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Shell Suspends Arctic Drilling After 'Disappointing' Test Well Results

Royal Dutch Shell plc announced Monday that it was disappointed with the results from an exploratory well in Alaska's Chukchi Sea, and was abandoning further activity in the Alaskan Arctic "for the foreseeable future."

Shell said it drilled its Burger J well to a total depth of 6,800 feet, at a location in the Chukchi about 150 miles from Barrow, AK, and in about 150 feet of water. The super major said it found traces of oil and natural gas, but they were not sufficient enough to warrant further exploration in the Burger Prospect. The well will be sealed and abandoned.

Despite seven years of efforts to drill in the Arctic offshore, the company said its decision to cease further activity there "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."

According to Shell, it is in the process of demobilizing equipment and its employees from the Chukchi region. The company said it expects to take a financial hit from the news, and will provide an update when it releases its 3Q2015 results. It said the balance sheet carrying value for its position in Alaska is approximately $3 billion, and it has an additional $1.1 billion committed to future contracts.

Shell holds a 100% working interest in 275 Outer Continental Shelf (OCS) blocks in the Chukchi.

"The Shell Alaska team has operated safely and exceptionally well in every aspect of this year's exploration program," Marvin Odum, director of the company's Upstream Americas division, said in a statement. "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 U.S. However, this is a clearly disappointing exploration outcome for this part of the basin."

In a separate statement Monday, U.S. Sen. Lisa Murkowski (R-AK), who chairs the Senate Committee on Energy and Natural Resources, said she was "extremely disappointed" by Shell's decision, but trained her ire on the Department of Interior (DOI).

"What we have here is a case in which a company's commercial efforts could not overcome a burdensome and often contradictory regulatory environment," Murkowski said, adding that DOI "has made no effort to extend lease terms...placed significant limits on this season's activities, which resulted in a drilling rig sitting idle, and is widely expected to issue additional regulations in the coming weeks that will make it even harder to drill.

"Add this all up, and it is clear that the federal regulatory environment -- uncertain, ever-changing, and continuing to deteriorate -- was a significant factor in Shell's decision."

Over the years, the company's Arctic plans have run aground -- literally and figuratively.

In 2012, its offshore drilling unit Kulluk ran aground off the coast of Sitkalidak Island, AK (see Daily GPIJan. 3, 2013). The following year, DOI blasted Shell for inadequate oversight of its Arctic program, and the company put its drilling plans on hold (see Daily GPIMarch 18, 2013). It did so again in May 2014, shortly after the ascension of Ben van Beurden as CEO, but three months later he touted the Arctic as a big potential opportunity for the company (see Daily GPIAug 4, 2014May 20, 2014).

This summer, environmental groups bitterly opposed to Shell's plans tried to block the company from leasing port facilities in Seattle, and physically attempted to prevent the icebreaker MSV Fennica from traversing the Willamette River in Oregon, after undergoing repairs in Portland, OR (see Daily GPI,July 8).

“Polar bears, Alaska’s Arctic and our climate just caught a huge break,” Miyoko Sakashita, oceans program director at the Center for Biological Diversity, said Monday. “Here’s hoping Shell leaves the Arctic forever.”

Shell first filed plans to explore the Chukchi in May 2009, but revised them in March of this year, saying it planned to drill up to six wells in the Burger Prospect. That same month, DOI upheld a disputed federal oil and natural gas auction held in 2008, awarding more of the leases to Shell (see Daily GPI, March 31). The super major made bids totaling $2.1 billion, but has spent an estimated $7 billion on its Alaska offshore program, which so far has yet to create any commercial production (see Daily GPI, April 10).

Last month, DOI's Bureau of Safety and Environmental Enforcement (BSEE) approved one application for permit to modify (APM) for the Burger J well after a capping stack -- safety equipment used to prevent well blowouts -- was brought to the site (see Daily GPIAug. 18). The APM allowed Shell to proceed with drilling into deeper, potential oil-bearing zones.

Shell had also applied for an APM for a second Chukchi well, Burger V, but it has not yet been approved by BSEE. It was unclear if Shell would abandon the application. Among the several conditions for Shell's original permit to drill, which was issued in July, the company was barred from drilling at both wells simultaneously (see Daily GPIJuly 22).

The current estimated recoverable oil and gas in Chukchi is 4.3 billion boe, four times more than in 2008 (see Daily GPI, Nov. 3, 2014).

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