Will Arctic Drilling Be Left Out in the Cold?
#sHellNo sign on water in front of Shell icebreaker Fennica in Portland, OR
On September 28th, Royal Dutch Shell announced that it would be ceasing oil exploration off Alaska’s Arctic coast for the foreseeable future. This announcement, combined with poor economic conditions for energy exploration might be seen as a death-knell for Arctic energy. But despite Shell’s troubles, energy majors have not given up on Arctic energy. While activity has decreased recently, there is no doubt that energy companies will soon redouble their efforts to exploit the estimated 22 percent of the world’s undiscovered energy resources that the Arctic hosts.
Shell’s announcement ends a seven-year saga that began with Shell’s 2008 purchase of 275 leases in the Chukchi Sea for $2.1 billion. Shell’s endeavors in the Arctic have a history of disasters, particularly the 2012 loss of the drill ship Kulluk, which led the company to take a hiatus for the summer of 2013, and an incident this July, when an icebreaker carrying a capping rig (a required piece of safety equipment) ran aground on an uncharted shoal. This latest incident occurred shortly after Shell had successfully ended a series of legal battles over regulatory approval for their exploration plans.
Shell’s decision to cease oil exploration had many causes. Environmental groups, particularly Greenpeace, quickly took credit for Shell’s defeat. The sight of “kayaktavists” blocking Shell vessels in Seattle and Portland, Oregon, was quite the spectacle and increased publicity of Shell’s activities. Shell also faced challenges to its technical capabilities. First among these is the requirement for on-site capabilities to handle an oil spill, which were central to the Obama administration’s approval of Shell’s plans. While the company has argued that it can indeed contain a spill if it were to occur, many remain unconvinced. Finally, oil industry groups argue that U.S. regulations of the end of the drilling season unnecessarily shorten the available time to operate.
Shell’s various disasters also highlighted particular challenges of operating in the far north, beyond just ice and weather: less than one percent of American Arctic waters are charted to modern standards. Under these conditions, dangerous incidents like the grounding of Shell’s icebreaker are largely unavoidable.
Shell is not the only Western company to have faced serious setbacks in the Arctic. Norway’s state-owned oil company, Statoil, faced serious challenges at its Apollo Well in the Barents Sea (including a standoff with Greenpeace), and when it was eventually able to drill the well, the company discovered that the well was dry. Statoil’s lack of success in 2014 led the company to suspend its efforts in 2015 and concentrate on mature fields to the south, in the Norwegian Sea.
The new low-price environment for energy has forced many companies to abandon their Arctic plans. Last winter Chevron suspended its plans to drill in Canada, and ExxonMobil and BP made similar decisions this past June. Statoil, as well as Denmark’s DONG Energy and France’s GDF Suez, also handed back most of the leases they held off the coast of Greenland.
Sanctions against Russian companies related to the conflict in Ukraine have also forced Western companies to abandon Arctic plans. After delaying the decision, Exxon decided to end its partnership with Russia’s largest oil firm, Rosneft, shortly after the companies struck large reserves in the Kara Sea. Other Western oil giants have faced problems, like the French company Total, which was forced to jump through hoops to finance its partnership with Novatek, Russia’s largest privately owned natural gas firm, so as not to run afoul of sanctions. Partnership with Russian companies, however, was challenging long before sanctions were enacted: BP has long had a tortuous relationship with Rosneft, and the Italian company Eni eventually was forced to sell its stake in the Russian Arctic.
Russian companies have also faced their share of Arctic problems. Despite striking oil in the Kara Sea, Rosneft determined it was not able to drill without ExxonMobil’s assistance. Gazprom continues to drill from its Prirazlomnaya platform, the world’s first Arctic oil platform, but determined that it was not able to drill in the flagship Shtokman field, a decision which led Total to abandon its share in the project. Russia’s only major private company to operate in the Arctic, Novatek, is continuing with its onshore LNG project, although it was forced to scramble to finance the terminal.
Future of Arctic Drilling
Despite a series of woes, the prospects for Arctic drilling will likely improve in the future. The elephant in the room is the price of oil – if energy companies anticipate continued low prices, investment in the Arctic makes little sense. However, as new technologies come online – particularly improved techniques for dealing with oil spills – the costs of operating in the Arctic will decrease. The other issue is whether the political pressure brought by groups such as Greenpeace (as well as indigenous groups, who are the most directly impacted by drilling) will change the regulatory environment. In the United States, the putative Democratic nominee for the Presidency, Hillary Clinton, has come out in opposition to Arctic drilling.
Nevertheless, short of government bans from major oil-producing countries, Arctic drilling will continue around the world. This month, ExxonMobil plans to put its Arctic drilling rig to work in the Norwegian Sea, and in the Barents, Eni is bringing the world’s northern-most field into production. Despite Shell’s failures, it is too soon to declare the end of Arctic oil.