Tech & Science

Shell Is Reeling After Pulling Out of the Arctic

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10/23/15
In the Magazine
Rusting barrels sit on the beach along the Chukchi Sea on July 7 in Shishmaref, Alaska. Shell Oil recently announced it would suspend its Arctic oil exploration "for the foreseeable future," stunning opponents and supporters alike. Andrew Burton/Getty

Earlier this month, Shell’s tumultuous Arctic drilling campaign came to an abrupt and costly end. In a written statement, the company announced the cessation of its offshore Alaska activities “for the foreseeable future”—at a loss of billions of dollars. This both stunned and thrilled critics, many of whom worried that the seven-year effort to stop Shell was dead in July, when the Obama administration approved the company’s permits to drill.

But the truth is, this was a long time coming. Over the past several years, in response to lawsuits by environmental groups and Alaska Natives, public pressure for greater safety following the BP Deepwater Horizon disaster in the Gulf of Mexico, and Shell’s series of failures in the Arctic, the federal government placed significant regulatory restrictions on Shell’s permits. These included effectively limiting Shell to drilling just one hole at a time and giving the company only a relatively short, three-month period to work in the Arctic. With the goal of avoiding the coming winter ice and severe weather which had resulted in the wreck of Shell’s Kulluk rig in December 2012, President Barack Obama’s administration had stipulated that Shell had to wrap up its exploration activities on September 28 and send its 29-vessel armada back to port; they would be allowed to return next summer.

And Shell’s operations faced obstacles even in the relatively milder summer months. In early July, Shell’s Fennica rig tore a gash in its ballast tank en route to the Chukchi Sea, delaying the start of operations for several weeks while it was repaired in Portland, Oregon. Then, once drilling was underway, strong winds and high waves in late August and early September forced Shell to temporarily suspend activities for several days.

All the while, self-titled “#ShellNo” protesters specifically focused on shrinking Shell’s tight three-month drilling window with actions that slowed the movement of its rigs to Alaska as they traveled in and out of Washington and Oregon.

There was also the near collapse of oil prices from about $150 per barrel in 2008 (when Shell purchased its leases) to less than $45 this past summer. Despite all this, Shell had publicly renewed its commitment to the Arctic as recently as mid-September. In an interview with the BBC, Ben van Beurden, Shell's chief executive officer, said production would not take place until at least 2030, thereby allowing the company to avoid having to sell the oil at the current low prices or lowering the price further by adding more product to an already saturated market. It is a stalling tactic that was echoed one week later by Exxon Mobil’s senior Arctic consultant, Jed Hamilton, who said, “American oil companies should explore for crude in Arctic waters so they can bring it up by the time the nation’s shale oil fields have been mostly drained, in two decades.”

Related: Greenpeace Protesters Block Shell Drilling Vessel From Leaving Portland 

Value accrues even without production in two ways. The most significant comes when the company is able to count the Arctic oil among its holdings, known as “booking reserves,” which would occur when (and if) Shell could prove that there was oil there that it could, and planned to, produce. Shell could also expect to get a short-term bump in its share price if it was able to demonstrate that it could anticipate being able to book those reserves in the future. Shell was likely unable to find enough oil in the one hole it had time to drill to meet these needs, and then it determined that the costs—already topping $7 billion—would not outweigh the benefits of moving forward.

Shell really needed that boost. There is an old industry adage that when “you can’t find oil in the field, find it on Wall Street”—which is why Shell is in the midst of seeking regulatory authorization for the second largest oil company merger in history: a $70 billion bid for the London-based BG Group. The merger is critical to Shell’s corporate health; the company’s profits collapsed by nearly 50 percent from 2012 to 2014 (versus 28 and 27 percent for Exxon Mobil and Chevron, respectively), and holding the dubious distinction of having the worst “reserve replacement ratio”—the rate at which a company replaces the oil and gas it produces with new finds—of any major oil company, which is also why Shell was sticking it out in the Arctic longer than just about anyone else.

But the increasingly negative public reaction its Arctic operations were attracting was not helping its cause. In fact, short of the Keystone XL oil pipeline, it is hard to recount an active oil project in recent history that has faced a more concerted and global opposition. Besides other well-known actions in places like Seattle and Portland, there was a steady deluge of protest at Shell’s London headquarters, including a weeklong encampment by a double-decker-bus-sized polar bear and live performances of “Requiem for Arctic Ice” by a 10-piece string orchestra. On September 10, Shell was very publicly ousted from Prince Charles’s corporate climate group, which it had helped found, over its Arctic drilling.

