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Artic Drilling: Economic Feasibility and Environmental Pressure

Just about every announcement from Royal Dutch Shell divides the oil industry and environmentalists but the latest one which no-one foresaw had an effect that no-one predicted.

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The energy giant has decided to pull the plug on oil exploration in offshore Alaska “for the foreseeable future”, saying it had not found sufficient levels of oil and gas in the Burger J well to warrant further efforts.

It is an astonishing development for the company which has spent $7bn on the project and has only just been allowed by President Obama to restart work after being shut down in 2012.

The president of Shell USA displayed little hope for any future return. “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 US,” said Marvin Odum, “However this is a clearly disappointing exploration outcome for this part of the basin.”

Kara Moriarty, president of Alaska Oil and Gas Association condemned the tight regulatory conditions Shell had to work within. “We know the oil is there. They were only allowed to drill one well. Nobody does that. They had so much committed they needed to make that one well be the prize winner.”

The entire ten-year project was beset with difficulties – steadfast opposition from environmentalists, losing control of the oil rig fire in 2012, multiple battles through the US courts questioning its oil spill response plan and now the current market conditions which are difficult for all projects, not least those trying to make a living from on the tough Arctic sea.

Just as it divided on a macro level it divides on a micro one too, depending on what brings food to your table. Those villagers of Barrow, Alaska who rely on whale hunting and marine mammals for food said the news has “lifted a burden”, while those who would have gained jobs in a difficult economy say it is “heart-breaking, sobering, devastating.” The US Artic programme director from the WWF Margaret Williams says there is possible mitigation – if the State moves to offset the losses from Shell’s decision by becoming a laboratory for renewable energy. The Governor Bill Walker has another idea, suggesting the federal government allow natural gas drilling in the Arctic National Wildlife Park.

The BBC spoke to Platts who said, “You could argue that this has been bad for Shell’s reputation.” The head of the energy information group’s Europe and Africa oil news team, Stuart Elliot, added, “It is possible that Shell might almost be relieved as they can stop exploration for a legitimate operational reason rather than being seen to bow to environmental pressure.”

It hasn’t put everyone off though. Just as Shell was bowing out from the stage, the Italian oil giant Eni swept in declaring that it would press ahead with oil production in the Arctic by the end of the year. No-one in the UK noticed one of the largest oil platforms of its kind sailing around the UK over the summer, but if successful the $5.5bn Goliat project would become the northernmost offshore oil field in the world to come on stream. Eni predicts it holds 175m barrels of oil and could deliver 100,000 bpd, and 8bn cubic metres of gas.

Eni says it’s different from Shell’s project as it is in part of the ‘manageable Arctic’, an area largely ice-free. However as well as being already two years behind schedule with The Guardian saying “reportedly around £1.1bn over budget”, it still has not had final approval from the Norwegian authorities. The Petroleum Safety Authority told Reuters, “There is still some work to do.”