Shell Abandons Arctic Oil Project, Casting Doubt on Crude Estimates in Region

Some are calling Monday's announcement by Shell Oil that it will cease drilling in the Arctic a victory for environmentalists.

In truth, it is a victory for economics. In essence, drilling in the region simply did not make financial sense.

Shell had already sunk billions of dollars into exploration, and the results were quite disappointing for the Dutch company.

Shell drilled in the Chukchi Sea this summer, but found only traces of oil and gas. The company got essentially nothing for its $7 billion exploration project.

It will result in an absolutely massive loss considering that Shell's entire net profit in the second quarter this year was $3.4 billion.

Shell’s investors must be none too happy right now. The oil giant’s share price has fallen by around a third over the past year.

When Shell got its license to explore the Chukchi Sea in 2008 and then began drilling, oil prices were more than $100 a barrel. Today, prices have tumbled to less than half that, due to excess global supplies.

The failure to find sufficient oil and gas casts doubt about the viability of future Arctic projects. That should buoy environmentalists.

But make no mistake: Shell’s decision to abandon its drilling project in the Arctic was not due to pressure from environmental groups. It was due to financial pressure.

The numbers simply didn’t add up, and economics (or good sense) prevailed.

Drilling more than a mile beneath the ocean’s surface (Shell drilled to 6,800 feet) has been compared to operating in outer space. The technology and costs involved are enormous. The process is challenging enough in the warm waters of the Gulf of Mexico. But it is another magnitude of difficulty in the frigid Arctic.

If crude prices again reach $100 per barrel, some energy companies may be emboldened to begin exploration in the area once again.

The U.S. Geological Survey estimates that American Arctic waters in the Chukchi and Beaufort seas contain 26 billion barrels or more of recoverable oil.

However, that estimate now seems highly questionable.

Additionally, an Energy Department advisory council said it would take more than a decade for oil in the Arctic to be discovered, developed and brought to market.

For example, Italian energy company Eni SpA and Norwegian producer Statoil ASA are just now moving into production on a giant oil field in the Barents Sea -- 15 years after it was discovered.

Timelines aside, it’s critical to remember that Shell didn’t decide to abandon its efforts simply because the price of oil had fallen too far for drilling to make financial sense.

Shell walked away because there simply wasn’t enough oil or gas to be found in the region, and $100 per barrel oil won’t change that.