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Shell’s Alaska Return Shows Arctic Drilling Defying Slump in Oil

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Article by Rakteem Katakey and Mark Drajem published 12 May2015 by

Royal Dutch Shell Plc’s plan to return to the Arctic this year shows exploration in one of the world’s most remote regions is proving resilient against the slide in crude prices.

The U.S. Interior Department on Monday endorsed Shell’s plan to have two rigs drill as many as six exploratory wells in the Chukchi Sea off the coast of Alaska. Shell wants to resume work halted in 2012 when its main drilling rig ran aground and was lost. It also was fined for air pollution violations.

Shell, which has already committed $6 billion to the Arctic project, is seeking to unlock Arctic resources that may total 10 times the amount of oil and gas produced from the North Sea so far, according to its website. Arctic oil is also being chased by Russia, though drilling has been slowed by sanctions. While exploration drilling in Norway’s Arctic will slow in 2015 to half last year’s level, at least seven wells are planned in the Barents Sea.

The activity shows the long-term opportunity of Arctic oil trumping the drop in oil prices in a world where few large fields remain to be discovered.

“The Arctic is the next big frontier,” said Ahmed Ben Salem, a Paris-based analyst with Oddo & Cie, which has a buy rating on Shell. “It’s also an expensive place to drill, even as Shell and other oil companies are looking to cut drilling expenditures because of lower oil prices.”

Two Rigs

Shell is planning a two-year drilling program in the Arctic starting this year if all approvals come through, Chief Financial Officer Simon Henry said April 30. It plans to use two rigs in the program to explore about 70 miles (112 kilometers) from the village of Wainwright. The drilling will take place in 140 feet (43 meters) of water.

Shell, which discovered oil in the same part of the ocean in 1986, is the first major explorer to return to the region since the last offshore Arctic drilling boom fizzled almost 30 years ago amid slumping crude prices.

Exxon Mobil Corp., BP Plc and other producers have discovered more than 10 billion barrels of oil in North American Arctic seas since the early 1970s. Those resources remain locked beneath the sea floor because of a lack of pipeline capacity to haul them to markets.

Oil exploration and production companies in the past decade stepped up plans to drill in the Arctic, using technology that may let them reach the reserves trapped in the sea floor beneath ice. The Arctic seas contain an estimated 24 billion barrels of oil, according to the U.S. Geological Survey.

Step Foward

Abigail Ross Hopper, director at the U.S. Bureau of Ocean Management, said on Bloomberg Television on Monday that other companies probably will “wait and see how Shell prevails” in the region. The U.S. approval is “an important step forward for Shell,” she said in the interview.

Shell’s plan to return to the Arctic and the U.S. approval itself are being resisted by the environmental groups. Greenpeace activists occupied Shell’s oil rig in the Pacific last month in their latest effort to stop drilling in Alaska.

“British shareholders should be very concerned about Shell’s irresponsible plans to drill in Alaskan waters,” Rod Downie, Polar Programmes Manager at WWF U.K., said in an e-mail. “Arctic wildlife is already threatened by warming temperatures and loss of sea ice.

Test Wells

Shell drilled two test wells in 2012 after spending about $6 billion over almost a decade in preparation.

In its review, the Interior Department found that drilling at in site in the Chukchi Sea would have no significant environmental impact. In approving Shell’s plan, the government listed 18 conditions, including a requirement that the company get other needed permits and that it comply with endangered species protections.

‘‘The approval of our revised Chukchi Sea Exploration Plan is an important milestone and signals the confidence regulators have in our plan,’’ Curtis Smith, a spokesman for Shell, said in an e-mail. ‘‘However, before operations can begin this summer, it’s imperative that the remainder of our permits be practical, and delivered in a timely manner.’’

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