Arctic drilling close for Shell, but still elusive

ANCHORAGE — Seven years and $4.5 billion after it bought leases to explore for oil off Alaska’s Arctic coast, Royal Dutch Shell is finally close to drilling a well in the pristine Chukchi Sea, confident that it will discover a vast oil reservoir buried thousands of feet below the seafloor.

“This is kind of like Christmas Eve,” said Lt. Gov. Mead Treadwell (R). “We can’t wait to see if Santa comes.”

But Santa’s path has not been smooth.

The thickest ice in a decade, along with problems in obtaining a permit for a 4,700-ton oil-spill-containment system, pushed Shell’s July 15 start date back three weeks. These glitches have postponed the first offshore drilling in the American Arctic in 15 years, a massive undertaking that could eventually yield 400,000 barrels of oil per day.

The Coast Guard delayed the firm’s oil recovery barge Arctic Challenger from leaving the Pacific Northwest earlier this month after raising questions about its ability to withstand a severe storm. Then, Shell petitioned the Environment Protection Agency to modify an air emission permit on the grounds that the technology did not exist to meet one of the requirements. Finally this past Saturday, Shell’s drill ship Noble Discoverer dragged its anchor off Alaska’s Aleutian Islands and drifted to within 100 yards of shore.

“The last thing Shell wants is a picture of a rogue platform running around,” said Fadel Gheit, an oil analyst with Oppenheimer & Co. “It is going to be the laughing stock of the late shows. ‘We spent billions of dollars and can’t even hook up the thing properly.’ ”

Shell is one of the few global oil giants that does not operate onshore in Alaska. And because oil firms are planning more Arctic drilling in the future as warming temperatures and melting ice make the area more accessible, the entire industry has a stake in the success of Shell’s drilling program.

Scaled-back goals

Although Shell during the past several months had obtained multiple approvals from the Obama administration for its drilling plan, last-minute challenges have prompted it to scale back its exploration goals.

On Monday, Shell’s vice president in Alaska, Pete Slaiby, said the company would complete at most one or two wells in the Chukchi and Beaufort seas this year, fewer than the five or six it had initially projected. Slaiby said the firm’s contractor was still completing the enormous oil-spill-containment system, which will be the key to receiving final approval for drilling permits from the Interior Department in both lease areas.

“I’m optimistic about our ability to get this to work, but we still have a hurdle to go over, getting these” final permits, he said. “We’re not going to rush. At Shell, we’re not looking at this as a numbers game, in terms of how many wells are completed.”

On top of logistical and regulatory difficulties, an unusually cold winter has left more multi-year ice in place, delaying drilling in the two areas where Shell holds federal leases. While the ice is now thawing — the National Oceanic and Atmospheric Administration reported that the Arctic lost a record amount of sea ice in June, totaling 1.1 million square miles — Shell officials say they won’t start drilling until the first week of August.

“While I do have some concern about the outstanding permit, the reality is that the ice is still up there, and it may be the ice that keeps Shell back this year,” Sen. Lisa Murkowski (R-Alaska) said. “That’s something that [Interior Secretary] Ken Salazar can’t fix.”

The Obama administration’s support for Shell’s drilling program comes despite criticism from environmental groups, which say that it is inadequate and that even safe drilling will disturb habitats of the walruses, beluga whales and seals.

Interior spokesman Adam Fetcher said the administration “undertook the most aggressive and comprehensive reforms to offshore oil-and-gas regulation and oversight in U.S. history” in the aftermath of the 2010 BP oil spill in the Gulf of Mexico, and was applying those stricter standards to Shell's Arctic activities.

Shell bought the offshore leases in 2005 and 2008, and they include 151 Beaufort Sea lease blocks and 275 Chukchi Sea lease blocks. The company is supposed to start drilling within 10 years of acquiring the leases.

It spent $2.1 billion to acquire Chukchi leases, plus more to collect seismic data, study the coast, and refurbish ice-breaking ships for drilling 70 miles offshore and in the Beaufort Sea during the summer of 2012. Shell says that so far it has spent a total of $4.5 billion and five years preparing to drill there.

