Arctic Oil Investing

It Failed!

By
Monday, December 10th, 2012

They left in September.

Offshore oil drillers contracted out by Shell packed up their things and headed home before the Arctic winter set in.

After six long years and about $5 billion dollars, Shell's Arctic drilling program was once again temporarily thwarted.

That's not to say they won't be back next year...

They will. There's too much at stake at this point.

Still, it's not going to be easy. In fact, less than three months after a containment dome failed, causing yet another setback for the company, we're now getting word that it was much worse than initially reported.

According to newly released Interior Department emails, Shell's most recent testing in the Arctic showed a complete failure of critical technology.

Day 5: All Hell Breaks Loose

Check out what was written regarding the fifth day of testing:

Day 5: The test has its worst accident. On that dead-calm Friday night, Mark Fesmire, the head of BSEE’s Alaska office, is on board the Challenger. He’s watching the underwater video feed from the remote-control submarine when, a little after midnight, the video screen suddenly fills with bubbles. The 20-foot-tall containment dome then shoots to the surface. The massive white dome “breached like a whale,” Fesmire e-mails a colleague at BSEE headquarters.

Then the dome sinks more than 120 feet. A safety buoy, basically a giant balloon, catches it before it hits bottom. About 12 hours later, the crew of the Challenger manages to get the dome back to the surface. “As bad as I thought,” Fesmire writes his BSEE colleague. “Basically the top half is crushed like a beer can.”

Of course, these types of things shouldn't be unexpected. After all, Shell is breaking new ground here, using a lot of very new and relatively untested technologies.

Certainly no one should expect this stuff to work right out of the gate. That's why we have these tests and regulatory controls to begin with.

So Shell will be at it again next year, testing, retesting, and then testing some more. It's all a part of the process.

The question is: Will it be enough?

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Risk vs. Reward

Over the past few years, there have been a lot of very vocal critics of Arctic drilling — and not just from environmentalists.

A few months ago Christophe de Margerie, CEO of Total SA (the fourth largest publicly-traded oil and gas company in the world), told reporters the risk of a potentially devastating oil spill was too high and that a leak would do too much damage to the image of the company.

He told the Financial Times that these Arctic operations could be a disaster and warned other companies against it.

Analysts at Lloyds of London warned this year that Arctic drilling will actually create a very hard-to-manage risk, stating:

The environmental consequences of disasters in the Arctic have the potential to be worse than in other regions. The resilience of the Arctic's ecosystems in terms of withstanding risk events is weak, and political sensitivity to a disaster is high.

As a result, companies operating in the Arctic face significant reputational risk.

Some banks are backing away from these projects, too.

German bank WestLB announced earlier this year that it would not provide financing to offshore oil and gas drilling in the Arctic, explaining:

The further you get into the icy regions, the more expensive everything gets and there are risks that are hard to manage.

There are projects that are evidently unsustainable in an encompassing sense. For WestLB, the risks and costs are simply too high.

Of course, that doesn't mean no one else will finance these operations. There's plenty of capital out there if the prospects are good.

But from an investor's standpoint, just looking at risk assessment alone, I just don't see a very enticing risk-versus-reward scenario.

When it comes to oil and gas, I'll take domestic shale over Arctic drilling any day of the week.

To a new way of life and a new generation of wealth...

Jeff Siegel Signature

Jeff Siegel

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Jeff is the managing editor of Energy and Capital and contributing analyst for the Energy Investor, an independent investment research service focusing primarily on stocks in the oil & gas, modern energy and infrastructure markets.  He has been a featured guest on Fox, CNBC, and Bloomberg Asia, and is the author of the best-selling book, Investing in Renewable Energy: Making Money on Green Chip Stocks. For more on Jeff, go to his editor's page.


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