Shell is ceasing further exploration offshore Alaska after the company's Burger J prospect failed to prove oil, resulting in a multi billion dollar write-down.
The Transocean Polar Pioneer
“Shell has found indications of oil and gas in the Burger J well, but these are not sufficient to warrant further exploration in the Burger prospect. The well will be sealed and abandoned in accordance with US regulations,” Shell said.
The Burger J exploration well, located in the Chukchi Sea, is 150mi from Barrow, Alaska in about 150ft water depth. It was the first well, and only well in the foreseeable future, in Shell’s US$1 billion Arctic drilling program.
Burger J was drilled with the Transocean Polar Pioneer semisubmersible to a total depth of 6800ft in a basin that Shell says demonstrates many of the key attributes of a major petroleum basin, and is equivalent to half the size of the Gulf of Mexico.
However, exploration activities offshore Alaska are ending for the supermajor, at least for the foreseeable future.
“This decision reflects both the Burger J well result, the high costs associated with the project, and the challenging and unpredictable federal regulatory environment in offshore Alaska,” Shell said.
With the failed well, Shell expects to take on substantial financial charges. Its carrying value of its Alaskan assets is about $3 billion, with a further $1.1 billion of future contractual commitments.
“It is disappointing on a number of fronts that due to a variety of factors, including regulatory constraints and cost issues, Shell has decided to halt their offshore drilling campaign in Alaska. First, the US will lack energy source diversification for the foreseeable future since low oil prices and high drilling costs in the Arctic will likely impact future exploration activity in the Alaskan OCS. Second, enormous economic opportunities for Native Alaskans have been delayed, if not lost, for the immediate future. Third, the US will continue to lag other nations in the exploration and understanding of Arctic offshore areas," National Ocean Industries Association (NOIA) president Randall Luthi said in a statement. "Due to Federal regulatory constraints, Shell was forced to put all their exploratory eggs in one basket, i.e., one well, rather than a suite of exploratory wells that would have given a more complete picture of potential resources. Unfortunately, the results serve as an example of the harsh reality of the exploration business; dry or noncommercial wells are not uncommon."
Shell is currently demobilizing operations and equipment from the Chukchi Sea.
"The Shell Alaska team has operated safely and exceptionally well in every aspect of this year's exploration program," said Marvin Odum, Director, Shell Upstream Americas. "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 US. However, this is a clearly disappointing exploration outcome for this part of the basin.”
This summer, Shell passed many hurdles to be able to drill in Arctic waters including a damaged icebreaker vessels, an outpour of resistance from several activists, and federal limitations that were later revoked.
“The groups cheering this news reveal the energy education disconnect in our country. The US and world will need more energy sources, not fewer, in the coming decades, whether they be fossil fuels, which are estimated to still supply nearly 80% of the world’s energy needs in 2040, or renewable energy sources, such as wind, wave, current, and solar," Luthi said.
Shell announced its return to the Arctic in its 4Q 2014 results, after being absent for two years.
Before this year, Shell had already spent eight years and about $6 billion in search of oil in the Beaufort and Chukchi Seas. Its exploration work off Alaska was set back in 2012 by mishaps involving the Kulluk drilling rig and spill containment system. Operations were put to a halt to repair equipment in 2012 and did not resume in the area until this summer.
Shell holds a 100% working interest in 275 Outer Continental Shelf blocks in the Chukchi Sea.