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Shell Abandons Chukchi Oil to Detriment of Alaska's Economy

By Erica Dingman

In a very broad sense the Arctic is predictably unpredictable. Temperatures in Anchorage, Alaska rose to a high of 86 F in June 2015 on a day with a historical average of 65 F. And the highly cited U.S. Geological Survey oil and gas report states that the Arctic region accounts for about 22 percent of the world’s undiscovered, technically recoverable oil and gas. However, this estimate is merely ‘presumed’ and must be explored to ascertain the precise location and quantity of these resources. So in some respects it was not a complete surprise when Royal Dutch Shell announced on Sept. 28, 2015 that they have suspended exploratory operations in the present lease area of Alaska’s Chukchi Sea, claiming that the oil and gas findings “are not sufficient to warrant further exploration.”

The exploratory well area in question that day, Burger J, is part of a multi-well exploratory project – 3 wells in all – that cost the company $7 billion in a seven-year quest to find economically viable sources. The well, which is located approximately 150 miles from Barrow, Alaska, was drilled to a depth of over 1¼ miles. The company did not move forward on drilling Burger V as planned, nor will they return to the partially completed exploratory well Burger A started in 2012.

Environmentalists hailed this moment as a victory for climate change and the Arctic environment. The Natural Resources Defense Council (NRDC) stated: “This is … the latest evidence that there's a better way to fuel the future. We can’t lock in fossil fuel production that we do not need and worsens climate change.” Both the NRDC and Earth Justice seized this moment to encourage investment in renewable energy development, which is notably a key priority of the U.S. Arctic Council chairmanship.  This does not, however, preclude development of fossil fuel projects in the state of Alaska as laid out in the U.S. Arctic Policy and various other policy tools such as the 2014 Implementation Plan for the National Strategy for the Arctic Region.

For the state of Alaska, however, the announcement is seen as a setback, in what was expected to have a “Gulf of Mexico sized” potential according to Kip Knudsen, Alaska’s Director of State and Federal Relations based in Washington, D.C. As Knudsen explained, the Shell project was a “big economic opportunity.” Though 100 percent of revenues from offshore drilling flow to the federal government, unlike land-based drilling which has 90-10 revenue sharing in favor of Alaska, the indirect economic impact was substantial in terms of job creation and pipeline efficiency.

At its height, the Trans-Alaska Pipeline transported over 2 million barrels of oil a day. Today the flow has declined to 500,000 barrels. At 300,000 barrels per day, the substance cools enough to become the consistency of a “tootsie roll,” causing technical challenges.  The costs associated with transportation are considerable, but the higher the quantity flowing through the pipeline the lower the transportation cost. A lower cost results in higher taxable revenues for state or federal coffers when the oil emerges in Valdez, Alaska, where it is taxed.

Alaska also stood to gain a considerable number of jobs in port construction and operations. Today, existing deep-water ports are located along the most southern portion of Alaska’s coastline, with none along Alaska’s Arctic coastline. Had the Shell project come to fruition the dearth of deep-water ports along the western and northern state shorelines would have been alleviated by the construction of at least one port, and potentially more, to support activities. Particularly along these coastlines, Alaskan infrastructure is failing to support increased human activity such as that involved in offshore oil production. A new port or ports would increase U.S. search and rescue coverage, as well as serving to protect U.S. air, land, and sea borders and diversification of Alaska’s economy“Anyone who wants a job would have one,” said Knudsen. As a comparison for potential job creation, Knudsen cited Trident's Akutan shore plant, the largest seafood production facility in North America, which employs 1,000 people seasonally.

Our conversation then turned to the potential for renewable energy source development. When asked if Alaska supports renewables, Knudsen answered adamantly “yes.” In Barrow it is less likely that renewables will be adopted where the community owns the gas that fuels their economy. However, in the many remote communities that must endure exorbitant energy costs, renewables are an appealing cost-effective alternative to meet even the most basic demands.

Renewable energy development projects have shown varying degrees of success throughout rural Alaska. In one case that I wrote about for the upcoming Arctic Yearbook, the fishing community of Craig installed a biomass energy system fueled by wood chips from the local sawmill to offset a monthly fuel bill in excess of $10,000 for the heating of two local schools and the community swimming pool. The wood-fired system has displaced 85 percent of diesel and propane use and expects the $1.5 million investment to pay for itself in 12 years from inception.

Alaska has invested $259 million since 2008 to improve the survival rate of nascent renewable development and production for communities that can barely afford to turn on the TV. Knudsen said, “I don’t see them as alternatives. Even with Shell we are going to develop renewables.” 

Notably, although Shell’s press release states, “Shell [still] holds a 100 percent working interest in 275 Outer Continental Shelf blocks in the Chukchi Sea,” the company claims that they will cease further exploration of offshore activities for the foreseeable future.

We are entering a tumultuous time in human history. Multiple factors are leading up to a potential shift in global economic trends. While Governor Bill Walker said at a press conference shortly after Shell’s announcement that, “no one assumes oil [is] staying at $50 a barrel,” Bloomberg and Citibank are planning for a future that puts renewable resources on the map for future energy needs. Moreover, environmentalists are exerting more pressure on decision makers to adopt environmentally friendly policies and practices. Some may see this as an ideological divide, and to a certain extent that is true, but for those who live in locations that depend on non-renewable resource projects for economic stability, the reasoning is not so clear.  How do these economies meet local economic demands such as state deficits and job creation when the tide may be turning toward a transition to renewables? In this regard governments and societies need to use their ingenuity to help these economies grow and thrive during this time of tumult. Transitions of any sort are difficult, but transitions on a potentially global scale are massive.

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Erica Dingman is a senior research fellow at World Policy Institute and directs the Arctic in Context initiative.

[Photos courtesy of Wikimedia Commons]

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