Shell’s Arctic Bust Echoes Around Alaska And Beyond

After sinking eight years and more than $8 billion into the effort, Shell Oil is pulling out of the Arctic Ocean, the company says.

Shell officials said the company safely drilled a well 6,800 feet beneath the floor of the Chukchi Sea this summer. They found indications of oil and gas there, but not enough to warrant further exploration.

“We thought it was the potential to be a multibillion-barrel prospect,” Shell Alaska spokesperson Meg Baldino said. “That is not the case. It is not commercial.”

Oil prices have plummeted in the past year as a bonanza of fracking in the lower 48 has made costly oil from the Arctic Ocean less attractive as a global commodity.

The announcement comes as Shell’s window for drilling in the brief Arctic summer draws to a close.

Baldino said about 400 people work in Anchorage on the Arctic drilling effort. Up to 3,000 Shell contractors are working in the field at any given time.

Two drill rigs and much of the 30-vessel fleet are still in the Chukchi Sea.

“The Burger J well will be sealed and abandoned, so we will begin demobilization immediately and head south,” Baldino said. “Everything has changed, so there’s lots of details of what will happen next that are going to be worked out in the coming weeks.”

“This is a very tough day for Shell, a very tough day for Alaska,” Alaska Gov. Bill Walker said. “We have to pick up the pieces from this and move forward.”

“It’s really a shocking development,” attorney Michael Levine with the environmental group Oceana in Juneau said. “It’s a good day for the Arctic Ocean and lets us move past arguing about Shell and Shell’s plans and its investment and move toward talking about the future of the Arctic Ocean.”

Shell Had Feds' Green Light

Environmental groups had been pushing — unsuccessfully — for the Obama administration to block the drilling. They argued that the twin risks of a catastrophic oil-spill and runaway climate change made Arctic Ocean oil too dangerous to drill.

Instead, the Obama administration gave Shell the green light. The U.S. Interior Department did require Shell to keep its rigs at least 15 miles apart to drill at the same time, a regulation put in place to protect walruses in the area from the noise of drilling.

Shell has spent $1.4 billion this year alone in the Arctic. In addition to the disappointing results from this summer’s well, the company cited high costs and regulatory uncertainty for its decision to quit the Arctic.

Alaska’s congressional delegation blamed Obama administration regulations for the sudden end of Arctic offshore drilling. Gov. Bill Walker also faulted the regulations.

“Typically when you bring a rig and spend that much money, you’ll drill multiple wells, and to be able to drill just the one, that was unfortunate,” he said. “You’re betting everything on that particular well.” Shell’s Fennica icebreaker struck a rock in Dutch Harbor over the summer, causing further delays in drilling.

CREDIT KUCB PHOTO/JOHN RYAN

An Uncharted Rock

Shell has had problems that its backers could not blame on regulators. In past years, its rigs have run aground. Ship construction ran behind schedule. Safety equipment was “crushed like a beer can,” in the words of an Interior Department official who witnessed one failed safety test.

This year, one of Shell’s icebreakers, the Fennica, was on its way out of Dutch Harbor after anchoring in an area ships of its size usually do not. It tore a three-foot hole in its hull on an uncharted rock.

Ship-salvage expert Dan Magone supervised the temporary repair work in Dutch Harbor.

“We would’ve gotten them squared away and on their way within a few days,” the head of Resolve-Magone Marine Services said. “The complication was that they were under contract to Shell. So the level of scrutiny and Shell’s bureaucracy turned it into this great big deal.”

Magone said Shell’s bureaucracy “makes the government look like pattycakes.”

The Fennica went to a dry dock in Oregon for permanent hull repairs before returning to the Arctic. The repairs and the trip south, with a key piece of safety equipment on the Fennica’s stern, cost Shell several weeks of its summer drilling season.

$4 Billion Hit

The company expects to take a $4 billion hit on its balance sheet from shuttering the project. Details are expected in the company’s third-quarter financial reports in a month.

Unalaska Mayor Shirley Marquardt said the decision would affect some businesses in the port city that has hosted Shell’s Arctic drilling fleet. But she didn’t expect it to have a huge impact on Unalaska’s future as a portal to the Arctic.

“There was always the knowledge with most people that this may work out for them — and it might not,” she said. “But I think it’s important for people to realize that the opening of the Arctic is much bigger than just Shell. Shell and the oil exploration from just that one company is just a small part of it.”

Any oil from Shell’s Arctic venture would have taken 10 to 20 years before it wound up in a pipeline or in anyone’s gas tank. John Ryan is currently on assignment with KUCB Community Radio in Unalaska, Alaska.