Shell's Alaska Exit Means Arctic Oil Reserves Remain Locked Away

Evacuation Of The Drifting Scientific Seasonal Station 'North Pole 2015

Evacuation of the drifting scientific seasonal station 'North Pole' on the 'Captain Dranitsyn' ice breaker on August 10, 2015 in Murmansk region, Russia. Since April 18 till August 10 the wide complex of meteorological, aerological etc researches were executed.

Photograph: Kommersant via Getty Images
  • Oil at $50 and sanctions on Russia are curbing exploration
  • U.S. Arctic may hold about three years of nation's oil demand

The inglorious end to Royal Dutch Shell Plc’s $7 billion search for oil in Alaska means billions of barrels of crude will probably remain locked away in Arctic waters from the U.S. to Russia -- at least as long as prices remain near $50 a barrel.

Shell abandoned exploration off Alaska for the “foreseeable future” on Monday after it failed to find meaningful quantities of oil or natural gas. In Russia, sanctions over Ukraine have halted partnerships aimed at exploring offshore in the Arctic, while exploration in Greenland has been on hold since 2012 and activity in Norway is slowing.

“This effectively ends exploration for new Arctic oil until prices recover,” Ahmed Ben Salem, a Paris-based analyst with Oddo & Cie, said by phone. “Shell was the only company with a strong enough balance sheet that was currently exploring in the Arctic.”

In a world where OPEC members control 72 percent of proved oil reserves, the largely unexplored Arctic could be the last great prize. Alaskan waters alone are estimated to hold 25 billion barrels of oil, equivalent to more than three years of U.S. oil demand, but drilling in remote waters plagued by storms and icebergs is expensive. Shell, Exxon Mobil Corp. and others laid their exploration plans when oil traded for about $100, more than double the price today.

Price Impact

Oil companies first ventured into Arctic waters decades ago. France’s Total SA was among companies that drilled off Greenland in the 1970s and Shell first discovered oil off Alaska in the late 1980s. A long slump in the crude price in the middle of that decade put an end to most exploration efforts. Shell chose instead to pursue vast reserves it found in the U.S. Gulf of Mexico, which were cheaper to develop and closer to market.

Thirty years later, Shell became the first major oil company to return to the North American Arctic to drill in Alaska’s Chukchi Sea. Sixteen billion barrels of oil had been produced onshore in Alaska and the company said offshore could provide “the next major chapter” for the region.

“The Arctic is really one of the very few extremely under-explored frontiers,” Tom Ellacott, a vice president of corporate analysis with consultant Wood Mackenzie Ltd., said by phone. “There is an opportunity to make a very large transformational discovery.”

Kara Sea

Russia, which earns about half of its government revenue from oil and gas sales, wants to secure future supplies from the Arctic as deposits in Siberia, discovered in the Soviet era, decline. The Kara Sea may contain resources larger than those in the Gulf of Mexico, according to state-run OAO Rosneft.

The Russian government signed up Exxon, Eni SpA and Statoil ASA to explore in partnership with Rosneft. Drilling in the Kara and Barents Seas is expected to continue next year, Deputy Energy Minister Kirill Molodtsov said Sept. 15 in St. Petersburg. Russia expects to produce as many as 660,000 barrels a day from its offshore Arctic zones by 2035, according to an Energy Ministry presentation.

Arctic wells are expensive to drill. Alaskan waters are covered with ice for more than nine months of the year. Shell needed to keep equipment -- including a backup drilling rig -- ready near the well in case of an accident or spill. The company spent about $1 billion to drill a single well this year and plans for a second hole next year at a similar expense have now been abandoned.

Shell's well in the Chukchi Sea failed to find meaningful amounts of oil.
Shell's well in the Chukchi Sea failed to find meaningful amounts of oil.

The high cost of the Arctic means that, along with shale oil and Canadian oil sands, “companies delay or reconsider these projects first” when prices fall, said Alexander Nazarov, an oil and gas analyst at Gazprombank. Brent crude has slumped by about 50 percent in the past year to $47.92 a barrel at 2:53 p.m. on the London-based ICE Futures Europe exchange.

In Russia, sanctions have worsened the slowdown in Arctic drilling. The U.S. and European Union restricted the export of technology to Russia following its annexation of Crimea. Prior to the sanctions, Exxon and Rosneft found the Victory field, containing more than 100 million tons of oil and 338 billion cubic meters of gas, in the Kara Sea. Exxon now sees a potential $1 billion loss related to its Russian operations.

Rosneft and Gazprom PJSC are delaying some offshore exploration by two to three years because of sanctions and weaker oil prices. The nation will drill just two offshore wells in 2017, down from an original plan for 14, Denis Khramov, Russia’s deputy minister of natural resources, said Tuesday at a conference at Yuzhno-Sakhalinsk in the country’s Far East.

In Norway’s Arctic, too, exploration drilling will slow in 2015 to half last year’s level following the slump in oil prices, according to the Norwegian Petroleum Directorate. No wells have been drilled off Greenland since exploration fizzled out in 2012 after companies that were awarded licenses didn’t find commercially viable reserves.

“All current plans and intentions have stopped in the Arctic for now,” Oswald Clint, a London-based oil analyst at Sanford C. Bernstein & Co., said by phone. “Besides the oil price, Alaska was a bone of contention for many investors” because of fears about the environmental impact, he said.

Environmental Protests

In May, Shell’s shareholders questioned why they should support a drilling program that could pollute waters and contaminate seafood. Campaigners from Greenpeace occupied Shell’s oil rig in the Pacific in April while demonstrators in kayaks tried to stop the Alaska-bound drilling rig from leaving the port in Seattle in June.

“Arctic oil has no role in a climate-safe world –- and the hunt for this high-cost, high-risk, high-carbon fuel was a sad example of how far Big Oil and their friends in government will go to cling to last century’s dirty energy,” Stephen Kretzmann, executive director of Oil Change International, said by e-mail.

While the odds may be stacked against Arctic oil exploration today, that may not be the case forever, said Cindy Giglio, a senior principal analyst at IHS Energy Inc.

“Reading Shell’s announcement, it’s not that they’re saying there’s not potential there, but in the current environment it doesn’t make sense,” Giglio said by phone from Norwalk, Connecticut. “Alaska has still got long-term potential.”

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