10_23_ShellArctic_02 The Shell floating drill rig Kulluk sits in Kodiak Island's Kiliuda Bay on January 7, 2013, after running aground a week earlier on Sitkalidak Island. Shell rigs like this have faced massive protests from around the world. James Brooks/Kodiak Daily Mirror/AP

Shell knew the chances it would ever be able to book reserves that it did find were shrinking, leaving little reason to incur the risks involved in maintaining a drilling presence in the Arctic. For example, even if Shell had stayed and found oil, it would have been required to apply for a new drilling permit, and the likelihood of receiving it was looking increasingly grim. In their efforts to court their environmental base, both leading Democratic contenders for president made clear their opposition to Shell’s Arctic drilling (Hillary Clinton) and to drilling in the Arctic altogether (Bernie Sanders).

Meanwhile, Obama’s historic trip to Alaska last month was meant to showcase his boldest case yet for action on climate in advance of the United Nations climate talks in Paris in November. “I’m dragging the world behind me to Paris,” Obama reportedly said. But instead, the visit was met with jeers of “climate hypocrisy,” with Shell’s drilling rigs—approved by his administration—looming in the public mind like a mental backdrop to every selfie and GoPro video he shot. In one video, Obama stood on the edge of Bristol Bay proudly discussing how he’d protected the area from oil drilling because “it’s such a sensitive site and people are so dependent on it for their economy, their livelihood and just for sustaining their families.” The same could be said for the communities living on the nearby shores of the Chukchi Sea.

Wainwright, Alaska, population 550, sits on the Chukchi Sea on the far northern edge of Alaska’s North Slope. The Inupiat who call it home have lived on the North Slope since A.D. 500, and for its entire history, what is now called Wainwright has been a subsistence village heavily dependent on the sea and the land.

Shell was drilling about 70 miles from shore. This is about the same distance that BP’s Deepwater Horizon operated in the Gulf of Mexico from Boothville-Venice, Louisiana—the closest populated area to the rig. And just as Shell planned to remain in the exploratory phase of its operations for years, BP was in preproduction when the Macondo well suffered an uncontrolled blowout leading to the largest offshore drilling oil spill in history. “I’m really worried about Shell,” James Griffin, a custodian at the village’s only school, told me. “If there’s a spill, that’s our whales and our seals. That’s our way of life.”

The walls of 63-year-old Ida Panik’s home proudly display photo collages of whale catches led by her husband and father, both whaling captains. “We protect them, and they provide for us,” she said. “We need each other.” Shell’s presence, she worried, threatened “our beluga, our bearded seal, our whale, which we depend on.”

On July 20, as Shell’s armada arrived in the Chukchi, Inupiaq rap artist Allison Akootchook Warden, aka “AKU-MATU,” was performing in the city chambers. Warden, who lives in Anchorage, Alaska, and was partially raised in the village of Kaktovik in the Arctic National Wildlife Refuge, opened her rap in Inupiaq: “Allai siakputallaŋuqtuq. Nunakput allaŋuqtuq. Sikuiqsuq”—“It is so wrong that our weather has changed, bringing with it the transformation of our land and our nation. There is no more ice.” Like so many other coastal Alaskan villages, Wainwright and Kaktovik are slipping into the ocean.

Climate change politicized Warden, but oil drilling led her to march in the streets of New York City with 400,000 others in September 2014 and to protest Shell’s Polar Pioneer rig in Seattle. “It’s a terrible thing to watch your culture be threatened in this way, our very way of life,” she says. “The people here, they haven’t seen [the Polar Pioneer] yet, but I have. It’s monstrous.”

Yet, a year ago, the village leadership signed an unprecedented agreement with Shell. Olgoonik, the village corporation, joined five other North Slope villages in paying a reported total of $45 million to buy an interest in Shell’s Chukchi leases (which are in federal waters)—making them direct financial beneficiaries of these operations. They had hopes of long-term oil revenue and immediate boosts to the local economy with jobs and increased local spending. But most of the workers staffing Shell’s operations here ended up coming from outside of the community, saving their income to spend at home with their families. These and other outsiders filled a 60-person “man camp” on the edge of the village; Shell had plans for another 300-person man camp (in a village of just 550 people) in the works.

Sitting on a bluff overlooking the Chukchi Sea watching for beluga whales, Tex Bodfish needed few words to express how he felt about Shell. Waving his arms aggressively out toward the sea, he exhorted the company, “Get out of here!”

He got his way—at least for now. In the announcement that it was leaving, Shell reported finding “indications of oil and gas,” but, given the high financial costs involved and the “challenging and unpredictable federal regulatory environment in offshore Alaska,” these were insufficient to warrant further exploration. Shell will be sealing and abandoning the one and only well it drilled.

But on the same day Shell said it would stop drilling, it also announced that it “continues to see important exploration potential in the [Atlantic-Arctic] basin, and the area is likely to ultimately be of strategic importance to Alaska and the U.S.” And, the company added, it will not abandon its extensive Arctic leases, which include 275 blocks in the Chukchi Sea.  

Antonia Juhasz is the author of several books, including most recently Black Tide: The Devastating Impact of the Gulf Oil Spill.