Time pressure

If Shell succeeds, it would still take seven to 10 years to build the infrastructure needed to bring the oil to market.

This year, Shell’s hopes have been high, but it is under other time pressure. Because of temperatures that drop as low as 56 degrees below zero, the ice-free drilling season is limited to July to October. Usually. The amount of ice fluctuates from year to year and this year is has been abundant.

Shell is also limited at the end of the season, because the offshore drilling regulators at Interior have ordered Shell to stop drilling 38 days before the end of the open water season. That’s how long it would take to drill a relief well if there were a spill at Shell’s well.

This isn’t Shell’s first foray here. In the late 1980s and early 1990s, Shell and other companies drilled wells in this area of the Chukchi Sea. Lower prices for oil at that time made it uneconomical to pursue. Now, with higher oil prices and technological advances such as 3-D seismic surveys, the company is confident that there is a lot of oil within reach and that it’s worth drilling again. It has overcome opposition from environmental groups and some Alaskan tribes, winning a series of necessary federal approvals for drilling.

Shell officials said they are close to resolving some of remaining regulatory hurdles, such as the fact that the generators running the Discoverer’s drill bit emit more nitrous oxide and ammonia than the EPA permit allows. The ship’s overall emissions would still be under the rig’s permitted limit, according to Shell spokesman Curtis Smith. He said that “the current available technology does not exist to meet that particular standard for these particular generators.”

EPA spokesman David Bloomgren said the agency is working on the issue and remains confident that “we can protect air quality while providing the EPA approvals required for Shell to operate this summer.”

The Coast Guard is still working with Shell to determine whether its oil-recovery barge meets federal standards for a “floating outer continental shelf facility,” according to Coast Guard spokesman Capt. Ronald LaBrec, and is still verifying both its engineering plans and equipment. Smith said Shell is working with the agency to determine “the most appropriate classification” for the vessel and will meet those given requirements.

Rig slipped anchor

The recent drifting of the Noble Discoverer rig did little to reassure drilling foes. The rig was anchored in Dutch Harbor, four to five days traveling time from the Chukchi Sea drill site, when it slipped its anchor and ended up extremely close to shore. The local television station KUCB captured the incident in photographs and posted on its Facebook page, noting that despite rain and 35-knot winds, more than a dozen residents turned out to watch Shell’s contract tugboat Lauren Foss “straining to pull the rig back out to sea.”

Smith said the anchor used in Dutch Harbor had nothing to do with the much bigger, more elaborate eight-anchor mooring system that would be used at the well site, and did not reflect on the company’s ability to drill safely. Divers examined the hull of the rig and on Tuesday proclaimed there was no damage or evidence of hitting shore, a Shell spokesman said.

But opponents of Shell’s drilling plan seized on the incident as further evidence that the Obama administration should block drilling. Michael LeVine, Pacific senior counsel of the advocacy group Oceana, said, “Alaskan waters are unforgiving and unpredictable, so we are glad that it appears everyone is safe. Shell’s plans and recent actions show that the company is not prepared to drill in the Arctic Ocean, and our government is not holding the company accountable.”

While offshore exploration enjoys significant support in Alaska, some Inuits there worry it will imperil the marine animals they depend on for subsistence. “Tell Obama not to put oil rigs out there, because we eat from the ocean,” said Marie Casados, who monitors the communications of ships traveling in the Chukchi Sea for the Tikigaq Corp. in Point Hope, which lies on the Chukchi Sea.

Reggie Joule, a former state lawmaker from Kotzebue, said northwestern Alaskans should keep in perspective that holes have already been drilled in the Chukchi and Beaufort.

“We’re looking at whether there’s a big enough find, and if we can bring it to market,” Joule said, but he added if drilling begins in earnest, federal officials will have to decide “if they can allow for the subsistence hunting and allow for these activities to go forward. That’s the $64,000 question.”

Rocky Milligrock, another Point Hope resident, said he has to laugh at the fierce political debate over drilling in light of the Arctic’s unpredictable conditions. “If Mother Nature wants it to go forward, it will,” he said. “If not, it won’t.”

Mufson reported from Washington.

Steven Mufson covers energy and other financial news.
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