Royal Dutch Shell is walking away from dreams of offshore oil in Alaska's Arctic after coming up dry on its $7 billion test well in the Chukchi Sea.
Citing high costs, disappointing results and an "unpredictable" regulatory environment, Shell announced Monday that it's giving up and leaving Alaska for the "foreseeable future."
Politicians quickly cast blame on the federal government and the Obama administration for sandbagging the regulatory process, slowing progress until it was no longer worth the trouble for Shell.
The company's ambitious plans for Alaska may not be completely dead, but it's unlikely that any Shell drilling will happen in the state's Arctic waters anytime soon.
"Shell continues to see important exploration potential in the basin, and the area is likely to ultimately be of strategic importance to Alaska and the U.S.," said Marvin Odum, director of Shell Upstream Americas, while acknowledging a "clearly disappointing" outcome to exploration.
The global outlook for oil exploration has changed dramatically in the years since Shell launched its plan to drill in the Chukchi -- the price of a barrel of oil has fallen from more than $90 to less than $50. But Shell spokesman Curtis Smith said Monday that current oil prices were not a significant driver in the decision.
"At any given time we have a suite of investment options in our portfolio and not all of them can be funded," he said. The company based the long-term feasibility of the project on expectations of prices 10 to 15 years from now, "not the price environment we are experiencing today," Smith said.
The company will seal its Burger J well, west of Barrow, and has no plans to drill at its Burger V well, Smith said.
The company's two rigs -- the Polar Pioneer and the Noble Discoverer -- will head south, along with dozens of support vessels.
"I'm not surprised," Cindy Giglio, a senior analyst with IHS Energy, said of the announcement, citing low commodity prices and Shell's ongoing merger with U.K. energy company BG.
Prices have dropped "$75 or so since they committed" to the project, Giglio said.
And given Alaska's financial troubles, the environment may not be as friendly as Shell would like, particularly with the merger taking up much of the company's focus, Giglio said.
Alaska also can't offer much in terms of a financial break as an incentive for further exploration -- the state has no authority to tax offshore oil in federal waters, and no rights to royalties from the drilling there.
Exploration over 'for the foreseeable future'
Alaska Gov. Bill Walker said Monday he contacted the White House to set up meetings to discuss the impact of Shell's decision and to renew his push for drilling in the Arctic National Wildlife Refuge.
"While the company's recent announcement is disappointing, it is a reminder that underscores the need for Alaska to drive its own destiny through development of known gas resources, as well as rich oil reserves in a small area of ANWR," Walker said.
But for Shell, further exploration is over "for the foreseeable future," the company said, noting an "unpredictable federal regulatory environment in offshore Alaska."
The chances for success weren't great from the start, Giglio said. "To drill one well and expect one well to be fantastic," the odds aren't good. "That's not how exploration works," she said.
Alaska is already an expensive place to drill, and "the Arctic's a lot harder to justify, financially," Giglio said.
Shell's most recent annual capital expenditure budget, revised for the second quarter, is $30 billion, down 10 to 15 percent from recent years, when the budget hovered around $37 billion. So spending billions on one test well takes up a large portion of that budget, Giglio said.
The drilling efforts offered some much-needed hope for filling the quarter-full trans-Alaska oil pipeline.
Recent resource evaluations by the federal government estimated total recoverable oil in the Chukchi to be 15.38 billion barrels and total recoverable oil in the Beaufort to be 8.22 billion barrels. Shell, in its approved exploration plan, had proposed to continue Chukchi exploration for at least another year. If exploration proved successful, development to bring the prospect into production would be sanctioned no earlier than 2020, the company's chief executive said earlier this month.
After years of halting efforts, this summer Shell drilled 6,800 feet into the basin, located in about 150 feet of water 80 miles off Alaska's northwest coast, with great expectations for discovering massive, untapped oil reserves. The company noted that the basin, which is about half the size of the Gulf of Mexico, "remains substantially under-explored."
