The controversy over Shell's Arctic oil drilling, explained

This week, President Obama has been touring Alaska, checking out melting glaciers and making speeches about how global warming is an urgent threat that needs to be addressed ASAP. And environmentalists are … not happy.

Specifically, they’re angry that, earlier this summer, Obama gave the go-ahead to Royal Dutch Shell’s efforts to search for oil and gas in the Chukchi Sea, north of Alaska. How, they ask, can the president say he cares about climate change if he’s opening up fresh areas for drilling?

This is part of a bigger conflict that’s been simmering for a few years. Sure, Obama has taken steps  to curb America’s fossil fuel demand — through new regulations on cars, trucks, and power plants. But, greens argue, he hasn’t shown nearly the same zeal in restricting fossil fuel supplies. The government still sells publicly owned coal in the Powder River Basin at bargain-basement rates. Obama’s wavered over the Keystone XL pipeline. And now Shell.

Obama, for his part, seems to take a genuinely different view on this. The only way to stop global warming, he’s argued, is to zero out fossil fuel consumption by developing cleaner alternatives. But that takes time. And in the interim, we’re still going to need oil. If we block drilling in the United States, some other country will just drill to satisfy that demand instead. Better we do it, with proper safeguards in place, than someone else. (That’s hardly the end of the debate; more below.)

In the meantime, Shell is pushing ahead, drilling an exploratory well in Arctic waters. The company has set its sights on the Chukchi and Beaufort Seas, which contain up to 22 billion barrels of technically recoverable oil. It’s an audacious plan — and quite risky. Shell isn’t expected to produce oil for at least a decade, and even that’s far from guaranteed. The area features violent storms, massive waves, and drifting ice floes, making drilling treacherous. Worse, any large oil spill here could be a nightmare to clean up.

So here’s a look at why Shell is going to such extreme lengths for oil, why Obama gave it the green light, and how this drilling project acquired such outsized significance in the climate debate.

1) No one’s producing oil from US Arctic waters. Shell wants to change that.

It’s not hard to see why energy companies would be interested in the Arctic Ocean. There’s a staggering amount of oil and gas beneath those waters (by some estimates, the entire ocean contains 13 percent of the world’s undiscovered crude and 30 percent of its undiscovered natural gas). And as global warming proceeds, sea ice has been receding in the summer, making more areas accessible.

Even so, no one’s really tried to drill in US-owned Arctic waters since a handful of exploratory efforts in the 1980s and 1990s. It’s difficult and costly. There are ice floes, severe storms, and if anything goes wrong, help is far, far away. In recent years, Total, ExxonMobil, Chevron, ConocoPhillips, and Statoil have all put Arctic drilling plans on hold.

So why is Shell persisting? For starters, the company is facing constant pressure to add new oil and gas reserves. Reserves are what determine an oil firm’s value, its ability to sell stock and borrow money. And as a company pumps and sells oil from its existing fields, it needs to add new ones. (Back in 2004, Royal Dutch Shell saw its share price plunge after admitting it had overstated its reserves by 22 percent.)

But finding new reserves keeps getting harder and harder. Most of the world’s “easy” oil has either been pumped already or nationalized by governments. So private companies keep pushing into increasingly unconventional territory. Deeper offshore waters. Extracting oil from shale rock formations. Or exploring the Arctic — which, for Shell’s US subsidiary, is one of the few frontiers left.

Shell has been poking around the Chukchi and Beaufort Seas since the early 1980s, and its geologists seem confident that there’s something to be had in this area. What’s more, says Tyler Priest, a historian at the University of Iowa who has written a book on Shell, the company’s US subsidiary has a history of pushing the envelope on exploration — it led the way on deepwater fields in the Gulf of Mexico in the 1970s. “There’s no question Shell’s the technological leader in offshore drilling,” Priest says. “It makes sense that they’d be the ones to take the initial risk.”

2) So far, Shell’s Arctic efforts have been bogged down by lawsuits and disasters

Shell’s Arctic foray got serious in 2008, when, under the Bush administration, the company spent $2.1 billion at auction to acquire leases in federal waters in the Chukchi and Beaufort Seas:

But then things got … difficult. Conservation groups, local communities, and Alaska Native groups all sued at multiple points to stop Shell from drilling. They argued that Shell’s preparations and spill-response plans were inadequate, forcing the company to propose fixes. Then, in 2010, after the BP oil spill in the Gulf of Mexico, the Obama administration put a six-month moratorium on offshore drilling while it revamped safety rules.

