Royal Dutch Shell's dry hole in the Chukchi Sea may be disappointing to shareholders, but it's potentially devastating to Alaska.
The company's decision to end oil exploration in offshore Alaska for the foreseeable future means the state must find another source to fill the 800-mile trans-Alaska pipeline and solve its economic woes, Gov. Bill Walker said.
"We need to get some oil in the pipeline, and we need to do it as quickly as possible and in the safest method possible," Walker said. He is suggesting the federal government open the Arctic National Wildlife Refuge to natural gas drilling.
The petroleum industry funds upward of 90 percent of state government. Declining oil production and low prices have left Alaska with a billion-dollar budget gap, and state leaders saw rays of hope in Shell's offshore prospects.
Confirmation of the estimated 15 billion barrels in the Chukchi lease area could have led to additional exploration by other leaseholders. And a transition to production — though a decade or more off — would have meant jobs, potential revenue and a source to replenish the trans-Alaska pipeline, now running less than one-quarter full.
Kara Moriarty, president and CEO of the pro-industry Alaska Oil and Gas Association, noted other companies holding leases in the Arctic were waiting to see what happened with Shell and will follow its lead.
"I haven't talked to anyone, but I have very low expectation that we're going to see any type of exploration or development in the Arctic anytime in the near future," she said.
She cited a loss of jobs as one of the biggest immediate effects in the state.
"At any given day during the project this summer, they'd have 600 to 800 workers and another 600 to 800 workers waiting to shift in and out, on a two-to three week rotation," Moriarty said. "So, I think in the short-term, it's loss of jobs, it's loss of investment."
Shell spent $2.1 billion on 275 Chukchi Sea leases in 2008 and $7 billion overall on Arctic offshore development. Before this year, the company last drilled off Alaska's northwest coast in 1991.
The exploratory well Shell drilled this month extended to 6,800 feet in 150 feet of water. It found oil and gas but not in commercial quantities that would justify additional exploration with two drill vessels, thousands of workers and a flotilla of 28 vessels supplied from a base 150 miles away in the community of Barrow.
A return to Alaska waters will depend, as always, on how drilling prospects compare to other areas, Shell spokesman Curtis Smith said.
"At any given time, we have a suite of investment options in our portfolio," Smith said. "Not all of them can be funded."
Today's oil prices were not a factor in the decision.
In an interview earlier this month, Shell USA President Marvin Odum said the company looks at projected prices at least a decade out.
Moving forward, he said, would hinge on finding a petroleum basin large enough to justify the enormous cost of a transition to development: Arctic-strong production platforms, undersea pipe to the Alaska coast, and an overland pipeline connection to the trans-Alaska pipeline.
The well results were a major driver in the decision, Smith said, but the regulatory environment also was a factor.
"It's our view that the current permitting system brings very high levels of operating uncertainty to offshore Alaska planning," he said. "Under normal circumstances, an exploration program like this one should have taken significantly less time."
Federal regulators are preparing to issue Arctic-specific exploratory drilling regulations, crafted in the aftermath of the Deepwater Horizon disaster in the Gulf of Mexico. One expensive provision is a requirement that two drilling rigs be on hand. If one is destroyed in a blowout, the second could drill a relief well.
Environmental groups were ecstatic with Shell's announcement. They contend the risk of a major spill is too great to allow Arctic offshore drilling.
Industrial activity, they say, will harm polar bears, walrus and ice seals already affected by diminished sea ice.
Burning the U.S. Arctic's oil reserves, estimated by the U.S. Geological Survey to exceed 26 billion barrels of conventionally recoverable oil, would add to climate warming and further delay a transition away from fossil fuels.
Susan Murray of oceans advocate Oceana said Shell's decision allows government to step back and apply science and careful planning to the Arctic.
"As President Obama saw firsthand, there are many challenges in the Arctic region, and we can use this opportunity to address changing climate and the need to protect and conserve important ocean resources," she said in a statement.
Shell is the major leaseholder in the Chukchi. ConocoPhillips holds 98 tracts but backed off of exploration plans in April 2013, citing regulatory uncertainties.