ARCTIC DRILLING:

Shell postpones exploration plans over new equipment problems

In a dramatic setback for oil exploration in the American Arctic, Royal Dutch Shell PLC today announced that it is scrapping plans to extend its wells into the oil-bearing rock in the Beaufort and Chukchi seas this summer due to new problems with its oil cleanup equipment.

Shell officials said the company's new containment dome, a key component of its Arctic oil containment system, was damaged this weekend during the final tests aboard the Arctic Challenger barge near Bellingham, Wash.

Shell needed Coast Guard approval of its oil containment system and the Arctic Challenger before the Interior Department would consider the company's final oil exploration permits.

Federal regulators have already allowed the company to begin preliminary "top wells" at its Chukchi Sea leases to prepare for future oil development. However, now those operations must stop short of actually drilling into the oil-laden regions of the lease (Greenwire, Sept. 10).

In announcing that the company will not extract oil on its Arctic leases this summer, company spokeswoman Kelly op de Weegh said that Shell will still seek federal drilling permits for the company's multi-year exploration program "upon the successful testing and deployment of the Arctic Containment System."

However, op de Weegh conceded that "[t]he time required to repair the dome, along with steps we have taken to protect local whaling operations and to ensure the safety of operations from ice flow movement, have led us to revise our plans for the 2012-2013 exploration program."

"In order to lay a strong foundation for operations in 2013, we will forgo drilling into hydrocarbon zones this year. Instead, we will begin as many wells, known as 'top holes,' as time remaining in this season allows," she said in a statement.

The setback is a major disappointment for Shell, which has spent $4.5 billion and endured six years of regulatory hurdles, legal challenges, ice delays and construction problems in hopes of beginning oil development in the oil rich regions of Alaska's offshore waters.

Shell's announcement came at a time when the company has already sent two drill ships, more than 20 support vessels, a capping stack and other oil spill response equipment to begin operations in the Beaufort and Chukchi seas.

Last week, Shell was forced to move its drill ship Noble Discoverer off the Chukchi Sea drill site after Arctic winds pushed a massive ice floe close to the drilling area. Shell officials estimate that the slow-moving ice, which will take a few days to clear, is about 30 miles long and 12 miles wide, with a thickness up to 25 meters.

No operations have begun in the Beaufort Sea due to the company's agreement to halt drilling during the ongoing subsistence whaling in the region. Shell said today that it will begin exploratory drilling in the Beaufort Sea following the conclusion of the fall whale hunt and the anticipated receipt of a top hole drilling permit from Interior.

Shell is the first of three oil giants that are expected to seek oil exploration permits in the Arctic waters off Alaska's north coast. Interior has estimated that the Chukchi could hold 12 billion barrels of recoverable oil. Together, the Beaufort and Chukchi seas could hold as much as 27 billion barrels of oil and 132 trillion cubic feet of natural gas, according to U.S. Geological Survey estimates.

Last week, Statoil announced that it is postponing its exploration plans in the American Arctic, citing the high costs of operating in the region, regulatory uncertainty and the continued delays that Shell has encountered this summer as it attempts to sink wells in the region. The Dutch company said it is pushing back operations at 16 leases in the company's Amundsen prospect until 2015 at the earliest. The company had previously set 2014 as its starting date.

So far, ConocoPhillips is sticking with its proposal to begin exploration in 2014 at one or two sites in the company's Devil's Paw leases in the Chukchi Sea. Statoil owns a 25 percent share in those 50 leases.

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