Oil Companies Cool to Drilling Off Alaska’s Arctic Shores

Photo credit: ConocoPhillips

So far, Shell (NYSE: RDS-A  ) has spent $5 billion on its Arctic offshore drilling program. That investment has yet to turn up any oil, or deliver any returns to its investors. It's also not likely to deliver anything in the near future as the oil exploration company currently has its exploration program on pause after enduring a number of equipment problems. In fact, neither Shell nor its industry peers currently have much interest in pursuing oil off Alaska's arctic shores.

The history
The fact of the matter is that the ice filled waters off of Alaska have not been kind to Shell. Just the other day it was announced that the company would pay another $1.1 million in fines for air-quality violations from the vessels it used to drill oil-exploration wells in the Arctic last year. Those costs were just the tip of the iceberg for Shell, which originally invested $2.1 billion for leases in 2008 and has now spend about $5 billion.

The air-quality fines consisted of 23 violations from the Discoverer drillship that Shell had contracted from Noble Corp (NYSE: NE  ) . Shell was also fined for 11 violations for the Kulluk, which was owned by Shell but operated by Noble. Shell suspended its Artic operations after the Kulluk ran aground in December of 2012.

The future of Artic drilling
Because of Shell's misadventures, the industry has been working with the U.S. Department of the Interior to put together a baseline Arctic standard. However, the industry is really in no hurry to move forward on exploration activities. It wants to insure the right standards are in place so that drilling can be done safely and responsibly.

Still, even if those standards were in place it might not be enough to tempt oil producers to risk more capital. That's why Shell has yet to decide on its next steps for Alaska. The same can be said for ConocoPhillips (NYSE: COP  ) , which is the only other company that has a detailed exploration plan for the Arctic. This past April Conoco put its 2014 exploration plans on hold. Conoco currently has no shortage of other less risky opportunities to grow its production including U.S. onshore shale plays in the near-term and the Gulf of Mexico over the longer term.

All that being said, there could be a tremendous amount of oil in the Arctic. According to a 2008 report from the U.S. Geological Survey, there could be up to 90 billion barrels of oil and 1,669 trillion cubic feet of natural gas. Meanwhile, according to The Bureau of Ocean Energy Management, Alaska's portion of those offshore riches are believed to be about 23 billion barrels of oil. To put that into perspective, current U.S. proved oil reserves are only estimated to be about 29 billion barrels of oil. That's one reason why Shell has spent so much to lock up the leases to access all that potential oil.

Final Foolish thoughts
Oil exploration is a very expensive and a risky venture. However, it's critical to meeting the world's future energy needs. As long as the price of oil stay high, oil companies will continue to take the risk to find new sources of oil. At some point and at some price, oil producers are likely to dip back into Alaska's frigid waters. 

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