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Huge Expectations, Huge Investment

“If you talk about 500 million barrels, I don’t think that will cut it. It must be a multi-multi-billion barrel discovery that we have there.”

After investing six years and $6 billion of its development capital, Royal Dutch Shell (ticker: RDS.A) is suddenly within earshot of obtaining final approval to begin offshore exploration for oil and gas on the leases it won in 2008 in the Chukchi Sea north of Alaska.

On May 11, the federal Bureau of Ocean Energy Management issued conditional permits that would allow Shell to begin exploratory drilling on its federal leases in the Arctic.

“After a comprehensive review and consideration of comments received from the public, stakeholders, and federal and state partner agencies and tribes, the Bureau of Ocean Energy Management (BOEM) today conditionally approved Shell Gulf of Mexico, Inc.’s revised multi-year Exploration Plan (EP) for the Chukchi Sea,” the BOEM announcement specified.

Paddle In Seattle

Paddle in Seattle

This development sent environmental protesters into a kayak-wielding frenzy in the Seattle harbor when the 400-foot Polar Pioneer drilling platform showed up at the Port of Seattle’s Terminal 5 for cargo and equipment loading.

According to the Wall Street Journal and Seattle area media, the environmental groups came to protest the overall concept of stopping fossil fuel development as much as to protest pending oil and gas activity in the Arctic north of Alaska. “We’ve got to wake up to the dangers of human-caused climate change,” one Seattle protester told the Associated Press.

Meantime, Shell is making preparations with the goal of beginning its offshore arctic exploration program this summer, while it awaits the remaining federal and state permits that it needs to have in hand before drilling may begin.

Remaining Conditions Shell Must Meet

In its announcement approving Shell’s drilling plan, the BOEM itemized some of the remaining conditions: “Among the conditions of approval is the requirement that Shell obtain all necessary permits from other state and federal agencies, including permits to drill from the Bureau of Safety and Environmental Enforcement (BSEE) and appropriate authorizations under the Marine Mammal Protection Act. Another condition of approval prevents Shell from commencing drilling operations until all Biological Opinions under the Endangered Species Act have been issued and requires all operations under the plan comply with the terms and conditions included in those Biological Opinions.”


 

ocs-ak-offshore-map

Shell’s revised exploration plan proposes the drilling of up to six wells within the Burger Prospect, located in approximately 140 feet of water about 70 miles northwest of the village of Wainwright, the BOEM news release reported. “Shell will conduct its operations using the drillship M/V Noble Discoverer and the semi-submersible drilling unit Transocean Polar Pioneer, with each vessel providing relief-well capability for the other. The two drilling units and their supporting vessels will depart the Chukchi Sea at the conclusion of each exploration drilling season.”


 

Bill-Walker-AKAlaska Gov. Bill Walker, elected last year, told Oil & Gas 360® that Alaska receives no remuneration or royalty participation from drilling on federal leases in offshore Alaska. “It all goes to the federal government. … We’re certainly very supportive of safe and responsible offshore development, but we also believe that we as a state should share in the revenues from that.”

To Walker’s point, Alaska Senator Lisa Murkowski introduced a bill last week that would generate revenues for Alaska from offshore oil and gas production in the Arctic.

High Stakes

The stakes are high for arctic oil and gas development. The United States Geological Survey estimates that most of the Arctic’s oil and natural gas resources—about 360 billion barrels of oil equivalent—are located in seven Arctic Basin provinces, with almost 30 billion BOE located in the Arctic Alaska basin alone, where Shell intends to drill. The National Petroleum Council estimates global offshore arctic conventional resources at 389 billion BOE.

The USGS’s estimate of 360 billion BOE is staggering, but so are costs associated with arctic drilling. Rystad Energy, an oil and gas data firm, estimates the breakeven price associated with arctic projects are as high as $80/barrel. (Today Brent crude oil July contracts are trading at $66 and change per barrel.)

Shell - Oil & Gas 360 - U.S. Arctic resource estimates by NPC

Source: National Petroleum Council

A 2009 Economic Analysis of Future Offshore Oil and Gas Development: Beaufort Sea, Chukchi Sea, and North Aleutian Basin, provided by Northern Economics and the University of Alaska, shows the Minerals Management Service’s 2006 estimate for Undiscovered Technically Recoverable Oil and Gas Resources for the Chukchi Sea Planning Area at 29 billion BOE (mean case).

eco-analysis-table-10In March, 2015, the National Petroleum Council, an oil and natural gas advisory committee to the U.S. Secretary of Energy, completed an extensive study on Arctic oil and gas development, and it delivered its recommendations to DOE Secretary Moniz in a report entitled “Arctic Potential: Realizing the Promise of U.S. Arctic Oil and Gas Resources.” The report’s executive summary lays out 70 pages of findings and recommendations regarding the positive and negative impacts associated with developing the U.S.A.’s arctic resources. The Arctic Research Study Leaders for the National Petroleum Council study included Rex Tillerson, Chairman, President and CEO of Exxon Mobil (ticker: XOM); Paal Kibsgaard, CEO, Schlumberger (ticker: SLB); Marvin Odum, President, Shell Oil Company (ticker: RDS.A); David Seaton, Chairman and CEO, Fluor Corp. (ticker: FLR); John Watson, Chairman and CEO, Chevron Corp. (ticker: CVX); other Arctic oil and gas operations experts, U.S. Deputy Secretary of Energy Elizabeth Sherwood-Randall, and Mark D. Myers, Commissioner, Alaska Department of Natural Resources.

Balancing Environmental Protection & Resource Development

Asked about the balance between protecting his state’s natural environment and promoting natural resource development, Gov. Walker, a 64-year-old lifelong resident and native-born Alaskan, told Oil & Gas 360® that his state has learned from prior incidents, like the 2010 Deepwater Horizon blowout in the Gulf of Mexico and the 1989 Exxon Valdez spill in Alaska. “We learned from each of those, and now on the oil side we have certainly the safest transiting system, ship escort response and oil spill response system–I think in the world–here in Alaska. So, we want to do it right, we want to do it properly. And we’re absolutely confident that it can be.”

When 500 Million Barrels is Not a Big Enough Opportunity

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Ben van Beurden, Chief Executive Officer, Royal Dutch Shell

Royal Dutch Shell Chief Executive Officer Ben van Beurden is well aware of the environmental and financial risks associated with drilling in such a controversial area.

“There is reputational concern around this,” he said in a conference call earlier this year. “I think that no amount of explaining our approach, the caution that we will take, the context that is there, the long history of operations that we have in the Arctic, the industry has, the preparedness with multiple lines of defense. There will be a very significant part of the society that will simply find it unpalatable that we drill in the Arctic no matter how good we are or how prepared we are.”

Aside from complying with environmental regulations, the cost associated with arctic drilling doesn’t mean Shell will settle for a minor discovery.

“If you talk about 500 million barrels, I don’t think that will cut it,” van Beurden explained. “It must be a multi-multi-billion barrel discovery that we have there. That will justify going ahead, it will take years to unlock. And of course we need to have an oil price outlook that matches the sort of cost that we envisage there. But let’s first of all see how much oil is there. We have of course, high expectations and probability and an outlook, but we need to prove first that we are right in terms of expectations.”

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.


Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.