Energy giant Shell, which has yet to hit oil after spending about $5 billion on a program to drill in waters off Arctic Alaska, on Thursday announced a deal to share leases and exploration expense with corporations owned by the Native Inupiat residents of the North Slope.
Under the deal creating the joint venture, the Native corporations have the option to buy into all 275 of Shell's leases in the remote Chukchi Sea, an ice-choked area with harsh conditions but vast natural resources -- whales, walruses and other Arctic marine life, along with potentially huge deposits of untapped crude oil.
The deal gives Arctic Inupiat Offshore the opportunity to assume an "overriding royalty interest" in Shell's leases, which Shell bought for about $2.1 billion in a 2008 federal sale. That lease sale yielded a total $2.66 billion in high bids, a record for Alaska.
The percentage of ownership contemplated and the corporations' financial commitments were not revealed. Those details are confidential, Arctic Slope and Shell officials said at the news conference.
Since it bought the leases, Shell has been able to drill only the top portion of one Chukchi well, in 2012 -- just the sixth exploration well ever sunk in the Chukchi -- and the top portion of another well in the Beaufort Sea off Alaska's northern coast. Drilling has been slowed by litigation and operational problems, the most costly of which was the grounding of a Shell drill ship, the Kulluk, on Dec. 31, 2012, in a Gulf of Alaska storm.
The new joint venture should result in smoother development progress, said Pete Slaiby, Shell's vice president for Alaska, and ASRC President Rex Rock Sr., who is also president of the new joint venture.
Both described the joint venture as "historic."
"It is my belief that a strong alliance with so many respected Alaska Native corporations provides Shell the opportunity to collaborate with savvy and experienced North Slope partners," Slaiby said. The agreement is about more than spreading the benefits of offshore development, he said. "It's really about what it's going to take to move us forward collaboratively. And it will take all of us working together to move us forward in the Arctic."
The joint venture announcement came on the same day that Shell's chief executive officer suggested the company has misgivings about its costly Arctic program.
CEO Ben van Beurden, in a conference call detailing the company's rebounded second-quarter earnings, said Shell still hopes to drill in the region but might re-evaluate.
"We want to be able to do this completely flawlessly. We obviously need all the permits in place and we need to be free of any sort of legal issues or blockages," van Beurden said in response to a question about the Alaska program.
"We can't do it this year, for reasons that are well known to you. And let's see whether next year will be better. In the meantime, of course, we do carry costs, absolutely, and we can't do that indefinitely. So there will be a moment where we will have to make up our mind, whether that is a position that we can continue to be in or not. That moment has not been decided, but it will be before the next season," he said.
Slaiby said Shell remains optimistic about Arctic offshore prospects, even as it waits for the U.S. Bureau of Ocean Energy Management to complete environmental studies that were ordered by a federal judge after the 9th Circuit Court ruled in January that the entire Chukchi Sea leasing program needed better review.
"I think our chief executive was fairly straightforward about what he said. We still view Alaska as an opportunity, but there are a number of issues we're working through," he said at the news conference.
Until a court-approved supplemental environmental impact statement is completed by BOEM, all onsite exploration work on Chukchi leases is suspended, under a U.S. District Court order.
In the interim, the BOEM is reviewing Shell's revised Chukchi exploration plan, submitted in November. Shell is proposing to use a different drill ship to substitute for the Kulluk and to temporarily shelve drilling plans for the Beaufort.
The creation of Arctic Inupiat Offshore highlights a rift among North Slope Alaska Natives.
For decades, Inuipiat residents opposed offshore oil development, fearing impacts to their subsistence whale hunts and other activities that depend on Arctic marine life.
But in recent years, some Native groups have warmed to offshore drilling, and Native corporations have been among the major contractors hired to do exploration work.
Still, some tribal organizations are steadfast in their opposition to offshore drilling and have been active in legal and political challenges to leasing and exploration. The Native Village of Point Hope and the Inupiat Community of the Arctic Slope, both tribal groups, are plaintiffs in the lawsuit that resulted in January's 9th Circuit ruling.
Rock, who pointed out that he is a whaling captain, said his people need oil development as well as their traditions.
"The Arctic Slope region is dependent on oil production, regardless of its origin," Rock said at the news conference. He repeated the statement for emphasis.
Not included in the joint venture are any of Shell's Beaufort Sea leases, which the company acquired in 2005 and 2007 sales.
Also not included in the joint venture are corporations owned by residents of the North Slope villages of Nuiqsut and Point Lay. Those village corporations still have the option to become part of the joint venture, said ASRC spokesman Ty Hardt.
Shell, in its quarterly statement, reported $5.1 billion in net earnings, a big improvement from the $2.4 billion reported in the second quarter of 2013. Factors in the improved earnings picture were higher volumes and prices of produced liquids, more favorable exchange rates and higher contribution from manufacturing operations, Shell said in its statement.