Royal Dutch Shell announced Monday that it has abandoned its Arctic search for oil after failing to find enough crude to justify the cost of continued investment. Shell has spent about $7 billion on exploration in the waters off Alaska so far and said it could book losses of up to $4.1 billion for pulling out of the Chukchi Sea for the “foreseeable future”.
As we recently described on this site, Arctic drilling has been a bone of contention between environmentalists concerned about the substantial risks of drilling, and pro-drilling forces who argue that, because the Arctic Ocean contains 20% of the world’s undiscovered oil, Arctic reserves could replenish a diminishing supply from the Bakken and other US shale fields.
In August the US Department of the Interior issued a permit to Shell to drill an exploratory well into oil-bearing zones in the Arctic Ocean, contingent on the company meeting strict environmental standards.
As he headed out on his recent trip to Alaska, President Obama described the rationale for the decision this way:
Now even as we accelerate this transition (to clean energy), our economy still has to rely on oil and gas. As long as that’s the case, I believe we should rely more on domestic production than on foreign imports, and we should demand the highest safety standards in the industry – our own.
The decision to close up shop in the Arctic is not totally surprising, given the currently-depressed state of the oil market. According to the New York Times,
Investors and industry executives questioned the wisdom of Shell’s spending heavily and putting its reputation at risk — especially with oil prices having fallen over the past two years from $110 per barrel to below $50 per barrel.
Stopping drilling in offshore Alaska is a major disappointment for Shell, whose executives thought they had locked up a potentially huge trove of oil there. In July, Ben van Beurden, Shell’s chief executive, said that the area where the company was drilling in the Chukchi Sea, 150 miles offshore, “has the potential to be multiple times larger than the largest prospects in the U.S. Gulf of Mexico.”
A victory for Obama
You have to score this one as a major victory for Obama, who likely anticipated that Shell was not going to be able to justify continued drilling activity when the permits were granted. He took considerable criticism from environmental groups like Greenpeace, who charged “We think it’s deeply hypocritical for a president who’s done so much for the climate, to see him do something that could undo that is a real tragedy.”
The President plays the long game, and he picks his battles carefully. He chose not to fight this one, but the ultimate outcome should satisfy his environmental critics without angering the oil and gas industry.
That’s good politics.