Shell finally got approval to drill exploratory wells in the Chukchi and Beaufort in the summer of 2012, but that turned into a fiasco. Early in the season, one anchored drill ship, the Noble Discoverer, got dragged by gale-force winds and nearly ran aground. Regulators then barred Shell from drilling deep into hydrocarbon zones after a containment dome, meant to limit the spread of oil in a spill, failed in early testing.

It wasn’t until September 2012 that the company was finally able to two shallow “top holes” (the first step in an exploratory well) in the Chukchi and Beaufort. And that’s when things really went awry. The Discoverer had to give up drilling in the Chukchi after being menaced by a drifting ice floe. It later caught fire and had to be towed to safety.

The other drilling rig, the Kulluk, worked for two months in the Beaufort before autumn sea ice started forming. En route to being towed down to Seattle for repairs that December, heavy winds and waves caused the tow rope to snap. The Kulluk was set adrift, the crew had to be rescued, and the rig eventually ran aground:

To make things worse, one of the rig operators involved in that season, a Shell contractor called Noble Corporation, later pled guilty to improper accounting and withholding information from the Coast Guard and got fined $12.2 million.

The federal government later investigated and found that Shell had “screwed up” (as Interior Secretary Ken Salazar put it) and needed to fix its glaring safety issues before it’d be allowed to go out again. The company didn’t even attempt to drill in 2013, and its plans to go out in 2014 were rejected. By this point, the company had spent more than $5 billion in the Arctic and still had nothing to show for it.

3) The Obama administration now thinks Shell is ready to drill

Now Shell’s trying again. In May 2015, the Interior Department gave conditional approval for Shell to begin work on an exploratory well at the Burger prospect in the Chukchi Sea. Shell had an updated operations plan, and regulators had imposed new rules limiting drilling to shallower waters and warmer months. (The agency had also issued stricter rules around blowout preventers, a type of valve meant to protect against undersea oil and gas well explosions.)

Environmental groups were livid at the decision to move forward, arguing that Shell still hadn’t adequately explained how it would avoid further disaster. “Our government has rushed to approve risky and ill-conceived exploration in one of the most remote and important places on Earth,” Susan Murray, a vice-president at the conservation group Oceana, said at the time. “Shell has not shown that it is prepared to operate responsibly in the Arctic Ocean.”

Nonetheless, Shell was cleared to start drilling the top sections of a well in the Chukchi earlier this summer while moving more equipment into place. Finally, on August 17, 2015, the Obama administration gave its approval for Shell to drill even deeper, into oil-bearing zones. (In June, kayak-paddling activists in Seattle tried to block Shell’s deep-sea drilling rig from leaving port, but the Coast Guard cleared them out.)

So what now? Shell has until late September to work in the Chukchi, at which point it will have to retreat before the sea ice returns. For now, the company is only drilling an exploratory well, which could take one or two seasons to complete.

And even if it does find oil or gas, commercial production still wouldn’t happen for at least 15 years. Among other things, the company would need to build pipelines that reach the coast and then stretch across Alaska to meet up with the existing Trans-Alaska Pipeline. Shell also has to hope it will prove economically viable to extract the fuel (not certain), that oil prices will stay high enough to justify production (not certain), and that regulations or litigation won’t halt Shell’s efforts in the future (also … not certain).

4) The biggest worry about Arctic drilling: A large oil spill could be a nightmare to clean up

Then there are all the risks of drilling — particularly the possibility of an oil spill in Arctic waters. Indeed, modeling by the US government has suggested that there’s a 75 percent chance of at least one large spill (i.e., more than 1,000 barrels) in the Chukchi Sea if oil and gas drilling expands significantly over the coming century.

If that ever happened, it could be extremely difficult for spill-response teams to get to this remote region, especially if a spill occurred in the fall or winter months. What’s more, groups like Oceana have pointed out that many of the usual methods of containing an oil spill — booms, dispersants — may not work as well in icy waters. And, unlike in the warmer Gulf of Mexico, it could be tough for microbes in the Arctic to break down any spilled oil quickly.

In a 2014 report, the National Research Council warned that current Coast Guard resources “are not adequate for overseeing oil spill response in the Arctic.” That report also pointed out that much too little was known about the effects of a spill on endangered species in the area, such as bowhead whales, polar bears, or ringed seals — not to mention nearby indigenous communities.

Shell, for its part, seems to believe it has a decent handle on the risks involved. In an interview with Bloomberg Business, Ann Pickard, Shell’s top executive for the Arctic, said that the company could have response materials, including a containment dome, capping stack, and surface booms, in place within 60 minutes of an accident.

