$4 Billion and Still No Drilling

Jim Brown
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Shell has spent about $4 billion for the rights to drill in waters off the coast of Alaska and they are still a long way from putting a drill bit in the water.

Last week Shell held an informational meeting at the Millennium Alaskan Hotel in Anchorage. About 170 oil executives, state employees and tribal members attended. Shell outlined its plans to drill in the Arctic waters off the coast.

Many of these people showed up not specifically to hear about Shell's plans but to figure out how they could get a piece of the action. Shell won the arctic leases in 2005 and has spent billions, nearly $4 billion to date, for the leases, engineering studies, government ordered studies, environmental research and seismic research.

The Chukchi and Beaufort sea deposits may hold up to 25 billion barrels of oil according to government experts and Shell researchers. That would be worth roughly $2.5 trillion at today's prices.

The drilling and development will last for decades and oil, which will be pumped through the Alaskan Pipeline, could keep that line open for 30-40 more years.

Once drilling begins it could create up to 54,000 jobs not just in Alaska but all across the USA as contractors and suppliers gear up for the effort. There will be undersea pipelines plus a cross country pipeline to connect with the Alaskan Pipeline at the northern end. The connector pipeline would be half the length of the Trans Alaskan Pipeline so it is not a small effort.

The state of Alaska could receive $4.8 billion in tax revenue but the big winner would be the U.S. with $161 billion in royalties and taxes through 2057.

Shell is planning on drilling 10 Arctic offshore wells over the next two years if they can get final approval from the government. They must still win 35 permits covering all phases of the effort. Shell says it has until the end of October to decide if it can be successful in the permit battles and then start lining up 18 vessels, a rig and 1,200 workers to begin drilling the first well next July.

The Trans Alaska Pipeline will be dependent on this oil to keep the pipeline open. Volume has slowed from the 2.0 mbpd in 1988 to only 570,000 bpd today. Any further decline under 500,000 bpd would require millions in upgrades and a decline under 350,000 could shut it down. It was never designed to run that slow and low quantities of oil create hardships like ice and wax buildup and lack of pressure to push the oil through the pipe. Engineers hope the Arctic drilling plus some new efforts onshore will increase pipeline volume to more than 1.0 mbpd once again although it could be 5-10 years before that oil begins to flow. Shell does not expect any offshore production until 2020.

Other companies in attendance included Statoil (STA) and Conoco Phillips (COP). They also won leases in the Arctic Sea but are not as far along in the development process as Shell. Statoil has already opened an Anchorage office in preparation for the development effort. Noble Corp (NE) also opened an office. They own the Discoverer rig Shell has contracted to drill beginning in 2012. Shell is currently using it off the coast of New Zealand at $155,000 per day.

Local villagers and Alaskan natives are vying for the rights to supply the effort from food and logistics to waste management.

If there was no shortage of oil reserves do you think Shell would spend up to $5 billion from 2005-2012 before they even started drilling with no hopes of production until 2020? Obviously not. No oil company executive would risk that amount of money and face the technological challenges of drilling in dangerous waters for a payout 10-15 years in the future. The only way it makes sense is that there is nowhere else to drill for easy oil. It has already been found and produced.

Jim Brown

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