Oil companies give Arctic the cold shoulder

Exxon, BP, Chevron and now Royal Dutch Shell have all recently backed off of plans to explore and drill for oil in the Arctic after meeting a fierce combination of high risk, low oil prices and government regulations.

Exxon, BP, Chevron and Shell back off amid mix of risk, red tape and runaway costs

The Arctic's unforgiving climate, combined with government regulations and the recent drop in oil prices, did much to pour icy water on Shell's plans to explore and drill, according to industry analysts.

It's not every day that environmentalists and the shareholders of an oil and gas company are on the same side of an argument. But there were smiles all around on Monday when Royal Dutch Shell said it was no longer looking for oil in the Arctic. 

Shell abandoned its Arctic search "for the foreseeable future" after spending about $7 billion US exploring the Chukchi and Beaufort seas — an about-face that came as a relief to those worried about the long odds it would ever pay off and the perhaps shorter odds that it would lead to environmental trouble. 

Doing pretty much anything in the Arctic is a challenge. And the unforgiving climate, combined with government regulations and the recent drop in oil prices, did much to pour icy water on Shell's plans, according to industry analysts. 

If I'm hearing the same thing from my banker and my Pope, I better start paying attention.— Doug Matthews, oil and gas analyst

"When you get up into very cold water and highly sensitive environmental conditions — where sometimes regulators want all sorts of additional measures to be taken to protect the environment — there's essentially a doubling of capital expenses," says Patricia Mohr, a commodities analyst at Scotiabank. 

For example, U.S. and Canadian regulations require a second rig to be standing by in case a drilling rig suffers a blowout. 

The idea is that the backup rig can drill a relief well and douse the fire immediately. Another rig might take too long to arrive if summoned from elsewhere in the world or might not make it at all if the accident occurred too late in the year and the sea had turned to ice. 

The Shell drilling rig Kulluk broke free and ran aground on the Alaskan coast in December 2012. (Associated Press)

Oil companies questioned whether the rule was necessary, according to oil and gas analyst Doug Matthews, noting there's no such rule for the cold, treacherous waters off the East Coast. 

"We're talking about some pretty specialized equipment that in many cases has to be purpose-built," says Matthews

"It's not like you can take these rigs, when you're finished with them here, and take them to the Gulf of Mexico. They have to be purpose-built. That's very expensive." 

Rig runs aground 

And sometimes, the Arctic is too much for even the toughest equipment, an embarrassing lesson Shell learned when bad weather got the better of one of its rigs. 

The Kulluk was being towed, on a tight schedule, through choppy waters in December 2012 when its tow line snapped. It ran aground off the Alaskan coast. Nothing was spilled but the Kulluk had to be scrapped. 

Tight schedules are a constant problem, says Laura Lau, a senior portfolio manager with the Brompton Group, an investment and advisory firm.

"You have a very short window in which to drill" in the Arctic, says Lau, who travelled through the region six years ago. "It's hard to predict when the ice will come. It's a much more difficult environment than I expected." 

Drilling blind

It's also hard to know when exploration might pay off. The geology of the area is so poorly understood that oil companies are in many ways "drilling blind," according to Lau, a situation that adds to the amount of time before any crude might make it to market and earn a return. 

"It can take two summers to drill a well," she says, and as much as a decade before that well is a source of marketable crude. 

Environmentalists — after fighting so many battles on land against pipelines and other petroleum issues — also brought fierce and effective criticism against anything offshore in the Arctic, she says. 

"The environmentalists got stronger, overall." 

Oilsands suffering

These and other complications had already nudged other petroleum companies out of the Arctic. 

Exxon Mobil backed out of the Russian Arctic after the annexation of Crimea brought sanctions down on Moscow. Exxon and BP are part of a consortium that in June suspended plans to explore the Canadian Arctic because there wasn't enough time to begin test drilling before its lease ran out in 2020. 

And Chevron recently put its Arctic plans on ice because of low oil prices. 

For the time being, analysts say oil and gas companies are more likely to stick with what works — shunning risky exploration on "the frontier" in favour of established sources like the Alberta oilsands and the Mideast. 

Environmentalists mounted fierce opposition to Arctic drilling in Canadian, U.S. and Russian waters. (Will Rose/Canadian Press)

The oilsands, now suffering with oil at less than $50 a barrel, could see more business as companies leave the Arctic, Matthews says. 

"So much development costs have already been sunk into them, they might as well keep producing." 

Beyond that, he thinks low oil and risk-averse investors could help bring greener energy sources into the mainstream. 

"The longer oil stays down and we don't go to the frontier, the more time the world economy may begin moving to a less oil-dependent, less petroleum-dependent economy." 

The pressure, he notes, is mounting on both sides of the divide. Criticism has also come from other voices, including religious and political leaders and others in the business sector.

"If I'm hearing the same thing from my banker and my Pope, I better start paying attention."