'That's incredible. That's huge'
President Barack Obama has defended his administration's approval of test drilling in the Arctic, despite strong criticism from environmental groups.
Meanwhile, leading Democratic presidential candidate Hillary Clinton has expressed opposition to the decision, and questions remain about future permitting and short lease periods, relative to the time it takes to get from testing to drilling in the difficult climate and given a limited summer drilling season.
The current federal permitting system "brings high levels of operational uncertainty to offshore Alaska planning. Under normal circumstances, a frontier exploration program of this complexity would have taken significantly less time," Smith said.
Alaska Sen. Lisa Murkowski echoed that statement.
"It's not like they started this effort a year ago and came up empty," Alaska Sen. Lisa Murkowski said Monday, citing an "unprecedented" seven-year, $7 billion commitment from Shell.
"And so, yes, exploring for oil is high risk; there's no guarantee; Shell knew that going into that," Murkowski said. But the "uncertainty" has been higher than necessary, she said, specifically pointing to a U.S. Fish and Wildlife permit issued in June that prohibited Shell from drilling two wells simultaneously within 15 miles of one another.
"When Shell started out this season, it was with the understanding that they would have two active rigs exploring. And at the last minute Fish and Wildlife Service comes back and says, 'Nope, only one. Only one at a time.' And that wasn't part of what they had anticipated. That was a huge financial setback for them," she said.
"Yes, dry holes do happen, but this was not something that was not done without incredible and enormous time and financial expense brought about by regulatory confusion and regulatory delay," Murkowski said.
Arctic Slope Regional Corp. CEO Rex A. Rock Sr. called the announcement "deeply disappointing" and "a major blow for Alaska."
"The federal regulatory environment has proven to be a burden for any development, whether onshore or offshore. With this type of uncertainty, we will continue to see good opportunities slip away because no one wants to do business in Alaska," Rock said.
Alaska Rep. Don Young, went further, saying that he is "sure somewhere (Interior Secretary) Sally Jewell and President Obama are smiling and celebrating Shell's decision to cease operations off the coast of Alaska."
"Make no mistake, this decision is the result of the administration's narrow-minded approach to responsible resource development -- putting large areas off limits, while building insurmountable new hurdles to use areas that have been leased," Young said in a statement Monday.
Alaska Sen. Dan Sullivan charged the Obama administration with throwing up new regulatory hurdles every summer since Shell began its latest quest for Arctic offshore drilling. "So the ability to move forward, even if you're a company as large as Shell, almost becomes impossible when the regulatory and permitting environment is so uncertain," he said. "The regulatory delays are cost delays."
"We'll continue to fight and try to fix things, but if you have federal agencies that really at the end of they day don't want to do this -- which these guys don't, they don't -- they've scored a victory today," Sullivan said.
The Department of Interior defended itself Monday amid accusations that the agency's regulatory structure had aided in bringing Shell's exploratory program to an end.
"The Department of the Interior has focused on making sure that Shell's exploration activities are performed as safely as possible," said Interior spokesperson Jessica Kershaw. "To that end, Interior has set the highest safety standards on offshore drilling off the Alaska coast -- with requirements tailored specifically to the conditions and risks of drilling in this area."
Not everyone on Capitol Hill is on board with drilling -- or with the Obama administration's mild support in recent months.
Just last week, a dozen senators wrote Obama to protest his support of drilling in the Arctic, arguing it is inconsistent with the president's climate change policies.
Environmental groups on Monday cheered Shell's decision, which came after high-profile protests and arguments that drilling in the Arctic could have disastrous ecological consequences in the event of a spill, particularly for polar bears, walruses and ice seals.
Sierra Club executive director Michael Brune called the announcement "joyous news" and said he hoped it would lead Obama to cancel 2016-17 lease sales and remove Arctic drilling from the 2017-2022 Outer Continental Shelf five-year lease plan.
Margaret Williams of the World Wildlife Fund called news of Shell's withdrawal stunning.
