Shell Exits Arctic as Oil Slump Forces Industry to Retrench

New York Times
SEPT. 28, 2015

As oil prices have continued their steady decline this year, rig after rig has been shut down, costing thousands of jobs in the United States. Yet major oil producers have been loath to pull the plug on their most ambitious projects — the multibillion-dollar investments that form the backbone of their operations.

Until now. On Monday, Royal Dutch Shell ended its expensive and fruitless nine-year effort to explore for oil in the Alaskan Arctic — a $7 billion investment — in another sign that the entire industry is trimming its ambitions in the wake of collapsing oil prices.

The announcement was hailed as a major victory by environmentalists, who had fought the project for years, only to be stymied by pressure inside and outside the industry to increase domestic oil production.

But at a time when global markets are glutted with oil, thanks to the advent of new drilling techniques, the announcement also confirmed major oil companies’ increasing willingness to turn their backs on the most expensive new drilling prospects in the Gulf of Mexico and suspend plans for new projects in Canada’s oil sands.

The industry has cut its investments by 20 percent this year and laid off at least 200,000 workers worldwide, roughly 5 percent of the total work force. Companies also have retreated from less profitable fields in places like the North Sea, West Africa, and some shale prospects in Louisiana and North Dakota.

American oil companies have decommissioned more than half of their drilling rigs over the last year, and production is beginning to drop in the United States. Even exports from Saudi Arabia are beginning to ebb because of a glut in its Asian markets.

“The decision by Shell to abandon its Arctic drilling program for now primarily reflects the realities of lower global oil prices,” said Michael C. Lynch, president of Strategic Energy and Economic Research, who advises oil companies and investment banks. “When prices go down, the oil industry shortens their list of projects in development by removing the most expensive ones.”

This year, industry executives held out hope that the oil price, which has fallen more than 50 percent to below $50 a barrel since last summer, would recover before too long. But in recent weeks, a growing number of executives have warned that the downturn could last well into 2016 and perhaps beyond, especially if the Iran nuclear deal leads to a flood of new oil on world markets.

With demand dwindling, the current market of 94 million barrels a day has roughly two million barrels in surplus supply.

Now, economic forces have scuttled what environmentalists had tried to do for years in the courts and with raucous protests in canoes and kayaks, arguing that drilling in the dark, ice-filled Arctic was dangerous to polar bears and other sea life.

“This is a victory for everyone who has stood up for the Arctic,” said Annie Leonard, executive director of Greenpeace, a leader in the protests against Shell. “There is no better time to keep fossil fuels in the ground, bringing us one step closer to an energy revolution and sustainable future.”

When Shell first leased a huge portion of Alaska’s Chukchi and Beaufort Seas after they were opened up by the George W. Bush administration, oil prices were soaring. Middle classes in China and the developing world were demanding more liquid fuels every year. At the same time, a growing number of oil fields around the world were aging and in decline.

Then, just as Shell began its Alaskan effort, the shale revolution began in the United States. Independent oil companies found ways to fracture hard rocks to produce oil, nearly doubling domestic production. That surprise development, along with the slowing Chinese and European economies, drove the oil price down just as Shell returned to drilling in the Chukchi this year. The environmental movement delayed Shell at every turn, but the 2010 BP disaster in the Gulf of Mexico pushed the company off several years as well.

Industry experts say that there is plenty of oil in offshore Alaska and that renewed efforts are still possible if and when the oil price recovers. But environmentalists declared a triumph.

Shell has spent more than $7 billion on an effort that has been plagued by blunders and accidents involving ships and support equipment, reaching a climax with the grounding of one of its drilling vessels in December 2012 in stormy seas. Even after ConocoPhillips and the Norwegian oil giant Statoil suspended their Alaskan offshore drilling operations, Shell carried on, asserting that the Chukchi Sea potentially represented the next great global oil find.

But the company announced that its one well drilled this summer “found indications of oil and gas, but these are not sufficient to warrant further exploration.” In a statement, it also acknowledged “the high costs associated with the project and the challenging and unpredictable federal regulatory environment in offshore Alaska.”

The decision represented a major turnaround from the faith in the project that Ben van Beurden, Shell’s chief executive, expressed as recently as August. At the time, he said that Shell’s holdings in the Alaskan Arctic could be “multiple times” more bountiful than the enormous fields in the Gulf of Mexico. “We can’t be driven by today’s, tomorrow’s, or next year’s, or last year’s oil price,” he said.

Shell’s efforts to drill in Alaska have long seemed quixotic. It came closest to finding oil in 2012 when it drilled two shallow wells but had to stop short of deeper oil zones after several bizarre accidents, including the crushing of a containment dome during a vital test. This summer, a storm whipping though the Arctic Ocean forced Shell to suspend drilling, and the United States Fish and Wildlife Service made a regulatory ruling that cut back the company’s drilling plans.

After a Finnish icebreaker hired by Shell struck an uncharted shoal in the Aleutians in July, it was forced to go to Portland, Ore., for repairs. Protesters there tried to block the vessel, going so far as to suspend themselves from a bridge over the Williamette River.

Shell’s current venture into the Alaska offshore began under Mr. van Beurden’s predecessors, and he has always been concerned about the project’s costs and risks. Soon after he became chief executive in 2014, he temporarily halted drilling in Alaska because of legal and regulatory issues.

He came around to the view that the potential bonanza was worth the expense and headaches, but now that drilling has produced an unexpectedly poor result, he may have decided to follow his original instincts and call a halt.

“This first dry well seems to have been the trigger for the C.E.O. to pull the plug on their Alaska exploration campaign,” said Oswald Clint, an analyst at Bernstein Research in London.

The Alaska operations have cost billions of dollars. Shell said the value of Alaska drilling on its balance sheet was $3.1 billion and that it had a further $1.1 billion in contractual commitments, probably for items like drilling rigs. The company said it would take write-offs as a result of the decision to halt drilling.

“Shell continues to see important exploration potential” in offshore Alaska, Marvin E. Odum, president of Shell Oil, said in a statement. “However, this is clearly a disappointing outcome.”

Energy experts have expressed skepticism about the economics of Arctic drilling for some time.

“The number of special challenges, unforeseen things you have to deal with, long supply chains, just make it very difficult to have the same level of confidence around costs as you do for development elsewhere,” said Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions.

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