Tapped out? Shell ending Arctic offshore oil exploration after test well disappoints

May 12, 2015: The Shell Oil Company's drilling rig Polar Pioneer is shown in Port Angeles, Washington. (REUTERS/Jason Redmond)

Royal Dutch Shell said early Monday that it was ceasing offshore oil and gas exploration in Arctic waters after a test well yielded unsatisfactory amounts of oil and gas.

The announcement was a huge blow to Shell, which was counting on offshore drilling in Alaska to help it drive future revenue and had poured billions in investment and years of work into the exploratory well. Environmentalists, however, had tried repeatedly to block the project, and welcome the news.

A statement from the company's headquarters in The Hague said Shell was ending exploration off Alaska "for the forseeable future" after what it called "a clearly disappointing exploration outcome."

Shell said it had found indications of oil and gas in the well in the Chukchi Sea, about 80 miles off Alaska's northwest coast. However, the petroleum was not in quantities sufficient to warrant additional exploration in that portion of the basin, the company added.

"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 U.S.," said Marvin Odum, president of Shell USA, in the announcement.

The decision reflects the results of the exploratory well in the Burger J lease, the high costs associated with Alaska offshore drilling and the challenging and unpredictable federal regulatory environment in offshore Alaska, the company said.

Shell has spent upward of $7 billion on Arctic offshore development in the Chukchi and Beaufort seas.

Monday was Shell's final day to drill this year in petroleum-bearing rock under its federal permit. Regulators required Shell to stop a month before sea ice is expected to re-form in the lease area.

The company reached a depth of 6,800 feet with the exploratory well drilling in about 150 feet of water.

Environmental groups oppose Arctic offshore drilling and say industrial activity and more greenhouse gases will harm polar bears, walrus and ice seals. Over the summer, protesters in kayaks unsuccessfully tried to block Arctic-bound Shell vessels in Seattle and Portland, Oregon.

Margaret Williams of the World Wildlife Fund in Anchorage, called the news stunning.

"That's incredible. That's huge," she told the Associated Press. "All along the conservation community has been pointing to the challenging and unpredictable environmental conditions. We always thought the risk was tremendously great."

"Polar bears, Alaska's Arctic and our climate just caught a huge break," said Miyoko Sakashita, oceans program director for the Center for Biological Diversity, in a statement. "Here's hoping Shell leaves the Arctic forever."

The U.S. Geological Survey estimates U.S. Arctic waters in the Chukchi and Beaufort seas contain 26 billion barrels or more of recoverable oil in total. Shell officials had called the Chukchi basin "a potential game-changer," a vast untapped reservoir that could add to America's energy supply for 50 years.

Shell had planned at least one more year of exploration with up to six wells drilled.

A transition to production could have taken a decade or longer.

Shell had the strong backing of Alaska officials and business leaders who want a new source of crude oil filling the trans-Alaska pipeline, now running at less than one-quarter capacity.

Charles Ebinger, senior fellow for the Brookings Institution Energy Security and Climate Initiative, said in an interview that a successful well by Shell would have been "a terribly big deal," opening an area that U.S. officials say contains 15 billion barrels of oil.

While oil prices have dropped significantly in recent years and nations have pushed for cleaner energy sources, analysts predict that the world between 2030 and 2040 will need another 10 million barrels a day to meet growing demand, especially in developing countries, Ebinger said.

"Areas like the Arctic are one of the areas that, if we're going to be able to do this, we need to examine," he said.

Shell in 2012 sent drill rigs to the Chukchi and Beaufort seas but was not allowed to drill into oil-bearing rock because the containment dome had been damaged in testing.

The company's vessels suffered serious setbacks getting to and from the Arctic.

One drill vessel broke loose from its towline in the Gulf of Alaska and ran aground near Kodiak Island. Owners of the leased Noble Discoverer, which drilled in the Chukchi and is back this year, pleaded guilty to eight felony maritime safety counts and paid a $12.2 million fine.

That was proof of Shell's Arctic incompetence, critics said.

Odum called drilling off Alaska's coast the most scrutinized and analyzed oil and gas project in the world and said he was confident Shell could drill safely.

The Associated Press contributed to this report.