"That's incredible. That's huge," she said from Anchorage. "All along, the conservation community has been pointing to the challenging and unpredictable environmental conditions. We always thought the risk was tremendously great."
"Shell's announcement is a very good news for the marine environment, sensitive coastal lands and the Arctic communities that would be devastated by a major oil spill," said Lois Epstein, a licensed engineer and Arctic program director for The Wilderness Society.
"Hopefully, this means that we are done with oil companies gambling with the Arctic Ocean," Epstein said.
"With this pipe dream ended, we can now stop arguing about Shell and focus on moving forward," said Susan Murray, deputy vice president of Oceana. "Shell's announcement today allows the government to take a step back to apply careful planning, precaution and science to forge a sustainable future for the Arctic."
But analyst Giglio noted that Shell is "not saying it's selling anything. So in another 10 years they could be interested in doing it again."
Repeat of history
The project has been plagued with difficulties, from rapidly falling oil prices to damaged vessels and federal fines, that have raised the cost and slowed the progress of the drilling effort.
Not all delays were at the hands of the federal government.
The company lost its ability to drill into oil-bearing zones in 2012 because it failed to meet requirements for required oil-spill equipment. A dome system aboard the Arctic Challenger barge repeatedly failed U.S. Coast Guard tests, and was repeatedly denied Coast Guard approval. During one summer sea-trial test in Puget Sound, the dome was crushed and the structure had to be repaired. Eventually, the barge and its repaired equipment won Coast Guard approval in October of 2012, too late to be used in that year's drill season.
Shell lost the entire 2013 season after the Kulluk rig was grounded in the Gulf of Alaska on Dec. 31, 2012. The damaged Kulluk was taken to an Asian shipyard, but Shell later decided that it was not worth repairing. A detailed Coast Guard report issued in 2014 blamed Shell for the wreck of the Kulluk.
Now, after about $7 billion in spending on the Arctic drilling effort, Shell Alaska still has $1.1 billion in contractual commitments in the area, the company said. And the company holds 275 leases in the Chukchi Sea, which expire in 2020, and 140 leases in the Beaufort Sea, which expire between 2017 and 2019.
Royal Dutch Shell's "A" stock fell 3 percent Monday on the New York and London exchanges after the news broke.
The full breadth of the decision's impact could be clearer when Shell's third-quarter financial results are released Oct. 29. The company earned $3.4 billion in net profit in the second quarter of this year.
But this wasn't Shell's first attempt in the Chukchi.
The company drilled four wells in the Chukchi Sea between 1989 and 1991, one of them at the same Burger prospect that has been Shell's focus in its latest program.
Those four wells, and one drilled by Chevron in 1991, were the only wells ever drilled in the Chukchi prior to 2012, when Shell drilled the top portion of a different well at the Burger prospect. The company did not return to that 2012 drill site, called Burger A.
After failing to find commercial success in the Chukchi, Shell sold off all of its producing oil and gas properties in Alaska, which included a small stake in the Prudhoe Bay field and some Cook Inlet assets. The company in 1991 announced plans to close its Alaska office, which had a staff of 50 people. Its leases in the Chukchi expired.
Murkowski said she was "really devastated" over Monday's announcement, and "very concerned, of course, about Alaska's future offshore as a consequence."
"And I recognize that this is just one operator, but other operators in the region, and really around the world, are looking at Shell's decision. And I think their actions today send a message that as much as we might say that Alaska's oil and gas opportunities are there, and enticing, and we're open for business," there is still a "difficult federal regulatory environment that can chase that business away."
Murkowski and Sullivan both said, however, that the fight is not over.
"I do think it's important to remember that we have had some highs and lows before in Alaska with our industry," Murkowski said.
"We're going to continue to work hard on fixing a permitting system that hurts all Americans," Sullivan said. "We have to fix this."
Alaska Dispatch News reporter Yereth Rosen contributed to this report.
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