That article was published at the McAlvany Intelligence Advisor on Friday, August 21, 2015:
Map showing the location of the East Siberian Sea, part of the Arctic Ocean, located north of Siberia and between the Laptev Sea and Chukchi Sea.
The last time Shell tried to find oil in the Arctic Ocean, it was 1991. Since then, challenges from environmental groups, escalating costs, and changing economies have stymied the company, or any of its competitors, from continuing their search.
In 2008, however, Shell succeeded in obtaining a lease to drill in the Chukchi Sea, off the northeast corner of Alaska. It paid $2.1 billion for the opportunity and has invested more than $7 billion since then.
It stubbed its toe in 2012 when its multi-billion-dollar Kulluk drilling rig ran aground, delighting environmentalists, and stalling its efforts for the next three years.
So far, for its efforts, it has not obtained a single drop of oil or a single cubic foot of natural gas.
And yet, knowing in May that final approval was coming to allow it to drill an exploratory well, Shell set out to determine if the enormous cache of oil and natural gas estimated to lie beneath the sea could be discovered and delivered.
Aside from the immense costs, there were obstacles placed by the greenies, including complaints by the Sierra Club and its “kayaktivists.” Said Michael Brune, the group's executive director:
To preserve his climate legacy, President Obama must change the course on Arctic drilling set eight years ago by former President george w. bush, and not perpetuate it.
Granting Shell the permit to drill in the Arctic was the wrong decision, and this fight is far from over. The people will continue to call on President Obama to protect the Arctic and the environment.
Its “kayaktivists” tried to block Shell's drilling rig, called the Polar Pioneer, from leaving Seattle in June. Early Monday morning, June 15th, 16 kayakers surrounded the 400-foot-long, 300 foot-tall colossus, in their protest. It took the US Coast Guard to remove them before the rig could be towed out to sea.
This was seconded by Franz Matzner, director of the Beyond Oil Initiative at the Natural Resources Defense Council:
Shell has already proven itself not [to be] up to the challenge of development in the Arctic Ocean.
But it's not just Shell. The fact is, there's no safe way to pursue oil exploration in the frozen wastes of the Arctic Ocean.
This is an inexplicable decision to do something that is dirty, dangerous, and unnecessary.
And then there are the risks, not only financial but credential if not existential. A report from Ernst & Young spelled out those risks:
The intense cold for much of the year, long periods of near-total darkness, the potential ice-pack damage to offshore facilities, the marshy tundra dictating seasonal activity in many areas … will take a huge toll on equipment and personnel.
Those risks were enough to dissuade ConocoPhillips and Norwegian oil giant Statoil from pursuing their own efforts. In 2012, france's Total CEO Christophe Margerie told theFinancial Times that an “oil [spill] … would be a disaster. A leak would do too much damage to the image of the company,” while its current president, Patrick Pouyanne, said: “At $50 a barrel, it does not make any sense.”
Claudio Descalzi, head of the Italian oil company Eni, also demurred: “It's too complicated. Everything that is too complicated is too expensive and too risky – and my job is to reduce risk.”
But Shell is willing to take those risks, learn from its mistakes in 2012, and satisfy the environmentalists, in the hopes that it will succeed in unlocking the vast potential under the oceans there. As Curtis Smith, a Shell spokesman explained:
The program has been fortified by new assets, an increased number of vessels, but most notably a new drilling rig.
It's our view [that] we have put together the most environmentally sensitive, technically sound Arctic program ever assembled, and if we didn't have confidence in it, we wouldn't execute it, even if we had all the permits.
It's a massive effort. It currently has two drill vessels and 28 support vessels operating in the Chukchi Sea and is working against the clock. All operations will be forced to cease in late September when the weather turns inhospitable.
Why would they bother? With all the opposition, all the hassle, all the expense, the risk of damage to the company's reputation in the event of a spill, why throw good money after bad?
Because that is what capitalists do. They perceive a need, a demand, an opportunity, they assess the risks, and, when all is said and done, take the plunge (pun intended).
What is the potential reward? In the immediate area where Shell is exploring, the Interior Department has estimated that there are 22 billion barrels of recoverable oil, using today's technologies. At $50 a barrel, that's $1.1 trillion. And that doesn't count the 93 trillion cubic feet of natural gas that's also estimated to be there.
But the US Geological Survey, in its own survey of a much wider area than just where Shell is drilling, estimates there could be 412 billion barrels of oil. At $50 a barrel that translates into $20.6 trillion, more than the entire economic output of the US in a year. If those estimates prove to be true, that would pay for a lot of hassle and heartburn.
Sources:
Washington Times: Feds allow Shell to drill for oil in Arctic Ocean off Alaska
Wall Street Journal: U.S. Issues Arctic Drilling Permit to Royal Dutch Shell
Background on Royal Dutch Shell
New York Times: Way Cleared for Shell to Start Drilling in Arctic Ocean
New York Times: Shell Wins Final Permission for Arctic Oil and Gas Drilling
The Guardian: Shell's Arctic oil rig departs Seattle as ‘kayaktivists' warn of disaster
The Guardian: The lure of the Arctic
New York Times: Shell's Record Adds to the Anger of Those Opposing Arctic Drilling
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