Shell’s Alaskan oil plan makes long-term sense amid questions over shale’s longevity

The National, by Steven Kopits.  Shell announced this week that it was abandoning efforts to develop oil from the Alaska’s outer continental shelf (OCS).

Faithful readers may wish to review related personal correspondence from last night with our esteemed Aussie oil and gas analyst, here.


Our equally esteemed Mid-Atlantic oil and gas analyst friend adds this note today that should be an even stronger signal to Alaska's Governor Bill Walker.

And, what is that signal? 

The note signals Walker that he better start acting as though Alaska were competing with oil and gas producing areas that have more competitive natural attributes.

Walker should observe that signal and begin sending his own signals to oil & gas industry investors.  He should begin showing them that he fully supports their oil and gas projects; will defend them before the feds; will cease demonizing industry; will remove from the table options for increased industry taxes; and, will cease efforts to attach conditions to a gas transportation project, including the condition of state ownership.  

He should also bite the bullet in Alaska's failing economy and begin decisively cutting state spending.  

-dh

The company had drilled a well in the Burger prospect in the Chukchi Sea this past summer, but the results were disappointing. Although the company found hydrocarbons, the flows were insufficient to warrant further exploration. With that, Shell decided to suspend activities in Alaskan waters indefinitely.

Shell had such high hopes. If all went well, it would have produced an average of 650,000 barrels of oil for 35 years from the OCS. From 2025 until 2060, the OCS would power Alaska’s economy and contribute up to 10 per cent of domestic US oil production.

The project, which we estimated would cost more than US$300 billion in total, would have represented the largest infrastructure project in the United States in the next 15 years.

There was no more visionary initiative anywhere in the world.

For Shell, the Alaskan OCS was the third leg in the company’s answer to peak oil. Shell was among the first to recognize in 2005 that increasing oil production would be a heroic undertaking. Finding new oil would be “no cheaper, no easier”, it said.

To meet the challenge, Shell proposed a three-legged strategy. First, a massive gas-to-liquids plant would be constructed in Qatar. And it was. The Pearl GTL plant, as it is called today, came on line in 2011. It produces 8 per cent of Shell’s total output, equaling 260,000 barrels of diesel and lubricants daily.

The second leg of Shell’s strategy rested on a series of liquefied natural gas plants. These plans were essentially scrapped earlier this year when Shell canceled four LNG projects.

This left the third leg, Alaska, which was perhaps the jewel in the crown. The scale of ambition, the volumes, the duration and the vision were breathtaking. The commitment was enduring. Even when the going got tough, Shell hung in there and continued to fight for Alaska, despite head winds from regulators, Greenpeace and a series of technical setbacks.

With weak initial well results, however, Shell capitulated and has suspended operations in Alaska “for the foreseeable future”, which should be read as “permanently”.

The vision of oil scarcity that fuelled Shell’s ambitions after 2005 has dissolved, the victim of the shale revolution. As little as two years ago, the promise of shale was uncertain and underestimated (not least by me).

Whereas Shell was prepared to go to the ends of the earth for new oil, company management could have driven a couple of hours from corporate headquarters to a fully plumbed basin – the Permian – and produced more oil with nothing more than fracking and horizontal drilling.

Alaska is redundant under such circumstances. Consequently, until the shale revolution has run its course and oil prices have returned closer to $100 per barrel, expect Shell to keep its distance from Alaska. By the time the dust has settled, the wait could be a decade or more.

And yet I still believe in Shell’s earlier vision. Shale may prove an endless cornucopia of new oil, but maybe not. The oil and gas division of North Dakota’s Department of Mineral Resources has estimated that Bakken shale oil production would only be 35,000 barrels per day higher at the end of 2017 than it is today, even at Brent oil prices above $95 per barrel. Restarting US shale may take much higher prices and much more time than anticipated.

The flood might not last. No one expects shale growth to last past 2025, and many see a peak before 2020. Shell, by contrast, would not have begun flowing oil from Alaska until after 2025.

If we look in decadal terms rather than quarterly, Shell’s visionaries may ultimately be vindicated. Shale, to the best of our knowledge, will not cover us for more than a few more years. In all likelihood, we will need the oil for which Shell is searching in Alaska.

Nor has Shell entirely closed the door. Marvin Odum, Shell’s director of upstream Americas business, has said that Shell “continues to see important exploration potential in

[offshore Alaska], and the area is likely to ultimately be of strategic importance to Alaska and the US.”

With oil prices at current levels, however, even three months has become a long time for a company such as Shell. Why was its decision to abandon Alaska announced two days before the end of the quarter? One might speculate that third-quarter financial results would be so disastrous that Shell would want to be able to demonstrate tangible, direct and immediate commitment to reducing expenses and capital expenditures. There is no easier place to cut than Alaska.

Even if everything went well, Shell would not see a dime from Alaska for at least a decade. Terminating Alaska improves the bottom line immediately.

But at what cost? We have allowed the surplus of shale oil to lull us into a false sense of security, that oil has become “cheaper and easier”. And in the short run, it has. But the long run is far from decided.

