By announcing the end of its exploration campaign in the north of Alaska, Shell delighted environmental NGOs. But the self-imposed moratorium, to the degree it even exists, will not last.
PARIS — The polar bear lovers have claimed victory. On Sept. 28, Shell announced it was suspending its exploration campaign in the Chukchi Sea, in the north of Alaska, after disappointing results. Many saw in this retreat the signal they'd been waiting and hoping for: oil companies have finally given up on the Arctic's black gold. Greenpeace and other environmental NGOs exulted on social networks.
Their reaction is understandable. But is it also premature? "There is still a lot of oil activity in the Arctic, for instance on land in Alaska and in Russia, or offshore in Norway," says Mikå Mered, the president of the regional consultancy firm Polarisk.
ENI and Statoil are about to launch their Goliat project — slated to become the world's northernmost production site — in the Barents Sea off the coast of Norway. This past summer, the Norwegian government launched a bidding process for petroleum activity licenses in a separate area of the Barents Sea. And in the Pechora Sea, off the coast of Russia, Gazprom is already extracting oil. Production there, in the Prirazlomnoye oil field, began last year.
If Shell's failure brought Arctic oil exploration to a halt, it's only in the most fragile areas — in the polar Chukchi and Beaufort Seas, off the coasts of Alaska, Canada or Greenland, which are frozen most of the year (unlike the Barents Sea).
"Many companies, such as ConocoPhillips, Statoil, ExxonMobil or Chevron, let Shell go first by taking on a "wait and see" attitude," says Jon Marsh Duesund, an Arctic specialist at the Oslo-based advisor Rystad Energy. "I don't see them returning there before at least five years." Chevron, ExxonMobil and BP reportedly already announced this year that they were suspending their operations in the region.
Exploratory drilling in this extreme environment involves huge logistical costs and challenges. The window of time during which the waters are not frozen is reduced to three or four months in the summer. The weather conditions (the cold air, storms, icebergs) make operations technically complex and hazardous. And the constraints imposed to limit the consequences of a possible leak in this extremely fragile ecosystem are huge.
Shell knows a thing or two about this. During a previous attempt, in 2012, the company faced a series of setbacks. One of Shell's anti-oil slick systems failed a test, which prevented it from drilling down to the layers of oil. Then one of its vessels became stranded on the way back. For its 2015 campaign, the company took precautions: it brought two oil rigs on site, as well as some 30 ships, seven planes and a host of other equipment and machinery.
Needless to say, the efforts weren't cheap: in the past 10 years, the group burned through a whopping $7 billion on its Chukchi Sea adventure. Shell has also had to face virulent environmental protection campaigns from top global NGOs. Greenpeace, in particular, organized various high-profile protests — including rallies with hundreds of kayaks — to protest and raise awareness among U.S. regulators.
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A polar bear on a frozen stretch of the Arctic Ocean. Photo: NOAA National Ocean Service
And yet, neither the exhorbitant exploration costs nor the legal or political risks were what really turned Shell and others off the idea of Arctic drilling. Those are things the companies are willing to live with given the potential windfall represented by the area's estimated oil and gas reserves of 90 billion barrells and 47 billion cubic meters respectively, according to a 2008 assessment report by the U.S. Geological Survey. The energy giants are in vital need of renewing their reserves, and the Arctic is one of the rare "new frontiers" where they hope to make major discoveries.
What did impact their push into the Arctic are falling oil prices, which are down by 50% since June 2014. On paper, that's not something companies would normally worry too much about with regards to long-term investment projects.
"We don't make investment decisions based on the price of oil in the short term," Tim Domson, head of the Statoil exploration, explained last January in an interivew with Les Echos. "In the Arctic, the time between the first drillings and production is more than 10 years. By then the price of crude oil will have gone back up."
Still, the low prices are a problem in terms of short-term cash flow, forcing companies, as a result, to squeeze investments.
Another determing factor are the sactions Russia imposed on Western companies, meaures that aim directly at the technologies needed for offshore exploration of the Arctic. ExxonMobil and Rosneft announced in September 2014 a potentially huge discovery in the Kara Sea, but had to close up the oil wells and interrupt their programs to respect the sanctions. The Russian companies Rosneft and Gazprom have neither the means nor the necessary technologies to pursue the venture on their own.
For now, the project is being shelved — at least until 2020 or 2021, Russia's energy minister announced in September. Overall interest in Arctic oil, however, isn't likely to disappear. Companies may have frozen their projects, but they haven't buried them for good.