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Arctic braced for oil rush as Shell eyes return to Alaska

Screen Shot 2015-03-02 at 19.49.45By Andrew Critchlow, Commodities Editor for publication in The SundayTelegraph 29 Mar 2015 under the headline:

Arctic braced for oil rush as Shell eyes return to Alaska

When the wreck of Royal Dutch Shell’s Kulluk drilling rig washed up on the coast of Alaska in 2012 following a storm at sea, many environmental campaigners hoped that the incident would draw a line under big oil’s quest to explore in the Arctic, the last remaining great frontier for fossil fuel reserves.

In rough seas, with waves as high as 18 feet and winds gusting at around 50 miles per hour, the drilling rig broke free from its towing rope and was cast adrift for four days in the northern Gulf of Alaska before washing ashore. It was carrying 560,000 litres of diesel fuel and drilling lubricant along with 18 crew.

However, three years on from the accident, which led to Shell being accused of making an “inadequate assessment and management of risks”, the UK’s largest oil and gas explorer is poised to renew its search for resources in the Arctic Circle continental shelf around Alaska.

Assuming that global consumption of oil and gas continues to increase at the current rate, tapping hydrocarbons in the Arctic will be essential for the global economy.

Approval by the US government for Shell to restart exploration could usher in the opening up of vast new reservoirs of oil and gas large enough to sustain global demand to the end of the century.

Before its expected go-ahead to restart work in the Chukchi Sea, Shell told The Sunday Telegraph: “We believe the Alaska Outer Continental Shelf has significant untapped potential and will play an increasingly important role in meeting the energy challenge in the future. Since the late 1980s Shell has successfully drilled over 20 wells in offshore Alaska.

“Additionally, we have gleaned thousands of miles of seismic data and produced hundreds of thousands of barrels of oil in Alaska’s Cook Inlet basin with no harm to people, marine mammals or the environment,” the company said.

Shell’s plan for the Chukchi may involve using two rigs to reach production eventually of around 400,000 barrels per day (bpd) of crude, roughly half the UK’s current output of oil from the North Sea. The company has already spent around $5bn (£3bn). Some estimates suggest that the Alaskan Arctic alone could deliver more than 1m bpd if put into full production.

“We believe we can play an important role in developing Alaska’s energy resources. We choose to explore there because we have the expertise and experience to operate responsibly and be profitable,” said Shell.

Despite the recent 50pc fall in the price of crude to around $50 per barrel, oil companies appear willing to shoulder the significant environmental and financial risks of working in the frozen seas of the Arctic.

According to estimates by energy consultants Wood Mackenzie, the region straddling territory belonging to Russia, Alaska, Norway, Greenland and Canada may hold as much as 166bn barrels of oil equivalent.

The figure is significant and roughly equal to two thirds of Saudi Arabia’s existing proven reserves.

Tapping these resources will be vital to meet future global demand for hydrocarbons based on future projections published by the International Energy Agency. The Paris-based watchdog believes that sufficient discovered resources exist outside the Arctic to meet world demand up to 2040, when it forecasts consumption of energy to grow by 37pc, with total world oil output reaching 104m barrels per day (bpd).

After that date, the world could run out of oil quickly unless new untapped resources are located, and that could mean having to drill in pristine places like the Arctic.

“The Arctic is potentially very significant, but there has been only very limited drilling and it’s highly uncertain what the exact size of the resource there is spread across about 20 different basins,” said Andrew Latham, vice-president of exploration research at Wood Mackenzie. “But that potential is pretty unique as there aren’t that many exploration plays elsewhere of that scale.”

Most of the new oil to meet world demand over the next 20 years will come from existing resources owned by countries such as Saudi Arabia, Iran and the Gulf sheikhdoms.

Although the US is now producing record volumes of crude because of its shale fracking revolution, these resources aren’t expected to last beyond 2040.

War-torn Iraq is also tipped to be a major future supplier and is thought to hold the potential to increase its output to almost 10m bpd from around 3.4m bpd at current levels of production.

The major drawback to depending on Middle East producers such as Baghdad is the high level of political risk in these countries and the limited scope for international investment.

Elsewhere, oil majors are scaling back operations in legacy areas where reserves of oil are in decline and the cost of operating is increasing, such as the North Sea. This is pushing them into exploring new frontiers like the Arctic Circle.