For now, oil in Alaska is dead. It is dead in Norway and Russia as well. Norway’s Statoil is struggling with costs on its Arctic Johan Castberg project, and Rosneft has conceded that it cannot proceed in Russia’s Kara Sea without its partner ExxonMobil.

Arctic oil, until the shale revolution ends, is in a deep freeze. But this does not mean that we will not need that oil, nor that current oil prices are sustainable.

Rather, the economics of the oil business have become so dire that even the most committed and visionary of companies are forced to abandon their most cherished plans.

Steven Kopits is the managing director of Princeton Energy Advisors in New Jersey
Source: The National  


…personal reflections from our Aussie oil and gas analyst friend who appreciates Alaska and other North American resource potential but frequently joins us in lamenting the unfortunate interference of political leaders.  He sent us this note in response to the "National" article above.   -dh
 
Dave,
 
I thought the article was a insightful one on Shell and AK.
 
In light of the analysis below, the simple questions for AK now seem to be:
  1. Can TAPS live long enough to support a new round of offshore exploration next decade (with production from any successful efforts therefrom in the decade after that)?
  2. Did Burger J materially reduce the technical assessment of the US Arctic’s prospective resources? (I have seen no on-line chatter about what the well actually found-out from a sub-surface perspective – in the long run this could be far more important than the regulatory/political issues that have received most media attention).
  3. Will Washington ever permit 1002 exploration/production and if so would that be sufficient to keep TAPS going until “1” above?
  4. AKLNG should help TAPS – but how will it fare given gas supply rivals internationally and the surprisingly socialist impulse from AK’s politicians?

My response to our Aussie oil and gas analyst friend:

 …here's an initial thought or two.
 
I think AK-LNG needs TAPS more than TAPS needs AK-LNG.  If the producers sense that there is no realistic hope for keeping the ANS oil flowing, at some point soon thereafter they will have no choice but to put the gas project on ice again.  You can't operate a huge gas project without a the huge ANS producing oil field, the TAPS transportation corridor, and the support services it pays for.
 
The timing this time does not look like its working in Alaska's favor.  No chance for ANWR to feed TAPS until there is a different president and then it will be a decade before production could occur.  The feds have locked up half of NPR-A and created delays for projects in the other half, so not much TAPS help from that corner.  The feds using their passive-aggressive strategy have chased Shell away from the Arctic resources, removing the largest hope for a fifty year extension on TAPS' life.  
 
Alaska's governor is a very foolish person who sees the world through the provincial eyes of a selfish and not very smart socialist whose every action moves industry investors farther from Alaska, creating a pre-text for state ownership.
 
But now the big question is whether the federal Administration can defend America and her resources against the ravages of real enemies, virtual ones, and against the internal time bomb of inflationary debt.  The jury is out but the odds of seeing a much weaker — if not defeated — U.S.A. in our lifetime is not an unrealistic possibility.  
 
…in which case, our discussion becomes academic.
 
Good to keep in touch.  Travel safely.


Dave,

It is a fascinating debate – but as you note, not only an academic one.  
 
There is a real issue of chickens and eggs with respect to both pipelines.  But there are so few places the Super-Majors can go and actually get low-ish sovereign risk assets of this degree of materiality.
 
I think even if there is a Republican President (Rubio is my bet for 2016 – but I may be indulging in wishful thinking), then he will still have to deal with the Senate.  Probably more significantly, unless oil goes back above $100, he wouldn’t want to spend scarce political capital on ANWR (pace G W Bush, etc).
 
On the Federal side, I’m (maybe optimistically) reminded of Churchill’s quote – “Americans will always do the right – after they’ve tried everything else”.  The nature of the US Constitution often drives such a process.
 
At the State level, Walker must surely have advisers and connections in the legislature who know how the real world works?  A quote which a Chairman of a Board I was on always made is apposite to most occasions: “remember the golden rule – he who has the gold makes the rules”.  AK does not have the gold to become a LNG player.
 
In the end of the day, unless willing Super-major money and expertise is involved, AKLNG cannot happen.  To go to the Norwegian analogue that you referred to recently – Statoil took multi-decades to become any good – and benefited from the hugely profitable early days of prolific oil-fields.  If Walker is just a one term Governor, then the Super-Majors can wait him out – the pace of required LNG supply growth probably suits that timetable anyway.
 
Cheers,
___________________________________
 
From Our Mid-Atlantic Oil and Gas Analyst Friend: A Serious Message Today About Demand For New LNG Projects In Japan.  
 
Remember, two weeks ago, Governor Walker went to Japan and returned with news about the high interest in Alaska gas?  
 
For decades he has been going to Asia, returning with stories about the high interest in Alaska gas.  
 
Walker's either giving false hope to his supporters or painfully unaware that Asian cultures train their hosts to be diplomatic, positive and supportive when entertaining visitors no matter how valid or invalid their visitors' messages might appear to be.  -dh
 
From our Mid-Atlantic friend:
"Japan is on the road to bringing back much of its nuclear power fleet.
 
"When many of the currently planned LNG facilities were being submitted on 2011-2013, there was a general belief that the Japanese nuclear fleet would not return for some time, if ever.
 
"LNG would be able to cheaply replace fuel oil and other oil-based sources. That source of LNG demand, based on the trend now taking place in Japan, now appears to be largely illusory."