Shell's announcement on February 27 that it would pause its drilling activity in the US Arctic in 2013 was inevitable. After a string of mishaps, a drill-ship run aground off the coast of Alaska, problems with environmental permitting, federal inquiries into its 2012 activities, and against a constant background noise of angry opposition to Arctic offshore drilling – some from locals, but much of it from environmental groups with strong backers in Washington, DC – Shell had little choice. The Twittersphere is alive with schadenfreude.
Perhaps the company jumped before it was pushed. Far better to be ahead of the story – appearing to take responsibility on its own terms, and confirming a cherished safety-first reputation – than to be seen to be campaigning too vociferously for its own corporate interests when government support might not be forthcoming. There was no unambiguously good outcome for Shell from this; damage containment was bound to be the order of the day.
Shell has been bruised by the campaigns of the last few years. It has relatively little to show for it. Whether or not environmental campaigners are right to criticise Shell so harshly is ultimately irrelevant. Many in Alaska want offshore development for the jobs and potential economic prosperity it might bring. Most Alaskan lawmakers favour it. But decisions on whether it will actually go ahead will be taken in Washington, not in Alaska, and discussions there are likely to be about lofty principles of conservation and about national security, rather than about parochial Alaskan interests.
Yes, Shell has probably done as good a job in offshore Alaska as any oil company might have done – perhaps it did better than others might have done – and it should not be overly demonized, but many would then conclude that if Shell can’t get it right then no one can. The argument about offshore drilling in Alaska is one Shell cannot win for the moment, either on the record of its activities over the last few years, or on the grounds of lowering pump prices for the American consumer, or improving US energy security. The engineering confidence that says ‘we can do this’ simply isn’t enough.
Two questions are now of key importance. First, will the pause in the US Arctic become permanent? Second, how will the pause affect other companies interested in Arctic projects more broadly?
The answer to the first question is complex, but it comes down to a few basic factors. Given the increase in US oil production over the last few years from tight oil, offshore Alaska no longer has the resonance it once had as the last frontier for US oil development, and the only way of reducing US import dependence. The truth is, US import dependence is already going down – partly because oil production is now at its highest since 1992, but also because oil consumption is peaking as efficiency measures take effect. Alaska itself now produces less than North Dakota. That is not to say there are not economic and security arguments for Alaskan offshore oil – in Alaska, there certainly are – but they are far weaker than a few years ago.
This gives more political space to valid environmental concerns about Arctic oil and gas activity, and the risks associated with it. (Some of these were covered in a recent Chatham House report). Questions of how an Arctic oil spill would be cleared up remain worryingly open. The treacherous nature of northern operating conditions have come more clearly into focus and the remoteness of some parts of the American Arctic has been brought home forcefully. All this changes the balance of forces in the national energy debate. Shell may say it is in for the long-haul. It may believe in the resources, that it has the technology to produce them, and that oil prices and demand would allow them to be sold at a handsome profit. But the flow of events is now against it. It may remain against it for a while to come.
Drilling to continue
The answer to the second question is simpler: it will have some effect for other companies in other parts of the Arctic, but a lot less than one might expect. Whatever the sense of victory among environmental campaigners, the Arctic has not been 'saved' from oil and gas.
Certainly, Shell's decision will chill to freezing point corporate interest in the US offshore Arctic. It may have a limited chilling effect more broadly, by underscoring a general point made last year by Christophe de Margerie, the CEO of Total. Arctic oil drilling and the possibility of a spill, he told the Financial Times, was too risky for companies such as his to contemplate, not so much on purely environmental terms, but in terms of risks to the corporation and its reputation. (The concerns did not apply to Arctic gas, in which Total has substantial interests).
But if Shell puts activity off in offshore North America, it is unlikely in itself to halt developments – for oil and natural gas – in other parts of the Arctic: particularly Norway and Russia. There, some developments are already underway. The physical environment is far more conducive to activity. In the Barents Sea in particular, while operations are still challenging, risks are lower. Government support from Oslo and from Moscow is strong, rather than lukewarm, as it is in Washington. Statoil, the Norwegian company, has a growing commitment to Arctic activities in Norway and beyond. Meanwhile, oil and gas is the lifeblood of the Russian economy and Russian state. Developing Russia's Arctic resources is a strategic priority and a string of deals have been signed with Western companies over the last eighteen months which are wholly Arctic or which have Arctic components.
Shell's travails in Alaska may spell a prolonged freeze for the US offshore Arctic. The thaw in other parts of the Arctic, however, will likely continue for as long as the price is right – a likelihood, but not a given – and government support is there.
Arctic Opening: Opportunity and Risk in the High North
Chatham House-Lloyd's Risk Insight Report
Charles Emmerson and Glada Lahn, April 2012
The Future History of the Arctic
Charles Emmerson, 2010