After seven years of preparation and several billion dollars spent, Shell has decided to abandon its exploration program in the U.S. Arctic “for the foreseeable future.” This follows barely two months’ drilling in the Chukchi Sea at the company’s Burger J. well, located 150 miles northwest of Barrow, Alaska. Evaluation of all data revealed “indications” of oil and gas but not enough to justify further activity in today’s low price environment.
To those of us in who closely follow the energy industry, the decision is hardly surprising. But it has meaning well beyond the Chukchi Sea. It helps show that the widely proclaimed “land rush“ to the Arctic, aimed at oil and gas most of all, is a myth.
There is no such roar of companies northward, crossing the Arctic Circle as if it were a Rubicon. In fact, economics and geopolitics have made clear that the greater part of the Arctic would remain quiet to hydrocarbon drilling—at least in the near term. And so it has.
Does this mean anti-Arctic drilling advocates have handed “Big oil … an unmitigated defeat,” as Greenpeace says. No, it doesn’t. Other factors than environmentalists’ opposition are far more important.
Goodbye to Yellow Brick Road?
The Burger well is located in the Chukchi Basin, part of the U.S. Outer Continental Shelf (OCS). The basin is largely unexplored, with an estimated mean of 29 billion barrels oil-equivalent potentially recoverable—a significant fraction of the Arctic’s undiscovered oil. The size of Mississippi, the basin had only five wells before the Burger. Thus the province remains a true frontier, with chances of a discovery for any well quite small.
Shell’s costs, however, were large. The company spent $2.1 billion to lease 275 offshore blocks and another $1 billion in preparations and drilling. All of this for a single, disappointing well.
Burger J. was drilled in 150 feet of water to 6,800 feet depth. Though well offshore, the OCS is shallow here, adding to its attraction since this means lower drilling costs. Besides “indications” of hydrocarbons, the company undoubtedly recovered a lot of valuable data, growing its knowledge base for the future.
Shell’s departure is certainly a pause in a new era of Arctic exploration. It is not, however, an end. The company has said nothing about dropping any of its 275 blocks in the basin.
Did Anti-Oil Advocates ‘Win’?
We should take Shell seriously regarding the three reasons it gives for leaving.
The first is the lack of a major discovery. The second is the low-price environment that now exists. Oil prices indeed went over a cliff between the time when Shell finalized its program in 2014 and when it began drilling this past summer, falling from about $100 to $45. At such prices, only a gigantic find, say one billion barrels, would make any sense to develop.
And the third reason? “The challenging and unpredictable federal regulatory environment in offshore Alaska,” is how Shell puts it. Can we accept this argument?