“If you’re thinking beyond 2030, for a major like Shell, the Arctic holds a lot more potential than the North Sea, which is now in decline,” said Mr Latham.

For the global economy the stakes are high, as higher energy prices could peg back growth and hit emerging markets hard.

The Organisation of the Petroleum Exporting Countries (Opec) predicts the price of oil could reach $177 per barrel by 2040.

At current rates of taxation that would see British motorists paying more than £3 per litre to fill up with regular diesel, compared with around £1.19 per litre at current pump prices. Arctic oil would help bridge any future gaps in world energy supply.

On these gloomy predictions, Shell and its peers are adamant that the world cannot afford to ignore the potential of the Arctic. Shell isn’t the only oil major with Arctic ambitions.

In Norway, state-controlled Statoil has collected data on the potential of the Barents Sea, but earlier this year it decided to suspend any further exploratory drilling of the area amid the current environment of low oil prices.

Canada is watching the US government’s review of Shell’s plans closely. Imperial Oil wants to drill on the Canadian side of the Beaufort Sea by the end of the decade. In Russia, state-run Rosneft and Gazprom have a monopoly to explore the country’s vast Arctic continental shelf, but work has been slowed by Western sanctions aimed at forcing the Kremlin to back down over its support of separatists in Ukraine.

But for significantly more drilling to happen, oil prices will have to return to above $100 per barrel, a level experts believe is essential to make Arctic drilling profitable.

The US Geological Survey estimates that the Arctic holds around 30pc of the world’s undiscovered natural gas and 13pc of its yet-to-find oil, most of which is believed to lie offshore.”

The biggest concern for most people is the impact on the environment. Images of stricken wildlife covered in black crude following the Exxon Valdez oil spill in 1989 remain a poignant reminder of the dangers of allowing the industry unrestricted access to a pristine natural environment like Alaska.

The oil slick affected 1,300 miles of coastline and its impact can still be felt today in certain remote areas around Prince William Sound. Then, in 2010, BP’s Deepwater Horizon oil platform exploded in the Gulf of Mexico spewing millions of barrels of crude into the sea and causing the biggest spill in US history.

What happened to the Kulluk rig three years ago proves the significant dangers involved.

After years of reviewing the Kulluk incident, Shell is confident it has the right system and safety measures now in place to ensure it will not be repeated.

Shell said: “We’ve taken a critical look at all of the experiences in Alaska and this latest plan takes those into account.”

Drilling in the Arctic is complicated by ice, which in seasonal areas can last for around six months. The exploration work that Shell plans to undertake may take several years to come to fruition and, according to Wood Mackenzie’s Mr Latham, it may not be until after 2025 before significant commercial quantities of oil will be produced.

Environmental campaigners are up in arms over Shell’s latest foray into the Arctic and the potential for a wider push by the oil and gas industry into the area.

They argue that these fossil-fuel resources would be better kept in the ground to avoid adding to the risks of climate change, and warn about the danger of a “carbon bubble” that could arise should major consuming nations suddenly cut back to head off global warming.

A further concern is the potential risk of a serious oil spillage, which according to Doug Parr, chief scientist at Greenpeace, is the likely consequence of opening up the region to widespread drilling activities.

The US Bureau of Ocean Energy Management has said there is a 75pc chance of “one or more large spills” happening.

Mr Parr said: “The iconic and beautiful Arctic, and its incredible wildlife, like polar bears and narwhals, is under threat like never before.

“Arctic sea ice is melting at an unprecedented rate, but instead of seeing the huge risks, oil companies like Shell are circling like vultures. It wants to drill for more of the stuff that caused the melting in the first place. And all the evidence shows Shell can’t drill safely in the Arctic. The extreme conditions mean it’s when, not if, a spill will happen.”

According to Mr Parr, exploring for Arctic oil and gas is a frontier too far for the environment despite the world’s need for new sources of energy.

“These expensive, long-term oil projects make no sense as governments around the world become increasingly serious about climate change.

“If we want to avoid catastrophic climate change, we can’t even burn all the fossil fuels we already have; we definitely don’t need to trash what’s left of the melting Arctic looking for more,” he said.

ARTICLE WITH VIDEO CLIPS

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