Shell Admits Defeat in the Arctic

The race to tap undersea oil riches in the Arctic stumbled Monday when Royal Dutch Shell announced it would pack up its exploratory operations and not come back. The reason is simple: the company couldn’t find enough to make polar drilling off the Alaskan coast worthwhile, especially at a time of rock-bottom crude prices.  

The decision to abandon oil exploration at the top of the world is at once both surprising and to be expected. It comes just two months after President Barack Obama signed off on Shell’s operations off the coast of Alaska, and after the company defended its actions to environmental groups. But low oil prices, an oversupplied market, a tricky regulatory regime, and a severe operating environment made Arctic oil operations a long-term play at best.

“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.,” Marvin Odum, director of Shell Upstream Americas, said in a statement. “However, this is a clearly disappointing exploration outcome for this part of the basin.”

Shell’s Arctic dreams were shattered by reality. Oil prices more than halved in the past year, making expensive Arctic drilling a tough sell to shareholders. Operations in frigid waters are more expensive than those elsewhere, and require a much bigger upfront investment with a much smaller window of opportunity to extract any oil. Shell has already spent about $7 billion in its failed search for energy supplies in the Chukchi Sea.

“The entire episode has been a very costly error for the company both financially and reputationally,” Deutsche Bank analyst Lucas Herrmann said Monday. He predicted the entire misadventure could end up costing Shell $9 billion.

When the Dutch conglomerate acquired the leases to explore 30 million acres in the Arctic in 2008, it did so in a different world. Oil was at near-record prices and energy companies were eager to find new sources of it.

Fast forward seven years, and it’s a different story. The shale revolution in the United States has added millions of barrels a day to the global oil market, helping flood the market, which translates to cheap crude prices. Shell, meanwhile, is trying to digest its $70 billion acquisition of BG Group PLC, a British company that is a major player in the global liquefied natural gas trade.

Shell’s defeat in the Arctic is the latest warning sign to others waiting to pounce on potentially vast reserves of oil and gas as polar ice caps melt. Finding economic basins is easier said than done.

Earlier this year, Norway’s Statoil again postponed its Arctic Johan Castberg project. In 2012, Russia’s energy firm Gazprom, Total and Statoil, canceled the Shtokman gas project in the Arctic Barents Sea. Russia’s Rosneft had to pull the plug on its own operations in the Kara Sea, because Western sanctions on Russia meant that its key partner, U.S. firm ExxonMobil, could no longer bring cash and technology to the table.

Even if Shell’s biggest obstacles were cash and geology, the retreat has cheered environmental groups who long opposed risky Arctic drilling.  

“Big oil has sustained an unmitigated defeat. They had a budget of billions, we had a movement of millions. For three years we faced them down, and the people won,” Greenpeace UK executive director John Sauven said.

“Arctic Ocean oil drilling is a thing of the past. The world cannot afford to burn the vast majority of known fossil fuel reserves, let alone to search for unknown oil in Arctic Ocean, risking an irreplaceable region and wildlife in the process,” added Drew Caputo, a vice president at Earthjustice.

U.S. Sen. Lisa Murkowski, a Republican from Alaska, placed the blame for Shell’s failure at the feet of the president.

“In the more than seven years that Shell has held leases in the Chukchi, it has only recently been allowed to complete a single well. What we have here is a case in which a company’s commercial efforts could not overcome a burdensome and often contradictory regulatory environment,” Murkowski said.

Photo Credit: David Ryder/Getty Images