Plunging Oil Prices Cast Doubt on Arctic Drilling

As oil prices continue to plummet, some corporations are scaling back on expensive exploration projects — like drilling in Arctic waters. But, one company with a major stake in the region has yet to tip its hand.

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Within the last few months, a handful of oil companies have backed away from the Arctic. Chevron decided to stop seeking government approval to work north of Canada. And over in Greenland, Statoil gave back three of its four licenses to drill offshore.

But Royal Dutch Shell has been quiet about whether it’s still planning to go back to Alaska this summer for the first time in three years.

drill-rigSpokesperson Megan Baldino wouldn’t comment on the role that oil prices might play in Shell’s decision. But Foster Mellen, a global oil and gas analyst with Ernst & Young, says it’s clear what they’re up against.

“Pretty much all companies — even the big, financially sound companies — are looking at very much reduced cash flows for the coming year,” Mellen says. “So discretionary spending such as high-risk, high-cost exploration is probably the first to be put on the shelf.”

Unless the price of oil is above $80 per barrel, Mellen says it doesn’t usually make sense to drill in the Arctic. Right now, the price is somewhere around $50.

But Shell’s investment in the Arctic might overshadow that. The company’s spent about $6 billion on its prospects in Alaska. And Malte Humpert, the executive director of the nonpartisan Arctic Institute, says that could spur Shell forward.

“They might really assume that prices go back up and it would take years anyways to develop the drills and get the oil out of the ground,” Humpert says. “But I think it would be a hard sell, to weigh those short-term roadblocks over long-term potential.”

Shell has walked away from the Alaskan Arctic once before, though. The company drilled several wells in the Beaufort and Chukchi seas in the 1980s.

But according to a fact sheet produced by the company, it was ”too expensive to operate given the technology and oil price regime that existed at the time.”

Shell didn’t turn its attention back to Alaska for more than a decade. In 2005, the company started buying up leases again — eventually spending more than $2 billion on sites in the Chukchi Sea.

Those leases have been the subject of a long-running legal challenge. And that could be the biggest hurdle Shell faces as they consider a return to the Arctic in 2015.

John Callahan is a spokesman for the Bureau of Ocean Energy Management in Anchorage.

“The court order prevents BOEM from formally processing — or what we call ‘deeming submitted’ — this exploration plan from Shell,” Callahan says. “However, this court order also explicitly allows BOEM to work with Shell, to get together and discuss ways the plan can be approved. And that’s what our people are doing.”

The formal review can’t start until the Secretary of the Interior decides whether to uphold the lease sale where Shell picked up big prospects in the Chukchi Sea. That decision is expected sometime in March.

That doesn’t leave a lot of time for oil markets to bounce back before Shell’s Arctic fleet would have to head north to start their drilling season.

The company’s expected to provide more details on its plans for the Arctic — and other ventures around the world — during a quarterly earnings call with investors on January 29.

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