Circular Economy

Shell's $7B Foray Into Arctic Drilling Fails; Environmentalists Rejoice

Royal Dutch Shell announced Monday it has aborted its mission to drill for oil in the Arctic after failing to find enough of it, according to the Associated Press. The move, which darkens the outlook for long-term domestic oil drilling here in the U.S., validates environmental groups such as Greenpeace, which has relentlessly campaigned against the company for years in efforts to prevent what Executive Director Annie Leonard has called “a terrible mistake.”

By Sustainable Brands | Published 9 years ago | About a 6 minute read

Royal Dutch Shell announced Monday it has aborted its mission to drill for oil in the Arctic after failing to find enough of it, according to the Associated Press. The move, which darkens the outlook for long-term domestic oil drilling here in the U.S., validates environmental groups such as Greenpeace, which has relentlessly campaigned against the company for years in efforts to prevent what Executive Director Annie Leonard has called “a terrible mistake.”

The announcement comes just six weeks after the final U.S. clearance to drill and three months after Shell was still defending the viability of the project.

When Shell began drilling in Alaska’s Chukchi Sea this summer, the company said the time and expense were justified by the size of the potential prize; its Burger J well is in an area that has been estimated as potentially holding 4.3 billion barrels of recoverable oil.

However, the company said in a statement on Monday that while it had found “indications” of oil and gas in the area, they are not sufficient to warrant further exploration.

“Shell will now cease further exploration activity in offshore Alaska for the foreseeable future. This decision reflects both the Burger J well result, the high costs associated with the project, and the challenging and unpredictable federal regulatory environment in offshore Alaska,” it said.

The oil giant has spent about $7 billion on offshore Arctic development in the Chukchi and Beaufort Seas since 2007, or roughly 20 percent of its exploration budget.

“Shell continues to see important exploration potential in the basin, and the area is likely to ultimately be of strategic importance to Alaska and the US,” said Marvin Odum, director of Shell Upstream Americas. “However, this is a clearly disappointing exploration outcome for this part of the basin.”

Environmental groups have opposed Shell’s drilling program both because of the risk of a spill in the vulnerable waters of the Arctic and because of the potential implications for climate change of opening up new sources of oil for long-term production.

“If Shell tries to drill in the harsh Arctic environment, then oil spills are inevitable,” Greenpeace Arctic campaigner Mel Evans said in August. “And an oil spill in the remote Arctic would be impossible to clean up, leaving local people and wildlife to suffer the consequences for years.”

For now it’s a moot point. Shell has spent roughly $7 billion on Arctic exploration to date and said Monday it could pay up to $4.1 billion more for pulling out of the area. This is the company's second major setback in the Arctic; in 2012, it ceased exploration for three years after when a drilling rig broke free and ran aground.

"The entire episode has been a very costly error for the company both financially and reputationally," said analysts at Deutsche Bank.

This is also the latest in a series of setbacks for other oil producers attempting to find oil and gas deposits — estimated at 20 percent of the world's undiscovered resources - in the Arctic. Earlier this year, Norway's Statoil postponed its Arctic Johan Castberg project again and in 2012 Russia's Gazprom, along with Total and Statoil, scrapped its Shtokman gas project in the Arctic Barents Sea.

“Shell’s abandonment of drilling and cancellation of all exploratory activity in the Arctic is joyous news for our climate, communities along the Arctic Ocean, and the hundreds of thousands of people who have joined in public protests saying ‘Shell No’ to Arctic drilling," said Sierra Club executive director Michael Brune. “We hope this announcement leads President Obama to cancel the proposed 2016-2017 lease sales, remove the prospect of Arctic drilling from the 2017-2022 Outer Continental Shelf five year leasing plan, and permanently protect the Arctic from the dangers of oil and gas drilling."

Greenpeace, whose campaign against Shell’s Arctic exploration has included everything from pressuring former partner LEGO to distance itself, to activists physically blocking ships from leaving port by dangling from a bridge, to a Titanic-themed orchestral performance outside Shell’s London headquarters, declared victory at the company’s announcement.

“Big oil has sustained an unmitigated defeat,” said John Sauven, executive director at Greenpeace UK. “They had a budget of billions; we had a movement of millions. The ‘unpredictable regulatory environment’ that forced Shell out of the Arctic is otherwise known as massive pressure from more than 7 million people. For three years we faced them down, and the people won.”

While Greenpeace may want to take credit, a more likely culprit may be plummeting oil prices — which have fallen from more than $115 a barrel to less than $50 in the past year — challenging the viability of exploration and production in treacherous areas such as the Arctic; dozens of projects have already been put on hold, according to the Financial Times.

"Arctic exploration has been a clear casualty of the oil price slump," said Peter Kiernan, oil and gas analyst at the Economist Intelligence Unit.

And with a limited amount of fossil fuels that can be burned if the world is to keep rising temperatures in check, scientists have ruled out drilling for oil and gas in the Arctic as “inconsistent” with efforts to tackle climate change.

Interestingly, Shell has already acknowledged the need for a Plan B: In February, its board of directors ratified a shareholder resolution that committed the oil giant to investing in a low-carbon future. The resolution called for the company to commit to reducing its greenhouse gas emissions, invest in renewable energy, scrap bonus systems associated with climate-harming activities, and base its business model risk assessment against the widely considered “safe” warming limit of 2ᵒC.

With scores of companies and governments committing to slash their greenhouse gas emissions and switch to 100 percent renewable energy during Climate Week last week, and divestment on the rise as a growing number of global investors looking to rid their portfolios of fossil-fuel-related investments, the timing couldn’t be better for Shell to turn a substantial loss from stranded assets into a business case for helping lead the charge to a clean energy future.