Why did Shell walk away from Alaska?

When Shell announced it was pulling out of the Arcticfor the foreseeable future,” it surprised just about everyone. Many in Alaska had high hopes for offshore drilling — from an Arctic economic boom to more oil for the Trans Alaska Pipeline. Shell’s announcement left the state wondering what to blame — low oil prices? Tough regulations? Better prospects elsewhere?

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Shell's Polar Pioneer leaving Dutch Harbor on Monday, Oct. 12, heading for Washington State. (Photo: John Ryan, KUCB)
Shell’s Polar Pioneer in Unalaska on Monday, Oct. 12. The rig is heading for Washington State. (Photo: John Ryan, KUCB)

In other words, is it us? Or is it Shell?

Kara Moriarty heads up the Alaska Oil and Gas Association. And she said…maybe it’s us.

“I think we have to ask ourselves, why did it take so long?” Moriarty said.

In other words, why did it take seven years, from when Shell bid for leases in the Chukchi Sea in 2008, to when it finally drilled its Burger J well this summer?

Moriarty blamed the slow pace of federal permitting and a thicket of regulations.

“We can’t control geology, and we can’t control the company’s decisions,” Moriarty said. “But what we can control, as Alaskans and Americans, is to make sure that we have the right policies in place.”

And, she thinks we don’t. That is also the view of many of Alaska’s elected officials. Sen. Lisa Murkowski called the federal regulatory environment “uncertain, everchanging, and continuing to deteriorate,” while Congressman Don Young complained of “insurmountable” hurdles.

But the full story is more complex. Shell declined a request for an interview, but in a statement, the company pointed to three things: first and foremost, the Burger J well itself.

“The killer was the results from the well,” said oil and gas consultant Brad Keithley. If Shell had found the elephant field it was hoping for, red tape probably wouldn’t have been an issue. But, “with declining cash, with increasing costs, you’ve got to have real blockbuster results to keep yourself in a position to go forward – and they didn’t have that.”

In its statement, Shell said it “found indications of oil and gas” but not enough to justify further exploration. We’ll never know exactly what they found, Keithley said. They’ll keep that information close, and perhaps dust it off five, ten, or fifteen years from now, if they ever decide to return.

Another issue Shell cited was what it called a “challenging and unpredictable” regulatory environment.

“I would agree that there was a challenging regulatory environment,” said Lois Epstein, of the Wilderness Society. “But that was absolutely essential.”

She pointed out that many of the regulations Shell faced were put in place after BP’s oil spill in the Gulf of Mexico. After that disaster, she said, it was clear there needed to be more stringent rules for the Arctic, where a clean-up would be much more difficult. But on one point, she agreed.

“The regulations that are in place are appropriate, but they do make things a lot more expensive,” she said.

And that’s the third issue Shell cites – the sheer cost of the project. Over the years, costs and delays added up. The BP oil spill prompted a wholesale reorganization of the federal agencies that oversee offshore drilling. There was litigation challenging the Chukchi Sea leases. Shell finally reached the Arctic in 2012, but wasn’t allowed to drill into oil-bearing rocks because its oil spill containment dome failed during tests in Puget Sound. Then, after the 2012 season, Shell wrecked its drill rig, the Kulluk, off Kodiak while trying to drag it across the Gulf of Alaska in the dead of winter. That put off drilling for another year.

“Shell was down to one hole,” Keithley said. “If there hadn’t been the delays, if things had gone better –frankly if Shell had done some things better — if they had been able to get out there before oil prices collapsed and cash flow fell away, they might have been able to drill more wells, and they might have found that their second or third location was the one with the oil.”

As it was, Shell ended up drilling its first well in 2015, with oil prices hovering around $50 a barrel.

And during the years that Shell spent navigating the challenges of the Arctic, other opportunities had opened up, opportunities that weren’t even on the horizon when the company first bid for the leases. New technology unlocked new, and cheaper, resources.

“Additional opportunities, like shale, like offshore Brazil, offshore Africa, the Gulf of Mexico, have opened up in a way that have made the Arctic less important in terms of that new frontier,” Keithley said.

Shell’s decision is part of a broader trend. In just the last two years, Chevron and ExxonMobil shelved projects in Canada’s Beaufort Sea. Exploration off Greenland ended in 2012 after disappointing results.

And Shell itself has other balls in the air. It is in the midst of a $70-billion deal to acquire the British company BG Group, which comes with offshore assets in Brazil and a focus on natural gas.

So, is this the end of offshore drilling in Alaska? Keithley said yes, for now.

“Shell put its best foot forward,” he said. “I think the industry is probably uncertain about where to try next.”