Shell Folds Arctic Drilling Gamble

September 28, 2015

As I’ve been posting for some time, Shell’s drilling in the Arctic was an exercise in very expensive futility, given the price of oil. Whoever gambled that oil prices were going to pop back up, and that some amazing discovery would make it all worthwhile, just lost to the Gambler in Chief.

I’ve said before that the President’s game is not three dimensional chess, as is so often asserted, but poker. Green campaigners who have been beating the president up over the Arctic decision might take a step back and ask themselves if in fact, given the Congress we have, and the political climate, whether they were a little too quick to judge an executive who plays the long game.

Reuters:

Royal Dutch Shell has abandoned its Arctic search for oil after failing to find enough crude in a move that will appease environmental campaigners and shareholders who said its project was too expensive and risky.

Shell has spent about $7 billion on exploration in the waters off Alaska so far and said it could take a hit of up to $4.1 billion for pulling out of the Chukchi Sea for the “foreseeable future”.

obamagambThe unsuccessful campaign is Shell’s second major setback in the Arctic after it interrupted exploration for three years in 2012 when an enormous drilling rig broke free and grounded.

Environmental campaigners and shareholders have also pressured Shell to drop Arctic drilling. Some are worried an oil spill would harm protected species while others are concerned about the cost after oil prices more than halved in a year.

“Shell has found indications of oil and gas in the Burger J well but these are not sufficient to warrant further exploration,” Shell said in a statement on Monday.

It said the decision to withdraw from the area reflected the results from the exploratory well, the project’s high costs and the unpredictable federal regulatory environment in the area off the U.S. state of Alaska.

“The entire episode has been a very costly error for the company both financially and reputationally,” said analysts at Deutsche Bank, who estimate the Shell’s Arctic exploration project could cost the company about $9 billion.

In the looking-glass world of the energy companies, of course, the ironic thing is that even a huge drilling success would, paradoxically, have been a disaster as it would have had a tendency to keep oil prices lower, longer, and further undermine the efforts of major oil companies to tap the world’s remaining reserves, most of which are very difficult and expensive to extract, ie Tar sands, deep water, arctic, etc.

The desired outcome for oil companies, of course, is to keep you addicted to, and dependent on, fossil fuel, for which they can charge ever higher prices, to extract ever more expensive oil from ever more sensitive environments.  In this, for now, they have been frustrated – so chalk one up for the good guys.

USAToday:

Charles Ebinger, senior fellow for the Brookings Institution Energy Security and Climate Initiative, said a successful Shell well would have been “a terribly big deal,” opening an area that U.S. officials say contains 15 billion barrels of oil.

Despite declining oil prices, and clamoring by activists and some countries for cleaner sources of energy, analysts expect that between 2030 and 2040, there will be a global need for another 10 million barrels a day to meet growing demand, particularly 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.

Shell’s vessels experienced some significant challenges working in the Arctic. A drill vessel broke away from its towline in the Gulf of Alaska, running aground near Kodiak Island. And owners of the Noble Discoverer, a leased vessel used for exploration in the Chukchi Sea, pleaded guilty to eight felony maritime safety counts and paid a $12.2 million fine

NYTimes:

The decision indicates that even though the oil industry believes the Arctic has major resources, the costs, a tricky environment and other risks are so high in the area that the hidden oil and gas will be difficult to develop if oil prices stay low.

Shell’s efforts to drill in Alaska have long seemed quixotic. The company’s decade-long project has been dogged by the opposition of environmental activists, who have said oil and gas production would pose unacceptable risks in the fragile Arctic. Shell also encountered mishaps; in 2012 it drilled two shallow wells, but a drilling ship, the Kulluk, ran aground.

The environmental protests continued this year when the Obama administration gave the green light for the company to resume its efforts. Investors and industry executives questioned the wisdom of Shell’s spending heavily and putting its reputation at risk — especially with oil prices having fallen over the past two years from $110 per barrel to below $50 per barrel.

