Shell Shuts Down Offshore Arctic Drilling After Huge Investment

Sep 29, 2015
Originally published on September 30, 2015 11:19 am
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Transcript

DAVID GREENE, HOST:

Now to a company that spent $7 billion on a project that has now decided to abandon it. Royal Dutch Shell announced yesterday that it is shutting down offshore oil operations in the Arctic. The energy giant was drilling some 150 miles off the coast of Barrow, Alaska, and what the company found was pretty disappointing. We reached Amy Myers Jaffe, a professor of energy and sustainability at the University of California, Davis, and asked her what exactly happened here.

AMY MYERS JAFFE: Oil and gas is a risky business. And because they did not find a - what we call a giant or elephant field of oil and gas. I imagine also because the oil price outlook now compared to maybe a few years ago, when they were first green-lighting this project, looks much less promising. It turned out to be not a profitable or smart strategy for Shell to continue to look in this area in Alaska.

GREENE: Well, let me just ask you about one thing you mentioned there, and that's prices. I mean, global oil prices are much lower right now. Is that really the driving force? I mean, were prices higher and they could see the potential profit? They might have said, OK, you know, the oil and gas isn't flowing, but it's still worth trying here.

JAFFE: Well, you know, it really depends on how bad the results were. I do think there are a lot of economic questions that hang over the whole venture of Arctic drilling in and of itself. It's very expensive, you know, has some political risk, has some technical risk. And, you know, at a $100-oil environment, where you think that oil demand is going to continue to go up, up, up and you write optimistic that everyone in China is going to want a giant car that's going to use a lot of gasoline, maybe Arctic drilling seems to be a very sensible investment. In a low-price environment, maybe the attractiveness of drilling - very expensive, far-flung resources - in a place like Alaska doesn't make as much sense.

GREENE: You know, you mention how expensive it is. I am just stunned to think about what Shell invested here - I mean, 10 years of research and development, $7 billion in costs to try and get this project going. I mean, this has to be a really big loss for this company.

JAFFE: I do think for Shell, it's a tremendous setback. A lot of money was invested. A lot of effort was put in. They got off to some bad starts. There have been people who have looked at the Arctic and decided that it's not going to be a very promising thing to do in the current environment, and Shell forged forward anyway.

GREENE: How in an atmosphere with all this new technology, where you can, you know, see through - I don't know - you can see parts of the Earth from miles and miles up in space - can this company misjudge so much where this oil was?

JAFFE: You know, oil exploration is still an art form. It's a science, but it's also a science with a bit of art. And there's no guarantees. You know, you can do seismic. You can do all the preparations. Shell is a great exploration company. But, you know, companies drill and they don't find oil and gas, or they find natural gas when they thought they might find oil. And this is a big failure for Shell. It's going to be difficult for the company to bounce back from this, and they're going to have to, I think, have a new strategic focus as to how they're going to return value to shareholders.

But, you know, it happens. Oil companies explore for fields that are supposed to be so promising all the time and find nothing. And I think that's one of the arguments that people make from the environmental left, which is that, you know, in these cases where we're not sure exactly where the oil is and how much there is, you know, do we really want to take the risks to the ecosystem unless we're really clear that we definitely know the oil is there and we definitely know we have the technology to exploit it in a way that won't be damaging to the communities and the ecosystem.

GREENE: Were there some communities in Alaska that were counting on this project?

JAFFE: I would say the state was highly counting on this project. When you look at the Alaska's state budget and the challenges that are facing the state in the coming years, this is a crisis for Alaska. They have declining production, lower oil prices and higher, higher social costs. I think it's difficult for Shell, but it's even more difficult for the state of Alaska.

GREENE: Amy Myers Jaffe is a professor of energy and sustainability at the University of California, Davis. Professor, thanks so much.

JAFFE: Thank you. Transcript provided by NPR, Copyright NPR.