Offshore in depth

Royal Dutch Shell’s dilemma in the Arctic mirrors the oil and gas industry’s predicament in the 21st century. In a world that is becoming increasingly dependent on fossil fuels, oil and gas companies are investing heavily and taking on financial risk to find and produce petroleum reserves. Simultaneously, concerned citizens and politicians, aware of the effect that CO₂ emissions have on the climate, blame the oil companies for the problem, without acknowledging that the “fossil fuel industry” makes modern civilization—and their own comfortable lifestyles—possible.

Shell’s Arctic adventures have been covered extensively in the trade press and mass media. Its ill-fated 2012 drilling campaign ended with the grounding of the Kulluk drilling barge, and news reports did not portray Shell in a good light.

Second try also fails. In 2015, Shell geared up for another drilling season, deploying a refurbished Discoverer drillship and the Polar Pioneer Arctic-class semi, while its drilling permit application was still being reviewed. Shell also readied the Fennica ice breaker (with a capping stack), a containment dome and about 30 other vessels to support the operation and to respond to any emergencies. Protesters in kayaks tried to block the Polar Pioneer’s arrival and departure from the Seattle harbor, while it was en route to Alaska.

When the drilling permit was finally approved, BSEE limited Shell to drilling one well, instead of the two that Shell had planned. Consequently, the Polar Pioneer would drill the Berger J well, 70 mi offshore, with the Discoverer standing by to drill a relief well in case of a blowout.

On Sept. 28, Shell reported that it had safely drilled the Burger J well to 6,800 ft, and had found “indications of oil and gas,” but “these are not sufficient to warrant further exploration in the Berger prospect.” Shell decided to plug and abandon the well, and to pull out of the Alaskan Arctic. In total, Shell had spent more than $8 billion on its offshore Arctic exploration program since 2008.

Why risk the Arctic? In light of the high cost and high-profile public resistance to its offshore exploration in the Arctic, and the debacle of the Kulluk’s grounding in 2012, why did Shell move ahead with the Berger J well in 2015? Other operators like Total, ConocoPhillips and Statoil had decided not to drill, and industry observers called drilling there “a dangerous wager.”

The simple answer is that drilling for oil is what E&P companies do, and that the size of the offshore Alaska prize is too big to ignore. And although it may seem ludicrous to environmentalists, it appears that Shell may be just as idealistic as the “kayaktivists” who tried to block the Polar Pioneer in Puget Sound.

An idealistic mission. A Business Week article, published in August, described Shell’s Scenarios forecasting process, and provided insights into Shell’s decision-making. For more than 40 years, the Scenario process has analyzed global economic, geopolitical and environmental trends, involving hundreds of Shell experts and using econometric models to anticipate major turning points in history. The Scenario process anticipated the 1973 OPEC crisis, the Iranian revolution and the decline of the Soviet Union. Also because of the Scenario process, Shell acknowledged in 1998 that climate change was caused by burning fossil fuels and came out in favor of a carbon tax. At the same time, Shell forecasters concluded that development of renewable energy cannot keep up with growing demand for energy as the world’s growing population seeks a higher standard of living. As an organization with the scope, technology and expertise to develop oil and gas in challenging conditions, Shell believes it can help meet the energy demand efficiently and responsibly. Exploring in the Arctic was part of that mission.

The North Slope of Alaska has produced more than 12 Bbbl, and while largely unexplored, the U.S. EIA estimates that the Chukchi and Beaufort Seas in U.S. waters (with an area equivalent to half the U.S. Gulf of Mexico) have the potential to produce over 26 Bbbl, about as much as the Bakken shale basin’s reserve base. Ben Van Beurden, Shell’s CEO, told investors on July 30 that a major find offshore Alaska “has the potential to be multiple times larger than the largest prospects in the U.S. Gulf of Mexico.”

We know how to do this. In addition, Shell shares the industry’s confidence that it can meet virtually any engineering challenge. Ann Pickard, the executive that Shell chose to head up its 2015 Arctic drilling effort, had just overseen the construction of the giant Prelude floating LNG plant in Australia, which is designed to survive Category 5 cyclones. Shell has operated in the North Sea for decades, where winter storms can be more powerful than those in the Arctic Ocean. The Berger J was drilled in 140 ft of water, into a relatively low-pressure reservoir, and is the type of well that is drilled routinely by Shell and other operators around the world every day.

Too many challenges for one company. Shell’s abrupt decision to pull out of Alaska caught many people by surprise. Alaska’s governor and the state’s congressional delegation blamed excessive regulation. Communities on the north coast expressed disappointment that jobs and income would not materialize. Operators of the Trans-Alaska Pipeline lamented that Chukchi Sea oil would not make up for dwindling North Slope production. The environmentalists claimed a victory, but Shell threw in the towel because of the poor results of the Berger J well, the high cost of operation, the low oil price and the prospects of even more restrictive regulations under the next U.S. administration.

Finally, Shell may have realized that exploring in the Arctic offshore is too large a task even for a super-major, if it decides to work alone. A concurrent effort of several large oil companies is probably required to build the infrastructure and support system needed to unlock the Alaska offshore prize.

About the Authors

Ron Bitto

Contributing Editor

Ron Bitto has more than 30 years of experience as a technology marketer and writer in the upstream oil and gas industry. RON.BITTO@GMAIL.COM