PHOENIX - Royal Dutch Shell's decision to walk away from its unsuccessful drilling efforts in the Alaskan Arctic is credit negative for the state government, Moody's Investors Service said Monday.
Shell, one of the largest oil companies in the world, announced last week that it is giving up on its $7 billion drilling efforts in the Alaskan Arctic after its first well yielded disappointing results. The company had received approval to drill only a month prior. The area could hold the equivalent of 29 billion barrels of oil and gas, according to the US Bureau of Ocean Energy Management.
"Shell's decision to stop drilling is credit negative for Alaska, although the state would not have received revenues directly from Shell's exploration efforts," wrote Moody's analyst John Lombardi. "Shell's drilling was to occur in federal waters and there is no oil revenue sharing between the federal government and Alaska, such as exists for Gulf states. Nevertheless, Shell's drilling activities would have provided indirect benefits to the state's weakened economy through job generation and improved economic viability of the Trans-Alaska Pipeline System, which is currently operating at less than one quarter of capacity."
Triple-A rated Alaska suffered significant revenue losses due to declining oil prices.
State revenues for fiscal 2015 of $2.3 billion were down 57% from $5.4 billion the prior year, and the state expects fiscal 2016 revenues to total around $2.2 billion, less than half of the $5 billion budget that included a 15% reduction in spending from the prior year, including an 81% cut in capital projects. The state has used reserves to balance its budget and is likely to do so again if oil prices remain low, Moody's said.
"The state estimates that available reserves totaled $17.7 billion as of the end of the last fiscal year," Lombardi wrote. "Crude oil prices have fallen substantially from their 2014 peak of $107 per barrel in June to approximately $45 currently."
