Shell’s Decision to Suspend Arctic Activities: Retreat or Pause?

Last week, in the wee hours of the morning on the East Coast, Shell announced it was suspending its offshore Alaska operations, after finding insufficient quantities of hydrocarbons to justify further development at its sole well in the Chukchi Sea. The news rippled its way around the globe, through Washington, DC and the North Slope of Alaska, leaving in its wake jubilant opponents of oil and natural gas development, disappointed job seekers and industry supporters in Alaska (and in the Gulf of Mexico), a half empty trans-Alaska pipeline, and questions within the energy industry of what comes next.

Shell expended over $7 billion on this “dry hole”. In addition, they have battled transportation mishaps, expensive renovations to drill ships, Green Peace hounding their every move, and an exploration plan unnecessarily crimped by Federal regulations. I heartily commend Shell for their efforts and their steadfastness in working with the local native governmental groups to pave the way for local support and understanding of oil and natural gas exploration. More importantly, Shell showed a wary public that exploration and drilling can be done safely in the Arctic. The technology is there, it has been used in other parts of the world, but the real challenge was navigating under the regulatory thumb of the Federal government.

From the view of the Federal regulators, they were going to do everything in their power to allow little or no margin for error. Shell was required to have the equipment and ability to cap a leaking well, response ships on stand-by and another drilling rig sitting idle in case a relief well was needed. The regulatory prohibition of not being able to drill more than one exploratory well certainly made that a Hail Mary attempt.

To the cheers of many environmental groups and the disappointment of others, Shell’s long shot missed. But the attempt doesn’t mean there aren’t commercially available oil and natural gas resources in the area; it just means there weren’t any where Shell drilled. But, what does it really mean? Is future Arctic exploration frozen out, or is this just a step backward, while gearing up for a big leap forward?

What does it mean to the Federal government, which also has a stake in the outcome? Considerable government resources are expended in Arctic related studies and the preparation of environmental documentation for the permitting of oil and gas development. The Feds collect billions of dollars in revenue from offshore oil and natural gas development through bonus bids, rentals and royalties. At this time, there are two more lease sales scheduled for the Chukchi and Beaufort seas in 2016 and 2017. The clock is ticking on the environmental reviews of these sales, and some question whether they can be completed in time. Certainly, the Feds cannot dawdle, dilly-dally and foot-drag if they are going to finish the studies on time. Of course, the Feds have never been known to use these tactics; just look at the Keystone Pipeline process. Intellectually, the Shell outcome should not result in the cancellation of scheduled sales. These two sales have been scheduled since 2012, and the process should play out. However, if the Administration is looking for a political exit, they may find one here.

What does it mean for the industry? The outcome at Shell’s lone well has not changed the overall potential oil and gas outlook of offshore Alaska. Government estimates say the Alaska offshore could hold over 26 billion barrels of oil and over 130 trillion cubic feet of natural gas. The Arctic outside of the U.S. will likely continue to be explored by other countries such as Russia and China. Of course, as Shell’s experience shows, the trick is actually finding the oil and natural gas. For industry, it may very well come down to economics. There are certainly less expensive offshore areas around the world in which to look for energy. Particularly for offshore projects, companies take a very long view, weighing several factors including cost, resource potential, and market and regulatory conditions 10 or 15 years out. Since the world needs more energy, companies are still going to invest in offshore possibilities. Certainly, had Shell’s well been a success, greater interest in long term investment would have been kindled.

What does it mean for Alaska? Alaska is an energy driven state and the oil and natural gas industry has supplied revenue and jobs for many years. The offshore play was hoped to be a continuation of that relationship. Some got a feel for that as there were temporary jobs created, but additional jobs won’t be coming from Shell, at least in the short run. Another concern is the Trans-Alaska Pipeline, which supplies oil to the lower 48. Onshore oil production has declined and the pipeline is certainly not running anywhere near capacity. A big oil find may have assured the pipeline’s existence for the foreseeable future.

At this time the future of Arctic development differs depending on one’s point of view. Those opposed to oil and natural gas development evidently see Shell’s departure as confirmation that the Arctic isn’t worth the effort or risk, and future exploration in the area is dead. From the industry view, while this is clearly a setback, there is still great potential for resources in the area, and the Alaskan Arctic remains an attractive, yet expensive, possibility.


Randall Luthi is President of the National Ocean Industries Association.