Know When to Fold ’em: Oil Majors Pulling Back from Arctic Drilling
May 11, 2016
Obviously, drilling for oil in the Arctic is a stupid idea. A lot of people are angry with President Obama for approving the new effort by oil giant Shell, which is nudging a huge rig up the coast of Alaska toward the Chukchi Sea.
But context is everything. The President has followed a pattern of choosing his battles carefully in relation to climate. The playing field is changing rapidly – and Shell’s efforts in the arctic, in light of the current global price for oil, seem ill advised.
I’m not the only one that thinks so.
In the case Shell’s current Arctic foray, today’s oil prices make it pretty easy for the Obama administration to acoommodate an oil major’s rush to burn cash, while the real action is taking place elsewhere, as low oil prices fail to ignite further global demand, and we increasingly glimpse the outlines of a new normal, where drilling for exotic, expensive oil, in the arctic or elsewhere, ceases to make economic sense.
Shell, of course, gave up on it’s drilling attempt last summer, after which I wrote:
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.
Which is why, if you read this blog – today’s news did not surprise you.
After plunking down more than $2.5 billion for drilling rights in U.S. Arctic waters, Royal Dutch Shell Plc, ConocoPhillips and other companies have quietly relinquished claims they once hoped would net the next big oil discovery.
The pullout comes as crude oil prices have plummeted to less than half their June 2014 levels, forcing oil companies to cut spending. For Shell and ConocoPhillips, the decision to abandon Arctic acreage was formalized just before a May 1 due date to pay the U.S. government millions of dollars in rent to keep holdings in the Chukchi Sea north of Alaska.
The U.S. Arctic is estimated to hold 27 billion barrels of oil and 132 trillion cubic feet of natural gas, but energy companies have struggled to tap resources buried below icy waters at the top of the globe.
Shell last year ended a nearly $8 billion, mishap-marred quest for Arctic crude after disappointing results from a test well in the Chukchi Sea. Shell decided the risk is not worth it for now, and other companies have likely come to the same conclusion, said Peter Kiernan, the lead energy analyst at The Economist Intelligence Unit.
“Arctic exploration has been put back several years, given the low oil price environment, the significant cost involved in exploration and the environmental risks that it entails,” he said.
All told, companies have relinquished 2.2 million acres of drilling rights in the Chukchi Sea — nearly 80 percent of the leases they bought from the U.S. government in a 2008 auction. Oil companies spent more than $2.6 billion snapping up 2.8 million acres in the Chukchi Sea during that sale, on top of previous purchases in the Beaufort Sea.
Shell relinquished 274 Chukchi leases and others in the neighboring Beaufort Sea. In doing so, the company forfeits what it paid the U.S government for the rights to drill in those tracts — and the millions of dollars it spent on annual rent since then.
“These actions are consistent with our earlier decision not to explore offshore Alaska for the foreseeable future,” Shell spokesman Curtis Smith said by e-mail. The decision also reflects the high costs of operating off Alaska’s northern coast and evolving regulatory standards, Smith said.