Shell postpones Arctic drilling plan

Royal Dutch Shell has confirmed it is not planning to drill off Alaska’s north coast this summer, in an admission that the controversy that has dogged its Arctic exploration plans has set back its ambitions for another year.

In a statement, Shell said it had told the US Minerals Management Service that it had withdrawn its Plan of Exploration for the Beaufort Sea for 2007-09, meaning that it will miss the short window for drilling in the area this summer.

The move is really only a formal acceptance of a position that was generally understod already: drilling this year was going to be too difficult. Shell insists, however, that this is a setback, not a defeat. In the Arctic, one of the last great frontiers for oil and gas exploration, it is playing the long game.

The approval from the MMS for Shell’s plans for drilling off Alaska was successfully challenged in court in San Francisco, on the grounds that the government agency had not sufficiently considered the potential impact on wildlife. The company argues that now it has withdrawn its plan, the case against that approval should be set aside as moot.

Shell still plans to drill in the Beaufort Sea, albeit on a more modest scale than it had originally envisaged in its exploration plan. It is talking about a single rig to drill two wells next year, instead of two rigs to drill four wells a year for three years.

Speaking to the Financial Times recently, Jeroen van der Veer, Shell’s chief executive, said that the Arctic was still a very important region for the company’s future.

The Arctic is thought to hold huge undiscovered reserves of oil and gas. Last year the US Geological Survey estimated that in total the Arctic could hold 90bn barrels of oil, and gas equivalent to the entire reserves of Russia, or about 30 per cent of the world’s undiscovered gas reserves.

As Mr van der Veer put it:

I think what is a very interesting development, not necessarily this year, but for the coming decade and after that, is the Arctic. This is the north of Canada and north of Alaska. We think there is a lot of oil and gas over there. We do think that from a safety point of view and from an environmental point of view, you can work safely there. We fully accept that there should be strict structures, we think that’s good because then you get only operators who have the capability to work there. And we think that the world, and basically it is a government decision, it is not Shell’s decision to open those areas for oil production, oil, gas production, but if they are opened up we would like to demonstrate that Shell is one of the responsible operators, based on our Sakhalin experience, regional experience, etc. For instance, we are reliable; we have more projects. And then we worked in Siberia, in Salym, we worked in the Athabasca oil sands, so that is more the cold climate experience.

On that long-term view, it is probably not so much the Beaufort Sea but the Chukchi Sea, also off the north coast of Alaska but further west, that matters. Shell’s leases in the Chukchi Sea cost it $2.1bn last year, accounting more than three quarters of the total raised by the licensing round, and earning the special thanks of Sarah Palin, Alaska’s governor.

MMS estimates suggest the outer continental shelf of the Beaufort Sea holds about 8bn barrels of oil and about half as much again in gas. But the Chuckhi Sea, it believes, holds 15bn barrels of oil and almost as much again in gas.

The more serious concern for Shell than what has happened over its Beaufort Sea plans is last month’s Washington court ruling over leases in Alaska, including the Chukchi Sea acreage. The court upheld complaints from local people and environmental groups that the leasing process had not taken enough account of the effect on widllife, such as wales, and other possible damage to the environment.

Part of the case against letting Shell and other companies explore the Arctic seas is the potential impact on whaling in Alaska: another sign of the sensitivity of the region. Big Oil versus the whalers creates an interesting dilemma for environmentalists.

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