Canadian Arctic offshore drillers discouraged by Alaska abandonment

Arctic offshore drillers could have learned how to operate in northern waters

CALGARY – Royal Dutch Shell’s decision to scrap plans to explore for oil off Alaska’s coast is sending a discouraging signal to those who want to see Canada’s Arctic offshore resources developed.

Shell drilled a well in the Chukchi Sea this summer that indicated the presence of oil and gas, but said Monday the results weren’t good enough to warrant further exploration for the “foreseeable future.”

“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. However, this is a clearly disappointing exploration outcome for this part of the basin,” said Marvin Odum, who directs Shell’s upstream Americas business.

The company said its decision to walk away from Alaska is based on the disappointing results of the well, along with high costs and a “challenging and unpredictable” U.S. regulatory environment.

In all, Shell has spent upwards US$7 billion on Arctic exploration.

A successful program in the Chukchi Sea would have helped along development of resources in the Beaufort Sea off the coast of the Northwest Territories, an even more challenging operating environment than Alaska, said energy consultant Doug Matthews.

“The loss for Canada is we really could have learned something from the Shell operation about how to better operate in the Arctic waters,” he said.

The National Energy Board, which has authority over the Arctic offshore but next to no experience in that region to draw from, could have learned from the U.S. regulatory approach.

“This would have been a very good laboratory for our purposes and that’s gone,” Matthews said.

The probability that Canadian Beaufort resources will one day be exploited was already looking dicey.

In June, Imperial Oil (TSX:IMO) and its partners deferred exploration in the Beaufort and asked for a seven-year extension to their licence, which expires in 2020. Chevron Canada said in December that it had put its plans in the region on ice indefinitely.

Both cited the National Energy Board’s requirement that companies show they can kill a ruptured oil well in the Arctic offshore in the same season it’s drilled, a difficult and costly proposition in a region that’s covered in ice for much of the year.

Shell’s decision is welcome news for environmental groups. After the U.S. government gave the green light to the company’s exploration plans in May, opponents mounted massive protests aimed at stopping drilling equipment stored in Seattle from moving north.

Shell did not cite the environmental opposition as a factor in its decision, but Greenpeace Arctic campaigner Diego Creimer said it was clear it played a role.

“What happened today can be an inspiration,” he said. “People campaigning, people protesting definitely had an effect because they were really undermining (Shell’s) social licence to operate in the Arctic.”

Shell’s Arctic experience is a lesson for companies pursuing expensive and risky projects elsewhere in the world, added Anthony Hobley, CEO of the Carbon Tracker Initiative, a London-based think-tank.

“I think they had underestimated the concern and the backlash from civil society about drilling in the Arctic. They clearly had not anticipated the strength of that reaction,” he said.

“I think increasingly investors are getting extremely wary of the high-cost projects in a low oil price environment, and particularly if they bring with them considerable reputational issues because of their environmental impact.”

By Lauren Krugel of The Canadian Press