Obama also seems to believe that the new safeguards his administration has put in place will be enough. “We delayed [Shell’s application] for a very lengthy period of time until they could provide us with the kinds of assurances … if, in fact, there was a leak that far north,” Obama said at a May press conference. “Based on those very high standards, Shell had to go back to the drawing board, revamp its approach, and the experts at this point have concluded that they have met those standards.”

But not everyone shares that faith, especially after Shell’s 2012 debacle. “Our takeaway from 2012 was that Shell did not appreciate how difficult it is to operate in Alaska,” Michael LeVine of Oceana, who has been at the forefront of legal efforts to try to stop Shell, told me back in June. “Now, three years later, without any real public disclosure of what’s new or different, we’re being asked to trust the same company. That’s why the government rush to approve these plans is so disappointing.”

5) Obama and environmentalists disagree on whether Shell’s drilling matters for global warming

Then there’s the global warming question. Climate scientists have long pointed out that we’ll need to keep the vast majority of our existing coal, oil, and gas reserves in the ground if we want to stay within our “carbon budget” and avoid significant temperature increases (say, 2°C or more). Given those constraints, environmentalists argue, it simply doesn’t make sense to open up new areas to drilling — especially ones that carry so many other environmental risks.

The Obama administration doesn’t seem to buy this — at least not entirely. Officials often appear to take the view, summarized here by Michael Levi, that trying to restrict fossil fuel supplies is like playing whack-a-mole. If you suppress drilling in the Arctic, someone elsewhere will drill instead, so long as there’s demand for oil.

That means the crucial thing is to reduce fossil fuel demand by developing alternatives. But, Obama has also argued, reducing demand won’t happen overnight. “In the meantime, we are going to continue to be using fossil fuels,” he said in that May press conference. “And when it can be done safely and appropriately, US production of oil and natural gas is important. I would rather us, with all the safeguards and standards that we have, be producing our oil and gas, rather than importing it.”

Increasingly, environmental groups have been pushing back more explicitly against this argument, making the case that it’s important to tackle both demand and supply. See Steve Kretzmann of Oil Change International for some counterpoints, including the argument that developing new supplies of oil now further locks us into fossil fuel infrastructure for decades. (A much longer version of the climate case against Arctic drilling can be found here.)

6) What’s next? Hillary says she’d oppose Arctic drilling. A Republican president… likely wouldn’t

Another key question is whether Shell was a one-off case or the start of an Arctic drilling parade. Obama officials have sometimes suggested that Shell was operating under leases purchased during the Bush years, and it would have been legally dicey to cancel them outright. Implying that it was somehow an exception.

But if that’s the case, what will Obama do next? As Ben Geman points out in National Journal, the Department of Interior is currently scheduled to hold another round of sales for oil and gas leases in the Chukchi and Beaufort Seas in 2016 and 2017. Environmental groups have been urging the Obama administration to postpone (or cancel) those sales. This is something to watch closely.

A lot will also depend on future presidents. Would they auction off more leases to oil companies? Will regulators approve drilling plans? A Republican president (Donald Trump, say) would probably be inclined to green-light these projects. By contrast, Hillary Clinton has said she wouldn’t have let Shell go forward with drilling:

So it’s safe to assume she’d be considerably more skeptical than Obama.

7) The broader future of Arctic drilling is highly uncertain — and a lot depends on Shell

It’s also unclear whether other oil and gas companies would even want to move forward on drilling in the Arctic. Right now, they’re watching what Shell does closely. If Shell has another misadventure — or, worse, a spill — that could be a major deterrent.

What’s more, even if Shell succeeds in the Chukchi, that doesn’t mean we’ll see an Arctic free-for-all. Oil prices are currently quite low, hovering around $40 per barrel, which is deterring many companies from contemplating the costly Arctic. In her Bloomberg Business interview, Shell’s Pickard said that oil prices would need to rise to around $70 per barrel or more by 2030 for the company’s Arctic project to have been worthwhile. If not, then not.

Then there are other countries. Russian officials have indicated a strong interest in oil and gas drilling in their slice of the Arctic. But those efforts, too, have bogged down. US and EU sanctions have prevented Rosneft, the state-owned firm that would do the drilling, from further exploration — since the company can’t import Western technology or work with its erstwhile partner ExxonMobil. Low oil prices haven’t helped, either.

Ultimately, it all comes back to demand. If worldwide demand for oil keeps surging in the coming years and props up prices, then there will likely be a renewed push to drill in the Arctic. After all, as a National Petroleum Council report pointed out earlier this year, the US shale boom won’t last forever, and the Arctic is the next logical place to look for further oil supplies. Conversely, if the world starts shifting to alternatives (electric cars, say) and reducing its fuel use, Arctic drilling will look less and less tempting over time.

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