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Polar Pioneer was the Focus of Protests Just Months Ago

Royal Dutch Shell (ticker: RDS.B) delivered some bad news for Transocean (ticker: RIG) as companies returned to their respective offices following an extended Christmas weekend. According to a RIG press release, Shell elected to cancel its contract for the Polar Pioneer rig, which was originally scheduled to expire in July 2017.

The Polar Pioneer is a harsh environment semisubmersible rig with maximum drilling depth of 25,000 feet. Shell originally contracted the rig for operations in the Arctic, but it was returned to Washington State in October 2015 following exploration in Alaska’s Chukchi Sea. Day rates ranged from $561,000 to $624,000.

Photo Credit: National Geographic

Photo Credit: National Geographic

A Foreseen Ending

The Polar Pioneer received plenty of publicity in its time with Shell: the rig was greeted by hundreds of protestors when it was first docked in Seattle earlier this year. Hundreds of activists in petroleum-based kayaks embarked on the Port Angeles harbor to voice their displeasure, but it did not deter Shell from drilling its Burger J exploration well offshore Alaska. Although the well yielded hydrocarbons, the results were deemed to be insufficient in the current commodity environment. Shell sealed and abandoned the project in September 2015, adding it would “cease further exploration activity in offshore Alaska for the foreseeable future.”

Three months after the supermajor pulled the Arctic plug, the Polar Pioneer is now officially off the grid. Shell expected to realize a $1.1 billion charge in future contractual commitments, amounting to a $4.1 billion write-down.

In addition to the challenging commodity environment, Shell blamed the high costs and the “challenging and unpredictable federal regulatory environment in offshore Alaska” as contributors to its decision. The exploration decision for Polar Pioneer was not a short-lived process: Shell spent roughly six years jumping through regulatory hurdles before the project finally received the green light. A previous exploration in 2012 was halted due to damages sustained during a drilling test.

Think Shale Drilling is Tough? Try the Offshore Market

Shell is not the only major to pull back on its offshore activity: Statoil walked away from its Alaska operations last month. The Norway-based major held a total of 66 both operated and non-operated leases in the Chukchi Sea, but didn’t drill a single well despite first entering the region in 2008. Several other companies, including BP plc (ticker: BP), Chevron (ticker: CVX) and ExxonMobil (ticker: XOM) have delayed Arctic explorations.

alaska-offshoreLisa Murkowski, one of Alaska’s two Senators and a proponent of oil and gas development, acknowledged the economic difficulties, but had another target in a prepared statement. “The real project killer,” she said, “was this administration’s refusal to grant lease extensions; its imposition of a complicated, drawn-out, and ever-changing regulatory process; and its cancellation of future lease sales that have stifled energy production in Alaska.”

The U.S. Department of the Interior denied lease suspension requests from Statoil and Shell in October, saying the companies “did not demonstrate a reasonable schedule of work for exploration and development.” The DOI also canceled two offshore Arctic leasing programs, citing “current market conditions and low industry interest.”

On Dec. 16, 2015, a group of U.S. Congressmen from 11 states delivered a letter to the Assistant Secretary of the Interior, who is responsible for managing the use of federal lands, demanding an explanation for federal oil and gas lease delays in their states and others.

Offshore Drilling Outlook

Moving more than 4,000 miles south from the Chukchi Sea, the much more developed Gulf of Mexico market is also experiencing its share of difficulty. The running rig count stands at 24 in the latest report from Baker Hughes, down roughly 57% from one year ago.

GOM Offshore Shallow and DeepwaterA note from Capital One Securities in November delivered a somber message on the offshore market. “Dayrates continue to decline, rigs continue to get stacked, contracting remains almost non-existent, and market commentary continues to be bleak,” the firm said. “With the stacked rig count at a multi-year high and likely to grow as uncontracted new builds are delivered into the market, we believe the retired/scrapped count needs to increase by 2x – 3x.”

Jud Bailey, an analyst for Wells Fargo Securities, said, “The outlook for the offshore drilling industry looks far tougher than when the year started.” Data from Bloomberg Intelligence said a total of 57 shallow and deepwater rigs have suffered from contract terminations this year alone. J. David Anderson, an analyst for Barclays, believes the number of non-contracted floating rigs could more than double on a year-over-year basis.

A Capital One note released on December 17 said the depressed market is nearing a period of “forced selling” as some offshore companies may have no choice but to divest some of its equipment. Capital One says the looming moment “could be a generational buying opportunity for offshore rigs.”

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