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Shell is abandoning its controversial plans to drill for oil in the Arctic

ShellNo flotilla participants float near the Polar Pioneer oil drilling rig during demonstrations against Royal Dutch Shell on May 16, 2015, in Seattle, Washington.
ShellNo flotilla participants float near the Polar Pioneer oil drilling rig during demonstrations against Royal Dutch Shell on May 16, 2015, in Seattle, Washington.
David Ryder/Getty Images

For years, many people thought Shell's efforts to drill for oil in the treacherous Arctic Ocean would end in disaster. More shipwrecked rigs, perhaps, or a nightmarish spill that proved impossible to clean up.

But on Monday, Shell announced that it was abandoning its controversial Arctic drilling plans for a much more prosaic reason: The company simply hadn't found enough oil and gas to justify further exploration "for the foreseeable future."

At this point, Shell has spent at least $7 billion since 2008 buying up leases and trying to drill exploratory wells in the Chukchi and Beaufort Seas, north of Alaska. It's a remote and forbidding environment, with dangerous ice floes and frequent storms. But geologists believe there could be up to 40 billion barrels of technically recoverable oil beneath these waters, enough to supply the entire United States for five years. So Shell had long thought the risk and high cost was worth it:

(Javier Zarracina/Vox)

Until now, that is. On Monday, Shell announced that it had successfully drilled an exploratory well to a depth of some 6,800 feet in the Chukchi Sea. Yet the company simply hadn't found enough oil and gas to "warrant further exploration."

Instead, Shell said it will seal the well it has already drilled and "will now cease further exploration activity in offshore Alaska for the foreseeable future." The company said its decision reflected this summer's disappointing find, the high costs of offshore Arctic drilling, and the "challenging and unpredictable federal regulatory environment."

This announcement means that no one is likely to drill off the Arctic coast of Alaska anytime soon. Most of Shell's competitors, including Tota, had long ago shelved their plans to drill in the Chukchi and Beaufort Seas, deeming it too risky and difficult. Shell was one of the last remaining gamblers, and everyone was waiting to see if they'd succeed. But at a time when global oil prices have plummeted, from $100 per barrel last summer to around $45 per barrel now, Shell has now decided it's simply no longer worth the endless headaches.

An end to the Arctic drilling controversy — for now

The announcement puts an end, for now, to the longstanding controversy over Shell's drilling forays.

Shell first acquired leases in the Chukchi and Beaufort Seas back in 2008, under the Bush administration, at a time when global oil prices were soaring upward of $100 per barrel and summer sea ice in the Arctic was receding due to global warming. The company hoped it could surmount the considerable technical challenges (and costs) in order to unlock massive new reserves of oil and gas.

Since then, the company has faced setback after setback. Conservation and native groups filed multiple lawsuits, arguing that Shell's response plans in the event of an oil spill were insufficient. (If a major spill did happen, it would be difficult for a response team to reach this icy and remote region.) Then, in 2011, Shell's efforts to drill two initial exploratory wells ended in utter fiasco, when, among other mishaps, gale-force winds caused one of its drill ships to run aground. As a result, the Obama administration put strict new rules in place to restrict how and when Shell could drill.

By the time this summer came around, Shell had gone seven years without successfully drilling a single wells and wanted to try again. Environmentalists urged President Obama to block those efforts, arguing that it made no sense to open up new areas to fossil fuel extraction at a time when the world is hoping to stop global warming. In August, the Obama administration sided with Shell and gave the company the go-ahead to drill, before Arctic sea ice started growing again in the fall.

In the end, however, it didn't matter. Shell got to drill its exploratory well and didn't find enough oil and gas. So it's giving up. There will be no more Shell Alaska controversy for now.

Shell said its decision was based on "the Burger J well result, the high costs associated with the project, and the challenging and unpredictable federal regulatory environment in offshore Alaska." On the latter point, note that Hillary Clinton has said she would oppose Shell's offshore drilling efforts if she became president.

The company is also expecting to take a financial charge on the move: "The balance sheet carrying value of Shell's Alaska position is approximately $3.0 billion, with approximately a further $1.1 billion of future contractual commitments."

Will anyone ever successfully drill for oil in the Arctic Ocean?

At this point, it's unclear if anyone will ever come back to drill for oil in the Chukchi or Beaufort Seas. A lot depends on what global supply and demand look like in the future.

Most of the other oil companies had been waiting to see if Shell could overcome the steep hurdles and succeed in tapping Arctic oil. That obviously hasn't happened. Earlier this year, Ann Pickard, Shell's top executive for the Arctic, told the Wall Street Journal: "If we fail for whatever reason … I think the US is another 25 years" away from developing oil and gas in the Arctic.

And what about the rest of the Arctic Ocean? Efforts to drill in Russia's portion have been hampered by low oil prices (as well as by US and EU sanctions). Meanwhile, up in the Barents Sea, north of Norway, Eni has been trying to produce oil, but those plans have been bogged down in cost overruns, delays, and other logistical challenges.

Presumably if oil prices ever surge again worldwide, the Arctic Ocean could once again seem more appealing. Shell has long said that oil prices would need to rise to around $70 per barrel by 2030 for drilling in the Chukchi to be worthwhile. That scenario is hardly unthinkable. Oil demand from China and Europe is currently growing more slowly than expected, but it could easily pick up again. Likewise, if the United States ever ends up exhausting its shale oil resources, the untapped Arctic may get a second look.

Ultimately, it all comes down to demand for oil. If companies think it's worth the risk, they'll likely come back in a few decades and try to push into the Arctic. If, by contrast, the world succeeds in finding alternatives to oil (electric cars, anyone?), then they won't.

Further reading:

  • Here's our longer guide to the controversy over Shell's Arctic drilling, including a look at why Obama and environmentalists disagreed over the global warming impact.
  • In the Financial Times, Nick Butler has a smart column on Shell's decision. Most of the oil majors are facing dwindling reserves, and the Arctic was their great hope. Now that Shell has failed, he says, "the industry needs some serious strategic rethinking."