Shell Exits Arctic as Slump in Oil Prices Forces Industry to Retrench

As oil prices have continued their steady decline this year, rig after rig has been shut down, costing thousands of jobs in the United States. Yet major oil producers have been loath to pull the plug on their most ambitious projects — the multibillion-dollar investments that form the backbone of their operations.

Until now. On Monday, Royal Dutch Shell ended its expensive and fruitless nine-year effort to explore for oil in the Alaskan Arctic — a $7 billion investment — in another sign that the entire industry is trimming its ambitions in the wake of collapsing oil prices.

 Shell had some mishaps in Alaska, such as when its floating drill rig Kulluk, center, ran aground in 2012. Credit James Brooks/Kodiak Daily Mirror, via Associated Press

The announcement was hailed as a major victory by environmentalists, who had fought the project for years, only to be stymied by pressure inside and outside the industry to increase domestic oil production.

But at a time when global markets are glutted with oil, thanks to the advent of new drilling techniques, the announcement also confirmed major oil companies’ increasing willingness to turn their backs on the most expensive new drilling prospects in the Gulf of Mexico and suspend plans for new projects in Canada’s oil sands.

Shell Web

The industry has cut its investments by 20 percent this year and laid off at least 200,000 workers worldwide, roughly 5 percent of the total work force. Companies also have retreated from less profitable fields in places like the North Sea, West Africa, and some shale prospects in Louisiana and North Dakota.

American oil companies have decommissioned more than half of their drilling rigs over the last year, and production is beginning to drop in the United States. Even exports from Saudi Arabia are beginning to ebb because of a glut in its Asian markets.

“The decision by Shell to abandon its Arctic drilling program for now primarily reflects the realities of lower global oil prices,” said Michael C. Lynch, president of Strategic Energy and Economic Research, who advises oil companies and investment banks. “When prices go down, the oil industry shortens their list of projects in development by removing the most expensive ones.”

This year, industry executives held out hope that the oil price, which has fallen more than 50 percent to below $50 a barrel since last summer, would recover before too long. But in recent weeks, a growing number of executives have warned that the downturn could last well into 2016 and perhaps beyond, especially if the Iran nuclear deal leads to a flood of new oil on world markets.

With demand dwindling, the current market of 94 million barrels a day has roughly two million barrels in surplus supply.

Now, economic forces have scuttled what environmentalists had tried to do for years in the courts and with raucous protests in canoes and kayaks, arguing that drilling in the dark, ice-filled Arctic was dangerous to polar bears and other sea life.

“This is a victory for everyone who has stood up for the Arctic,” said Annie Leonard, executive director of Greenpeace, a leader in the protests against Shell. “There is no better time to keep fossil fuels in the ground, bringing us one step closer to an energy revolution and sustainable future.”

When Shell first leased a huge portion of Alaska’s Chukchi and Beaufort Seas after they were opened up by the George W. Bush administration, oil prices were soaring. Middle classes in China and the developing world were demanding more liquid fuels every year. At the same time, a growing number of oil fields around the world were aging and in decline.

Then, just as Shell began its Alaskan effort, the shale revolution began in the United States. Independent oil companies found ways to fracture hard rocks to produce oil, nearly doubling domestic production. That surprise development, along with the slowing Chinese and European economies, drove the oil price down just as Shell returned to drilling in the Chukchi this year. The environmental movement delayed Shell at every turn, but the 2010 BP disaster in the Gulf of Mexico pushed the company off several years as well.

Industry experts say that there is plenty of oil in offshore Alaska and that renewed efforts are still possible if and when the oil price recovers. But environmentalists declared a triumph.

The announcement was hailed as a major victory by environmentalists, who had fought the project for years, only to be stymied by pressure inside and outside the industry to increase domestic oil production.

Shell had some mishaps in Alaska, such as when its floating drill rig Kulluk, center, ran aground in 2012. Credit James Brooks/Kodiak Daily Mirror, via Associated Press

Read more: http://www.nytimes.com/2015/09/29/business/international/royal-dutch-shell-alaska-oil-exploration-halt.html

Related blog post: Help Close the Door on Risky Arctic Drilling

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