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Shell's departure will mean no drill rigs in Chukchi Sea

Published:Tuesday | September 29, 2015 | 10:40 AMAP

Royal Dutch Shell is giving up on its expensive and controversial push to produce oil in Alaska's Arctic waters "for the foreseeable future" - a decision that darkens the long-term oil prospects of the US and brings relief to environmental groups that had tried desperately to block the project.

Shell is abandoning the region "for the foreseeable future" because it failed to find enough oil to make further drilling worthwhile.

The company has spent more than US$7 billion to explore for oil in Alaska's Arctic, slogging through a years-long regulatory gauntlet and attracting spite from environmental groups who feared a spill in the Arctic's harsh climate would be extremely difficult to clean up and devastating to polar bears, walruses, seals and other wildlife.

But Shell, drilling to 6,800 feet about 80 miles offshore in the Chukchi Sea off Alaska's northwest coast and supported by a 28-vessel flotilla, just didn't find much.

The company cited disappointing results from a well drilled during the 2015 open-water season in the waters north of the Bering Strait off Alaska's northwest coast. The company also cited the "challenging and unpredictable federal regulatory environment in offshore Alaska".

Shell, in February 2008, was by far the most robust bidder for Chukchi Sea leases and its departure means no company has plans on the books to drill there. ConocoPhillips also committed substantial funds for leases.

The US Geological Survey estimates US Arctic waters in the Chukchi and Beaufort seas contain 26 billion barrels or more of recoverable oil in total. Shell officials had called the Chukchi basin "a potential game changer," a vast untapped reservoir that could add to America's energy supply for 50 years.



Royal Dutch Shell, bidding as Shell Gulf of Mexico Inc, submitted 275 high bids at a cost of US$2.1 billion. Shell bid US$105 million for one tract that worked out to be US$18,497 per acre. Shell was outbid on 27 other tracts. Shell committed upwards of US$7 billion for Arctic offshore exploration.

Oil giant ConocoPhillips paid US$506 million for 98 tracts. It was outbid on 47 other tracts. ConocoPhillips made plans for an exploratory well in 2014 but backed off in April 2013. The company said that given the huge investment required to operate offshore in the Arctic, it would not be prudent to move ahead until regulatory requirements were clarified.

Other national and international oil companies also have smaller lease holdings in the Chukchi Sea: Spain-based Repsol E&P USA Inc paid US$14.4 million for 93 leases; Norway-based Statoil Hydro USA E&P Inc paid US$14.4 million for 16 tracts; Italian company Eni Petroleum US LLC paid US$8.9 million for 17 tracts; and Iona Energy Company (US) Limited, a Canadian company operating in Scotland, and US-based North American Civil Recoveries Arbitrage were high bidders for one tract each at US$61,000 and US$400, respectively.

Shell, which is based in The Hague, Netherlands, warned investors Monday that the disappointing well results would lead to a charge against its earnings for the third quarter. It didn't disclose the size of the charge, but it said the accounting value of the project is US$3 billion, with another US$1.1 billion in commitments to contractors.

The company took charges of US$2.1 billion in 2013 and US$1.9 billion in 2014, also as a result of disappointing drilling results in the United States.