Despite Shell’s About-Face, Industry Interest in Arctic Oil Grows

After billions of dollars invested over several years, Royal Dutch Shell said September 28 it would end oil exploration offshore Alaska after “disappointing” results.

But industry efforts to drill for oil and natural gas in the Arctic are unlikely to end with Shell’s decision to abandon the Chukchi Sea.

Indeed, momentum to exploit fossil fuel reserves in the Arctic has been building for decades. This week, in fact, political and industry leaders will converge on Fairbanks, Alaska for the 2015 Arctic Energy Summit, where they will consider options and opportunities for energy development, despite some of the lowest gasoline prices in years and a glut of natural gas in the US.

The trends pushing for oil and gas in the Arctic run counter to the efforts of a growing number of advocates who argue some fossil fuel resources need to remain untapped to slow the rate of carbon emissions. The prospect of oil and gas drilling also opens fresh questions over how such development would impact the local wildlife and cultures and the influence of environmental activists.

From ANWR to Chukchi Sea

As Shell’s decision to abandon its exploration well about 150 miles from Barrow, Alaska shows, energy development in the Arctic environment entails significant technical challenges. However, it remains an enticing resource: geologists know that the Arctic region’s 19 geological basins contain nearly 90 billion barrels of technically recoverable oil – roughly 13% of the undiscovered oil in the world!

To date, only half of the basins have been developed at all, a process that began with the Alaska North Slope where oil was first produced in 1968 from Prudhoe Bay. The increased land-based development was one outcome of the 1970s gasoline crisis caused by an embargo of oil shipments to the US from Arab members of the Organization of Petroleum Exporting Countries (OPEC).

In 1977, when US President Jimmy Carter approved construction of the pipeline connecting Prudhoe Bay to Valdez – the trans-shipment point to allow Alaskan crude to reach markets – he also established the Arctic National Wildlife Refuge (ANWR).

The wilderness status of this refuge was meant to preclude access to some of the largest reserves in the region – or at least, accessing the crude would force American voters to admit that they prioritized energy over wilderness. Drilling or not in ANWR became a routine test as Americans considered whether or not their need for energy merited infringing on a “last frontier” of undisturbed wilderness in the far north.

Over the years, there have also been reminders of the immense challenge of developing Arctic energy supplies. Most memorably, the 1989 Valdez spill in Prince William Sound demonstrated the impact industrial accidents could have on pristine natural areas.

Why Focus on the Frozen North?

Efforts to develop ANWR diminished over the following decades. In fact, it appeared as if energy companies for the last decade had determined that the public relations costs of drilling in the Arctic outweighed the benefits – a possible win for modern environmentalist action.

Today, though, developers are again looking at this unique region, with a particular emphasis on offshore waters of the Chukchi and Beaufort seas. Their interest is drawn less by immediate needs to add to the global oil supply than it is by slow, grinding long-term trends within the energy industry, including:

The Reality of “Hard Oil”: Most of the “easy” oil reserves – that is, places where oil is relatively simple to drill for – have been developed. As a result, the modern energy industry redefined what projects it considered to be possible and economically viable, particularly during the years of higher prices. Whether reaching deeper into the ocean, converting tar sands into oil, or overcoming the technical challenges of developing in the Arctic, more expensive, less-easily-gotten reserves have emerged for many companies as reasonable for development.

Once these designs are set in motion, they play out over years because they require large sums of money. It also means development plans are not scrapped because of momentary shifts in the price of oil and natural gas. Many people in the industry believe that we are steadily depleting known energy reserves and that higher prices will return.

Outcomes of Arctic Warming: The influence of climate change that has reduced polar ice cover has contributed to a bit of a land rush by China, Russia and other nations seeking to secure any energy reserves that become feasible or accessible due to climatic shifts. This has created incentives for nations to tap known reserves before other nations seek to do so.

Current Politics: President Obama surprised many observers by approving Shell’s request to begin Arctic drilling earlier this year, which could have set off the birth of an offshore oil industry in the Arctic Ocean. As a presidential election nears, this stance was contested by Hillary Clinton, the Democratic front-runner, who has said she was not in favor of further drilling in the Arctic.

Most Republican candidates fully support energy development in the Arctic. Therefore, in a political season with much at stake, energy development in the Arctic could clearly have reached a hinge moment when it may conclusively shift in one direction or the other based on the outcome of the 2016 presidential election.

Gaze on the Arctic

A dramatic emphasis on Arctic drilling, of course, reopens debate on the pros and cons of development, arguments that have remained largely unchanged since interest commenced in the 1960s. These include the challenges of technology and climate; impacts on wildlife and native peoples living in the region; and strong resistance from environmental organizations.

In order for Arctic energy development to proceed, companies must contend with these challenges. Before abandoning its program, Shell had experienced a variety of setbacks to its efforts at expanding into the Arctic: from the wreck of the Kulluk, which was to serve as the primary Arctic exploratory rig for Shell, to environmental-activist-kayakers blockading its equipment from leaving port in Seattle, Washington.

But despite Shell’s reversal, political and industrial winds are making energy developers remain focused in the frozen north – particularly as it becomes less frozen.