Unintended Consequences?

Todd Shriber
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By no means is it Seward's Folly, but Royal Dutch Shell sure does have its own little headache brewing in Alaska. While Alaska is still one of the top oil-producing states in the U.S., production at Prudhoe Bay has been in decline for years now. In fact, Reuters reported on Wednesday that the Trans Alaska Pipeline may only have another decade of service left if Alaska's oil output continues to decline at current rates.

In comments made on Wednesday, Shell Oil President Marvin Odum, a man some industry observers view as a possible successor to Shell CEO Peter Voser, tried to remain optimistic about the outlook for his company's Chukchi Sea endeavors. At this point, for anyone from Shell to put on a smile regarding its Chukchi efforts is a trying task.

After all, the Anglo-Dutch oil giant has been put through the regulatory ringer more times than it probably cares to admit. Shell acquired these leases several years ago and has already spent $2.1 billion, but all of that still has not resulted in any drilling. Bottom line: Shell is four years into 10-year leases in the Beaufort and Chukchi Seas and still has not produced a drop of oil due to regulatory delays.

The company says it needs to two years to prepare for drilling and that was actually ready to tap Beaufort back in 2007. Shell (RDS-A) was planning to tap Chukchi this year, but last year's Gulf of Mexico oil spill put a wrench in those plans. You see, a consequence, unintended or otherwise, of the moratorium on deep-water drilling that was imposed after the Gulf spill was that the moratorium was not Gulf-specific. Meaning, Shell's Alaska plans fell under the moratorium's jurisdiction.

Now, with any luck, Shell MIGHT be able to start drilling Chukchi in 2012 or 2013. To be sure, there are legitimate concerns regarding deep-water drilling anywhere let alone in area as treacherous as this part of Alaska. Environmental groups are not only concerned about the effect drilling with no missteps would have on indigenous people, seals and whales, but also what the impact of a Gulf-like spill in the area would be. As the map below indicates, spill concerns are at least legitimate.

Alaska Drilling Map

While this is not politically unfriendly territory, it is is still unfriendly territory (Shell's areas are in light pink and yellow.) Limited daylight in the winter months, heavy ice to drill through and the remote location would make a spill here perhaps even worse than what we saw in the Gulf. In other words, there are risks, just as there with almost every other deep-water project at any location across the globe.

There are also risks to not tapping Chukchi. On Wednesday, the Associated Press reported estimates indicate there are 26.6 billion barrels of recoverable oil reserves and 130 trillion cubic feet of recoverable natural gas reserves in Alaska's out continental shelf. That is nearly four times annual U.S. oil consumption and five times annual gas consumption, as the AP notes. Some estimates put the region's recoverable oil reserves at closer to 30 billion barrels.

Translation: Even if those numbers are cut in half, that is still a lot of domestic energy resources, a lot of jobs and a lot of tax revenue for Alaska and Uncle Sam. Question is will Shell get the chance to prove all this regulatory wrangling was worth it?

Todd Shriber