Dry Hole Gives Shell Excuse to Bow Out of Arctic

This morning, Shell announced that their Burger J well in the Chukchi Sea didn't hold oil and gas in "sufficient quantities to warrant further exploration...". These words are oil and gas industry code for dry hole. More significantly, though, the company went on to say that it is ceasing "further exploration activity in offshore Alaska for the foreseeable future."

That's a big deal, especially since Shell has spent about $7 billion in the effort over the last 10 years. I personally believe that Shell was looking for a way to exit this area, and the dry Burger Well gave them a reason for that exit. Shell has been trying to open offshore Alaska since 2005, but has been plagued by regulatory delays and operational failures. The Burger Well was the first well that Shell was successful at drilling to TD (or total depth).

I have never believed that drilling in the Arctic oceans made much sense, and the challenges are very different from deepwater drilling in areas like the Gulf of Mexico. In deepwater, the challenges are not only surface sea conditions, but also the fact that the wellhead, or control point of the well, is so far from away the rig, sometimes as much as 10,000 feet below the surface where it is dark and perpetually cold. Also, deepwater Gulf wells are often over-pressured, with a very fine margin of error between success and hole trouble or blowout. An analogy I often use is that deepwater drilling is a little like trying to drive a car from the back seat...you can reach the wheel, but not the brakes.

The challenges in Alaska are different, but no easier, and in a lot of ways a lot harder. First, the extreme conditions are on the surface with often gale force storms and rough seas. Harder, though, is that the water is too shallow. One of the biggest risks is a phenomenon called ice scour, where icebergs often drag across the seafloor digging trenches and destroying everything in their paths. This is why Shell devised the technique of drilling mudline cellars, which are essentially big holes in the seafloor where the blowout preventer can be set below the mudline, hopefully out of the reach of icebergs.

Harder, there is no deepwater port within 1,000 miles of where Shell planned to drill, so a fleet of supply vessels, icebreakers, containment vessels, and rescue ships had to stay constantly on station nearby operating rigs. The drilling season there is a few short months each year, and if something goes wrong, the chance for catastrophic damage is very possible. Can you imagine an iceberg ripping up a production line, or worse, destroying a wellhead during ice season? it could take weeks, or longer, to even get to it before it could be contained.

I believe that Shell threw in the towel after experiencing 10 years of market therapy. The volatility of oil prices, added to chronically low natural gas prices, make the economics of this project stink even if it was logistically feasible to develop oil and gas reserves this remotely. Add to that the risk of catastrophe and the regulatory burden, it makes a lot of sense for Shell to pull out. Good for them. I just wished they had done this a long time ago.

All I can say is, if we're this hard up for hydrocarbons to go to these extremes and take these risks, we can damn sure afford to develop alternate sources of energy and advance efficiency and conservation technologies that actually improve performance and safety, all while improving the environment in which we live. Let's go do that.