After committing more than $4.5 B of company funds to its offshore arctic program, Shell has decided to take a year respite - regroup, retool and reassess.
With technical difficulties and treacherous conditions in the Chukchi and Beaufort Seas having threatened operations of the company’s two drill ships, the Kulluk and the Discoverer, Shell is sending the vessels to an undisclosed location in Asia for major renovations and repairs. Since winning a license to drill in the notoriously choppy seas in 2005, the company has spent $4.5 billion searching for oil. The news suggests a crisis of confidence on the part of Shell, and is being celebrated by environmental groups that hope to use the company’s failure to make strides against future drilling in the pristine Arctic.
Consensus estimates are that about 22% of the world’s remaining oil and gas lies underground within the Arctic Circle. Obviously Shell would profit from tapping into those reserves, and there are other companies in the game as well, with ConocoPhillips (ticker NYSE-COP) having reaffirmed its plans to open exploration wells in the Chukchi Sea in 2014. Moreover, Norway has recently boosted its estimates for undiscovered oil in the Arctic, from 16.2 billion barrels to 18.7 billion. That country hasn’t opened up new drilling since 1994, but will decide this summer if it will expand into the Arctic itself, with acreage in the Barents Sea.
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. This drilling was completed safely, with no serious injuries or environmental impact.
After the drilling season ended, however, one of Shell’s drilling rigs, the Kulluk, was damaged in a maritime incident related to strong weather conditions. The Kulluk and the second drilling rig, the Noble Discoverer, will be towed to locations in Asia for maintenance and repairs.
The Kulluk experience of 2012 provided Shell with valuable experience in offshore arctic drilling in the nastiest conditions. The company will be back in 2014 ready to carry-on.