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Shell’s Arctic oil well comes up dry

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Screen Shot 2015-08-13 at 11.35.25September 28, 2015 | By Jennifer A. Dlouhy

WASHINGTON — After spending $7 billion and seven years searching for oil under Arctic waters, Royal Dutch Shell on Monday said its quest had come up dry.

Shell announced that its exploratory oil well in the Chukchi Sea north of Alaska encountered “indications of oil and gas” that are “not sufficient to warrant further exploration” — a significant blow for the Anglo-Dutch firm that had hoped to find a multibillion barrel crude reservoir in those remote waters.

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

The declaration means the end of Shell’s high-stakes Arctic drilling campaign and could chill other oil industry investment in the region.

Shell said in a statement that it would cease further exploration activity off the coast of Alaska “for the foreseeable future.” “This decision reflects both the Burger J well result, the high costs associated with the project and the challenging and unpredictable federal regulatory environment in offshore Alaska,” the company said.

Shell also will take a financial charge from the decision, since the firm’s Alaska assets have a carrying value of about $3 billion and the company still has an additional $1.1 billion already committed in existing contracts for rigs, ships and other assets. Shell could pare its potential $4.1 billion write down by putting some of those contracted vessels to work elsewhere or subcontracting them to others.

Shell drilled into the same prospect in 1989 and 1990 and found gas, but this time, the company was aiming for oil. Executives knew that with the high cost of constructing production facilities and pipelines in this frontier region, a discovery of merely low-priced gas — without more lucrative crude — would not be economical to develop.

Shell’s executive vice president for the Arctic, Ann Pickard, bluntly warned about the risks in May. “If we find more gas, it’s before it’s time,” she said in an interview. “It might be worthwhile some point in the future, but it’s before it’s time. We really do need to get out and prove there is some oil there.”

Pickard also cast Shell’s Burger J well as a critical test of the company’s Burger prospect. “If we get a dry hole in J, we’re done,” Pickard said at the time. “I’ll recommend we say goodbye.”

Still it is a major disappointment for the firm that had been pursuing a major Arctic oil discovery for years. Shell spent a record-setting $2.1 billion to buy Chukchi Sea drilling rights in a 2008 government auction and took the lead role exploring the region. Shell holds 275 oil and gas leases in the Chukchi Sea.

Other oil companies, including Statoil and ConocoPhillips, have leases in U.S. Arctic waters but have delayed their own exploratory bids, citing regulatory uncertainty.

Related story: Oil companies forfeit Arctic drilling rights

Oil exploration is inherently risky — whether in icy seas north of Alaska or the temperate waters of the Gulf. In the deep-water Miocene play, where much Gulf activity is concentrated these days, just one in five recently drilled wells has been a success. Another top target, the Eastern Gulf Norphlet, has a success rate of just 17 percent.

Analysts have noted that Shell is the sole owner of the Chukchi Sea leases that make up Burger, a position that limits the company’s outside advice on the prospect. Shell did not have other partners asking potentially tough “what if” questions about the prospectivity of the site and the location of the firm’s planned wells.

The episode recalls the long-abandoned Mukluk well in the Beaufort Sea, just a few hundred miles from Shell’s Burger prospect. A consortium of companies spent nearly $1 billion on the well in the 1980s because they were convinced it was loaded with crude. But their only discovery, in December 1983, was salt water and traces of long-gone oil.

Shell started drilling its Burger J well on July 30, beginning by excavating a special “mud-line cellar” to hold emergency equipment below the reach of floating icebergs. The company was forced to briefly halt drilling in late August, amid gale-force winds and 11-foot seas.

Company officials have described the well itself as relatively straightforward — sited in shallow, 140-foot waters about 70 miles from Alaska’s northwest coastline. Using the Transocean Polar Pioneer rig, Shell drilled the well to a total depth of 6,800 feet.

A second rig, the Noble Discoverer, was barred from simultaneously boring a second well about 9 miles away because of federal walrus protections that required a 15-mile buffer zone.

Shell’s last Arctic drilling bid, in 2012, was marred by a series of mishaps, including a drifting drillship, air pollution permit violations and the grounding of the company’s contracted Kulluk drilling unit during a botched tow to Seattle.

The Arctic is a challenging place for oil exploration, with 20-foot seas, ice, freezing temperatures and storms that can produce hurricane-force winds. Conservationists argue that any misstep in the remote region about 1,000 miles from the nearest deep-water port could irrevocably damage the fragile Arctic ecosystem, jeopardizing walruses and whales that migrate through the area.

Environmentalists opposed to Arctic drilling also feared the activity could exacerbate climate change by unlocking significant new oil reserves.

“Drilling for oil there is inherently dangerous and will only drive the world deeper into the climate crisis,” Miyoko Sakashita, oceans program director for the Center for Biological Diversity, said in a statement. “If we’re going to leave behind a livable planet, we need to leave that oil in the ground today, tomorrow and always.”

“Polar bears, Alaska’s Arctic and our climate just caught a huge break,” Sakashita added.

Niel Lawrence, the Alaska director for the Natural Resources Defense Council, said Shell’s announcement is “a watershed moment for the climate, the company’s investors, the fragile region and its iconic wildlife, and American consumers.

“For the climate, Shell won’t be locking in fossil fuel production we don’t need and can’t afford if we want to limit global warming,” Lawrence said. “Shell’s shareholders won’t be on the hook for billions more investment that any rational climate agreement would leave stranded.”

Related story: Senators ask SEC to probe oil companies’ risk disclosure

Shell’s results will further discourage other companies from exploring for oil and gas in U.S. Arctic waters.

There already were signs of tepid interest. When the federal government invited the oil industry to detail what parts of the Chukchi and Beaufort seas should be available for leasing during separate 2016 and 2017 auctions, companies largely ignored the request for information. Firms objected to the Interior Department’s decision to limit available Chukchi and Beaufort Sea acreage to areas with fewer environmental risks, with tracts nominated by would-be bidders.

Although the Bureau of Ocean Energy Management has not announced plans to delay or cancel either auction, previous offshore oil sales have been postponed amid low industry appetite.

The Arctic Ocean is believed to hold major oil and gas resources. The Chukchi Sea alone is estimated to contain 15.4 billion barrels of oil that can be recovered with existing technology, according to the government’s ocean energy bureau.

Shell nodded to the area’s continued potential in its statement Monday. “For an area equivalent to half the size of the Gulf of Mexico, this basin remains substantially under-explored,” the company said.

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