 2014 also as a result of disappointing drilling results in the US.

Shell's shares were down 3 per cent Monday in afternoon trading, in line with a broad market decline, to US$45.89. Shell's share price has fallen by around a third over the past year as oil prices have fallen by half, to about US$45 a barrel.

Those weak oil prices are forcing oil companies around the world to cancel or delay new exploration, especially in risky or high-cost areas. That was probably a factor in Shell's decision to abandon offshore Alaska.

The Alaskan decision is "an example of not going forward with a project because there is just not enough oil and gas to make it economic," said Louise Cooper, an independent analyst at CooperCity. "If the oil price rises again and the well becomes economic, then it can try again."

But Miyoko Sakashita, oceans program director for the Center for Biological Diversity, urged Shell not to make another attempt.

"Polar bears, Alaska's Arctic and our climate just caught a huge break," Sakashita said. "Here's hoping Shell leaves the Arctic forever."