Shell returning to the Arctic

January 30, 2015

Shell has its sights set for Arctic exploration this year by spending US$1 billion, after being absent since 2012.

Ben Van Beurden. From Shell.

The supermajor announced in its 4Q 2014 results that subject to getting permits and legal clearance, the company’s plans include higher spending off Alaska’s coast. Overall spending on conventional exploration will be kept at approximately $4 billion, meaning outside of Alaska, spending for 2015 will be less than $3 billion, a reduction from 2014 levels.

“We are driving strong top-down decision-making in exploration, with capital allocation in a series of precise risk and size-banded categories,” said Ben Van Beurden, Shell CEO. “Drilling adds short-term value through near-field activity, with medium and longer term potential through expanding our heartlands, frontier exploration and Arctic positions.”

In October, Shell asked the Obama administration for an additional five years to explore off Alaska, saying setbacks and legal delays may push the start of drilling past the 2017 expiration on some leases.

Shell completed top-hole drilling on two wells in 2012 in the Beaufort and Chukchi Seas, marking the industry’s return to offshore drilling in the Alaskan Arctic after more than a decade.

Shell has 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 still have not resumed in the area.

Greenpeace's reaction

In response to Shell’s Arctic exploration announcement, Greenpeace reciprocated with its own, stating that Shell is taking a massive risk with shareholder value and the Arctic’s environment by chasing oil.

Arctic risk map. From DNV GL.

“It’s time for investors to recognize that it’s impossible for Shell to justify its continued pursuit of offshore Arctic oil. Shell’s Arctic ambitions have been on the rocks since its rig ran aground in 2012. The more we discover about the mistakes Shell made three years ago, the clearer it becomes that it cannot be trusted to drill in the Arctic,” says Charlie Kronick, Greenpeace campaigner. “No company is able to operate safely in this remote, fragile ocean where the nearest rescue fleets are hundreds of miles away. These expensive, long term oil projects make no sense as governments around the world become increasingly serious about climate change. It’s time for Shell to scrap this hapless project for good.”

A spill in the Arctic would be both environmentally and financially catastrophic, as DNV GL discussed in September 2014 at its annual Technology Week.

According to DNV GL, several environmental risks to the region’s diverse ecosystems come in to play due to the Arctic’s harsh climate and remote nature, which results in specific adaptations and characteristics of Arctic species and ecosystems. The large variations in climate, species distribution, and human activity influence the environmental risk picture in the Arctic.

Greenpeace says that the US Arctic Ocean presents almost a perfect storm of risks and that Shell’s efforts to date resulted in a cascade of operational problems – from failure to meet regulatory targets to grounding and scrapping of its principle drilling rig, the Kulluk. The independent organization noted the most recent of many setbacks was Shell’s leading contractor in Alaska, Noble Drilling, pleading guilty to eight felony offences and agreeing to $12.2 million in fines and community service payments in December 2014.

Shell all alone in the Arctic

Rosneft, and now Statoil, are bowing out of exploring the Arctic, according to a Bloomberg news report today. Instead, the Norwegian giant will set its focus on data it has already acquired during its previous drilling campaign of 12 wells in the Barents Sea from 2013 and 2014. 

In November, Statoil said that the Barents Sea exploration program has overall been very efficient, with special regard to the last seven wells drilled by the Transocean Spitsbergen that were drilled 40% faster than industry average for the Barents Sea, enabling two more wells than originally planned for to be drilled.

“I see our 2013-2014 exploration program as an important building block for the future of Barents Sea exploration,” said Irene Rummelhoff, Statoil Sr VP, in November. “Our focus next year [2015] will be to analyze the extensive data we have collected, interpret the 3D data from the joint seismic acquisition in the southeastern Barents Sea and decide on the way forward in the Barents Sea. We will also work hard to deliver a strong application in the 23rd concession round.”

Shell 4Q results

Earlier this week, Shell announced it is trimming its spending by more than $15 billion over the next three years with further options to reduce spending.

Full year 2014 oil and gas production decreased from 2013 by 4% at 3.08 MMboe/d. At the end of 2014, total proved reserves were expected to be around 13.1 billion boe, after taking into account 2014 production. The 3-year average headline proved reserves replacement ratio was expected to be around 67%.

Read more:

Shell curtails $15bn spending

Statoil comes up dry at final well

Shell seeks arctic extension

DNV GL discusses Arctic challenges

Shell halts Arctic program

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