Shell says it plans to drill in offshore waters in Alaska's Arctic in 2015, even as it retrenches on capital spending elsewhere, an important announcement for a state hit hard by falling oil prices and a multibillion-dollar hit to the state treasury.
"This year we are planning on drilling in Alaska," Royal Dutch Shell Chief Financial Officer Simon Henry said in remarks in a conference call to investors Thursday morning.
That's the case despite the company's plan to hold spending on capital projects flat, Henry said, meaning any increase in Alaska spending will come at the expense of spending on other prospects.
"We are keeping overall spending on conventional exploration flat again … at around $4 billion," Henry said, which means such spending in other regions will be held to less than $3 billion in 2015: "This has required some deferrals, for example in the Gulf of Mexico, China offshore and Malaysia."
Henry and CEO Ben van Beurden said the company's Arctic drilling program -- bitterly opposed by conservation groups concerned about climate change and species such as bowhead whales, polar bears and walrus -- will depend on getting necessary permits and having a reasonably ice-free summer. If Shell is able to drill, the company expects to spend more than $1 billion on the project, Henry said.
"Even if we don't drill, it will be approaching a billion dollars," he added, "because of the commitment to keep the fleet of ships that we need."
Though Shell has leased multiple areas to explore for oil in the U.S. Arctic Ocean off Alaska, its chief target is the Burger prospect in the Chukchi Sea about 70 miles off the northwest Alaska coast.
As recently as earlier this month, the company's plans in the region remained uncertain, and Alaskans watching oil prices and state income plunge feared the company would not continue to pursue its Arctic prospects.
Van Beurden acknowledged that concern Thursday, saying that "the price needs to be significant for us to go ahead," and adding that the company must make a major discovery for the project to make economic sense.
"But let's first see how much oil is there," he said.
That would require, at the very least, completing the single well that the company began drilling more than two years ago, with the federal government approving a preliminary drilling effort in the Chukchi that stopped short of the undersea zones thought to contain hydrocarbons.
The state would currently not receive production taxes or royalties from offshore oil development in federal waters off its coast. But with other states, such as Louisiana, sharing revenue with the federal government, state leaders believe Alaska has a compelling argument to land a similar deal.
A Shell spokeswoman in Alaska, Megan Baldino, said if the project gets the green light Shell expects to directly employ about 2,000 employees and contractors this summer, similar to its Alaska drilling effort in 2012, when about 750 of those workers were Alaskans.
Shell has faced numerous obstacles in its efforts in the Chukchi so far.
The company scrapped plans to drill in 2014 at this time last year, facing a drop in earnings and a lawsuit that slowed federal approval.
And missteps -- including the grounding of the drill rig Kulluk near Kodiak Island and the criminal conviction of Shell contractor Noble Drilling for environmental and safety violations -- have plagued the company and emboldened conservation groups who warn that a spill in the Arctic Ocean will be catastrophic.
But Shell has remained bullish on the prospect, despite those expensive setbacks and years of delay, plus future costs likely to soar into the billions of dollars based on the scale of infrastructure that would be required to move oil produced in Alaska's Arctic to market.
The federal government estimates that areas in the Chukchi Sea open to leasing hold an estimated 15.4 billion barrels of oil and gas liquids. That's less than the 17 billion barrels of oil that have flowed down the trans-Alaska pipeline for almost four decades. The estimated gross value of those technically recoverable Chukchi Sea reserves is worth about $750 billion at today's oil prices.
Shell and the Bureau of Ocean Energy Management must overcome two major hurdles before the company can proceed with drilling.
Before any exploration activity is allowed in the Chukchi Sea, the BOEM must complete a court-ordered study of environmental impacts of leasing there. That supplemental environmental impact statement is the second one that courts have ordered BOEM to complete to correct what they determined were deficiencies in studies conducted prior to the 2008 lease sale. BOEM on Oct. 31 released a draft version of its study, and has said it hopes to complete the final version and win its approval in court by this spring.
Shell must also win BOEM approval of its revised exploration plan, submitted in August. The agency is reviewing that plan at the same time it is completing the environmental study of Chukchi leasing. Shell's revised plan proposed two rigs drilling simultaneously in the Chukchi to complete the Burger well started in 2012 and five other wells.
In a prepared statement, Annie Leonard, the U.S. executive director of Greenpeace -- which has consistently targeted Shell's Arctic drilling program -- said: "Shell's reckless decision to return to the scene of 2012's Arctic crimes is stunning. Not only does the global oil giant want to proceed in the Arctic with Noble Drilling, a contractor guilty of eight felonies from its last trip, but also with the knowledge that the Obama administration itself predicts a 75 percent chance of a catastrophic spill if the leases in the Chukchi Sea are developed."
Greenpeace is calling on the Obama administration -- which recently released a new five-year offshore plan that places additional parts of the Chukchi and Beaufort seas off-limits to drilling -- to stop the lease.
Greenpeace was joined by other environmental groups in condemning the move.
"The threat of oil spills from risky exploratory drilling threatens Alaska's Arctic seas and the people who depend on them. After the series of accidents and errors during its first foray of Arctic exploration, today's news from Shell raises serious concerns," wrote Margaret Williams, managing director of U.S. Arctic programs for the World Wildlife Fund. "No oil company should be drilling in the Arctic Ocean when there are no proven ways to do it safely and no viable means for cleaning up potential spills."
Meanwhile, pro-industry forces in Alaska were buoyed by the announcement. They said Shell's decision to move forward with oil prices so low indicates the enormous resource off Alaska's shores.
"I think it's really good news, particularly in light that Shell is cutting back their global capital spend by $15 billion," said Rick Rogers, executive director of the Resource Development Council. "That they are bullish enough in the Alaska (offshore) speaks volumes to the importance of the project."