In a surprise statement earlier this week, Shell has announced that the company will stop offshore petroleum exploration off the coast of Alaska in the Chukchi Sea “for the foreseeable future”. This decision comes after the company has spent roughly $7 billion on Arctic offshore development and endured many years of environmentalist opposition to drilling in the North’s fragile ecosystem.
The impetus for Shell’s decision comes from poor results in exploratory drilling in the oil and gas Burger J field this summer. The president of Shell USA, Marvin Odum, has stated that “Shell continues to see important exploration potential in the basin, and the area is likely to ultimately be of strategic importance to Alaska and the US”.
However, the reasons to be optimistic about further development of Arctic offshore oil are few and far between.
Shell’s decision to end its costly development of offshore drilling in Alaska with such abruptness speaks loudly to the gap between oil company narratives of an Arctic where lucrative petroleum deposits wait to be tapped just below the ice and the realities of working in an uncertain, complex environment.
In an era of high oil prices, the Arctic was imagined as the next ‘hot’ region for petroleum extraction. Led by a publically hyped US Geological Survey, oil companies and permitting governments continuously quoted the estimated 90 billion barrels of undiscovered, technically recoverable oil north of the Arctic Circle – a reserve accounting for roughly 22 percent of the undiscovered resources in the world.
Even in the face of rapidly dropping oil prices – currently hovering around $50 a barrel – Shell continued to stand by its investments in offshore Arctic drilling throughout the summer of 2015. Shell’s Chief Executive Ben van Beurden has incessantly reaffirmed his company’s commitment to drilling in the Arctic as the world begin a "multi-decade transition" from fossil fuels to renewable energy up until the unexpected announcement earlier today.
But Shell’s narrative does not reflect the economic or ecological reality of drilling at the top of the world.
At $50 a barrel, operating in the Arctic has long passed the estimated $80 to $90 barrel prices necessary to make development profitable. Economist and petroleum analysts are predicting prices to stay low in the years to come, exacerbated by the increased supply of shale oil entering the market.
Despite opportunistic business reports and news stories based on melting ice initiating a resource race, the Arctic Human Development Report makes clear that climate change is a net cost to companies operating in the Arctic. The future of an ecologically changing Arctic – an already risky geography from which to extract oil – is unreliable. Increasing storm surges, shoreline erosion, and thawing permafrost are all serious challenges to existing and forthcoming industry infrastructure needed for a large-scale Arctic oil project.
Beyond climate change’s physical consequences, the UN climate negotiations in Paris this December holds the added potential to strand Arctic oil assets through a multilateral treaty to decarbonise the global economy. This is particularly true for assets within the United States, where President Obama has made both national and international action on climate change an integral part of his legacy.
Shell’s announcement to end its project in the Chukchi Sea may seem to be only the most recent chapter in an ill-fated journey to extract the riches that lie beneath the Arctic’s disappearing sea ice. But its importance reaches far beyond Shell’s particular offshore project. The announcement exposes the cracks in the oil industry’s confident but contrived story of sound economic investment in the Arctic. It calls into question the foundational merits of a resource-rich narrative constructed around the North Pole and invites a serious reconsideration of Shell’s reassurances that the fear of Arctic oil deposits becoming stranded assets is "fundamentally flawed".
It is now, in the aftermath of Shell’s announcement, that company investors, local communities and governments should question the validity of Shell’s and other extractive industry’s guarantees that Arctic resource development is a sensible economic endeavour. Equally vitally, these same stakeholders should also use this gap between rhetoric and reality to explore opportunities for more economically secure investments in the future of energy. As Mr van Beurden himself noted in an interview earlier this month: “I have no hesitation to predict that in years to come solar will be the dominant backbone of our energy system.” It is high time that Shell heeds the predictions of its own Executive Director and reevaluates investing so heavily in exploratory projects whose worth is based on an unrealistic oil outlook.
*Victoria Herrmann  is a Research Associate at The Arctic Institute, doing a PhD in Polar Studies. Photo credit: Wikipedia.