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Royal Dutch Shell suspends Arctic drilling indefinitely

This story has been updated.

In a setback for dreams of Arctic oil riches, Royal Dutch Shell announced early Monday morning it will indefinitely suspend its Arctic drilling off the Alaska coast after finding insufficient oil and gas in one of its exploratory wells to justify costly development.

The move puts an end — for now — to the contentious debate over whether oil and gas exploration should take place in the environmentally sensitive area off Alaska’s coast. President Obama has come under intense fire for allowing drilling to proceed, and environmentalists cheered Shell’s announcement.

It also highlights the tremendous costs and risks of drilling in the Arctic frontier, which is thought to have vast oil reserves but where little exploration has taken place so far. Daunted by the task, half a dozen companies had already put their Arctic plans on ice; while Exxon Mobil found oil in Russia’s Kara Sea, economic sanctions forced it to halt operations there.

In a statement at 1 a.m. Eastern time, Shell said that while it had successfully drilled its Burger J exploration well in Alaska’s Chukchi Sea this summer to a total depth of 6,800 feet, the indications of oil and gas “are not sufficient to warrant further exploration in the Burger prospect.” The well lies roughly 150 miles from Barrow, Alaska, a base for shuttling supplies. Shell had sent about 30 vessels, including two large drilling rigs, to take advantage of the narrow summer window when drilling is feasible.

“The Shell Alaska team has operated safely and exceptionally well in every aspect of this year’s exploration program,” said Shell Oil Co.’s president Marvin Odum.  “Shell continues to see important exploration potential in the basin, and the area is likely to ultimately be of strategic importance to Alaska and the U.S. However, this is a clearly disappointing exploration outcome for this part of the basin.”

The firm said it would seal and abandon the well in accordance with U.S. regulations and “will now cease further exploration activity in offshore Alaska for the foreseeable future.”

[READ: Shell’s big gamble in the Arctic]

“This decision reflects both the Burger J well result, the high costs associated with the project, and the challenging and unpredictable federal regulatory environment in offshore Alaska,” the statement added.

Many Republicans seized on the announcement as evidence that Interior Department regulations had made it more difficult and costly for Shell to continue. One Interior Department regulation barred Shell from simultaneously drilling wells less than 15 miles apart because of the sensitivity of marine mammals to noise. Shell had asked to drill a second well just nine miles away.

At the same time, co-founder Bill McKibben on Twitter claimed credit for Shell’s drilling halt: “I think great activists are big reason why. Huge win!”

But a Shell official, who asked for anonymity to preserve working relationships, said “Our decision to stop exploration for the foreseeable future was based purely on the well results of Burger J.”

Interior Department spokeswoman Jessica Kershaw said Monday the department “has focused on making sure that Shell’s exploration activities are performed as safely as possible” and would continue to monitor its activities as it scaled back its operations “to ensure that de-mobilization activities are done safely and responsibly.”

The company said it would take a large financial charge as a result of the announcement. The balance sheet value of Shell’s Alaska position is approximately $3.0 billion, with approximately a further $1.1 billion of future contractual commitments for equipment the company expected to use in 2016 and 2017, the company said. It will try to redeploy some of those assets, but some write offs will be required. Shell executives will provide shareholders with more details when it reports results for the third quarter.

Shell has spent more than $7 billion on oil exploration in the Alaskan Arctic, including more than $2 billion in what was a record Interior Department lease sale in 2008 and $1.4 billion this year. But its efforts to find a vast amount of oil have been mired in lawsuits and a regulatory process complicated by a series of mishaps — a rig ran aground and an ice breaker hit uncharted shoals — that have damaged vessels required for the drilling program. The BP oil spill in the Gulf of Mexico also resulted in a suspension of all offshore drilling for a period and made regulators more sensitive to spill risks.

But environmentalists argued that the mishaps illustrated the difficulty of operating in a remote area covered with ice most of the year. Lois Epstein, a licensed engineer and Arctic program director for the Wilderness Society, said the project made no sense given the area’s wildlife, lack of an oil spill response infrastructure and the threat fossil fuel burning poses to the climate.

“Shell’s announcement is a very good news for the marine environment, sensitive coastal lands and the Arctic communities that would be devastated by a major oil spill,” Epstein said in a statement. “Hopefully, this means that we are done with oil companies gambling with the Arctic Ocean, and we can celebrate the news that the Arctic Ocean will be safe for the foreseeable future.”

For the oil industry, however, the well results were bad news.

“That was a huge disappointment not only for Shell but also for the industry,” said Fadel Gheit, an oil analyst for Oppenheimer & Co. “This has been a saga. Bad timing, bad planning, bad circumstances. It was not meant to be. Everything that could go wrong went wrong.”

He said that though the company only completed one well, he said that it was the best prospect Shell had. “If you wanted to make a bet on one horse, this was the horse in for the money,” he said. “This was the best candidate.”  In the 1990s, five wells were drilled in the area and abandoned after yielding natural gas, but by early 2008 oil prices had soared and Shell had taken another look at the seismic data.

The announcement that Shell would halt drilling came less than a month after President Obama’s historic trip to the Alaskan Arctic to highlight climate change and Arctic policy. Environmental activists had both celebrated the trip and yet also suggested a contradiction between the president’s climate concern on the one hand, and his administration’s allowing Shell’s drilling plans to go forward.

“As President Obama saw first-hand, 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,” said Susan Murray, a deputy vice president at Oceana, in a statement. “Shell’s announcement today allows the government to take a step back to apply careful planning, precaution, and science to forge a sustainable future for the Arctic.”

“Today’s announcement from Shell that it will not drill for oil in the Arctic Ocean for the foreseeable future underscores the reality that drilling in this harsh and sensitive Alaskan environment is not worth the risk,” Sen. Edward J. Markey (D-Mass.) said in a statement Monday.

Yet Sen. Lisa Murkowski (R-AK) cited Shell’s decision as evidence of regulatory policy gone awry and of the need for a more vigorous federal policy to exploit the Arctic.

“There is more at stake here than the current status of one company’s exploration program,” Murkowski said. “Development in the Arctic is going to happen – if not here, then in Russia and Canada, and by non-Arctic nations. I personally believe that America should lead the way. The Arctic is crucial to our entire nation’s future.”

Some Alaska Natives, especially those in local businesses, were also unhappy about Shell’s results. Rex A. Rock, Sr., president of the Arctic Slope Regional Corporation (ASRC), a consortium of Alaska Native companies that recently invested in Shell’s oil prospects, said in a statement that he was “deeply disappointed” with the news from Shell. The leaders of ASRC said they had invested in Shell’s venture because of concerns that climate change would make it more difficult to sustain their traditional whaling and fishing based economy.

“We are looking for solutions on how we continue to sustain our local economies to support our communities,” Rock said. “Absent any responsible resource development onshore and offshore, we are facing a fiscal crisis beyond measure.”

Mead Treadwell, former lieutenant governor and president of Pt Capital, a fund seeking investments in the Arctic, said the fate of the Alaska Arctic was not settled. “Oil was found at Prudhoe Bay after several firms gave up,” said Treadwell. “It should be an objective of the US to get more holes drilled in what could be our nation’s biggest prospect.”

But Shell spokesman Curtis Smith, a fourth generation Alaskan, said “Only further exploration is going to determine the value of this basin. But that exploration is not in our immediate future.”

Also in Energy & Environment:

Yet another survey suggests the climate change ‘debate’ is settled among scientists

Why some scientists are so worried about a cold ‘blob’ in the North Atlantic Ocean

With cap and trade plan, China adopts an emissions policy that couldn’t get through U.S. Congress

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