Stopping drilling in offshore Alaska is a major disappointment for Shell, whose executives thought they had locked up a potentially huge trove of oil there. In July, Ben van Beurden, Shell’s chief executive, said that the area where the company was drilling in the Chukchi Sea, 150 miles offshore, “has the potential to be multiple times larger than the largest prospects in the U.S. Gulf of Mexico.”

6 Responses to “Shell Folds Arctic Drilling Gamble”

  1. dumboldguy Says:

    You’ve got to know when to hold ’em
    Know when to fold ’em
    Know when to walk away
    And know when to run

    You never count your money
    When you’re sittin’ at the table
    There’ll be time enough for counting
    When the dealin’s done

    LMAO! The “dealin’s done”, and the Gambler in Chief is now counting the $2.1 billion that he doesn’t have to give back to Shell, as he would have had to do if he had summarily cancelled their leases. And Shell is trying to minimize their losses—-ONLY $4.1 billion? But they “invested over $7 billion? And what’s the word on Shell’s activity in the Russian Arctic waters?—are they giving up there too?

    An interesting article in the WashPost a couple of weeks ago—-well worth the read for some insights into the whole question of oil and Alaska and $$$.

    post.com/business/economy/shells-big-gamble-oil-wrangling-at-the-far-reaches-of-the-arctic-frontier/2015/09/11/2d6b6f9e-5324-11e5-933e-7d06c647a395_story.html

    Rather than having to pay income or sales taxes, every Alaskan gets a check from the state every year—-their “dividend” from the state’s take from the oil companies—-this year ~$2K, and has been as high as ~$4K in the recent past. Under ANCSA (the Alaskan Native Claims Settlement Act), the Native Regional Corporations and the Native Village and Urban Corporations can cut their own deals, and some of them have done way better.

    One very disturbing thing in the WashPost article is that many of the Native Americans, both individually and collectively through the corporations, are in favor of drilling for oil and otherwise despoiling the environment. They don’t seem to care what damage fossil fuels are doing, as long as they get their share of the $$$$. Yet at the same time they complain about how their “traditional way of life” is being destroyed by AGW. A bit hypocritical, IMO.

    PS, I had mentioned on other threads that Alaskans were counting on the Chukchi oil to boost the flows in the Alyeska pipeline. Since the Prudhoe Bay fields are in decline, there is barely enough oil moving in the pipeline at times to keep it from freezing solid and becoming useless. What happens now? The folks who built and run the pipeline have made dark jokes about the pipeline becoming an “800 mile long popsicle”. If that happens, the free ride for Alaskans will be over.

  2. Jim Housman Says:

    It seems the Alaska natives are just as hypocritical as the rest of us. We all want clean air, pristine forests and the ability to drive our air conditioned cars to the travel agent to plan our next flight.

    The Alaskan response to the $2000-$4000 annual check reminds me of the old joke about the guy who walks up to the girl and asks if she will go to bed with him just once for a million dollars. The girl says OK for a million dollars she would do that. So the fella says “How about for ten dollars?” Insulted she says “Ten dollars, just what do you think I am?”. He responds “We’ve already established that, now we’re just dickering over the price.”

    Getting money for nothing is absolutely corrupting.

  3. Paul Magnus Says:

    shame that $4b can be spent on #climate solutions…

  4. dumboldguy Says:

    More followup to the Shell “fold ’em and walk away”. One of the Native Corporations is now moaning about how they have now lost a pile of money they had invested in a joint drilling venture with Shell.

    Poor babies—-Marie “Nanook” Antoinette had the answer—-“Let them eat whale blubber”!


  5. I have a strange gut feeling there is more to this than we are being told.
    There always has been the risk, especially with warmer Arctic waters and triple knee Clathrate structure that that drilling could trigger a substantial or very substantial uncontrollable methane release.
    Maybe get out while they could and before it becomes obvious and they are held to account.

    As I said just a gut feel


  6. […] Shell, of course, gave up on it’s drilling attempt last summer, after which I wrote: […]


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