Shell Arctic Drilling: Considerations urge caution


imagesThe Obama administration appears to have given green light to Shell Oil Company to resume its plan to drill in the highly oil-rich Chuchki Sea in the Arctic offshore Northern Alaska. This follows an aborted effort to commence this program in 2012 when poor preparations and mistakes led to junking the two drilling vessels then sent to the area. In particular, a containment dome designed to cap runaway wells failed a crucial test. Environmental groups have stated that an oil spill in the drilling area would or could be more costly to inhabitants and wildlife than the BP Deepwater Horizon spill offshore Louisiana is 2010, which has already cost BP and others over forty billion dollars. The International Business Times said, “The Chuchki Sea is prone to icy waters, major storms and waves that can reach 50 feet high. In the event of a spill or accident the closest Coastc Guard resource with necessary equipment is more than 1000 miles away. The Alaskan coast nearby has no roads leading to major cities or ports for hundreds of miles”. Compare this to the BP spill area immediately accessible to all types of assistance – yet spilling crude oil for weeks as a result of human error and equipment failure

An almost unprecedented campaign by people and a number of organizations is underway to try and stop Shell from this initiative. Interestingly, one group is appealing to Shell shareholders asking them to consider whether they believe Shell should be risking this amount of money or more to bolster the company’s relatively modest reserve of proven oil. In 2012, Shell stated that it had $ 6,196MM bbls of proved reserves versus 12,816MM bbls. for ExxonMobil. 10,050MM bbls for BP and 16,773MM bbls, for Russian Rosneft. Drilling down on the Shell number, it includes 1,763MM bbls, for “synthetic crude oil”, which must largely be crude derived from Canada’s tar sands. So, Shell is really lagging behind its rivals in establishing proven “normal” crude oil. Remember also that Shell was castigated not many years ago for overstating its reserves, leading to management changes as I recall.

Looking at these figures, one might ask, is the Shell Arctic initiative a sort of “Hail Mary”  pass to try and ramp up Shell’s crude oil reserves? That may be a harsh judgment? If Shell believes that its approach is as safe as an be, how do we know that all the appropriate authorities have totally vetted the proposed drilling and recovery systems to assure double or triple backup protection against unforeseen events, accidents, human error, etc?

At this time, crude oil price is around $ 50-60, far too low for justifying Shell’s potential investment. With the U.S. continuing to produce more and more oil from shale it is difficult to project when oil will steadily sell at over $ 100/bbl, Renewables are cutting into oil demand creating downward pressure on crude oil.

All of this makes me wonder whether this is a good time to go ahead with Arctic drilling. Perhaps that’s worth another look in 5-10 years.





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