ARCTIC DRILLING:

After season of setbacks, Shell girds for more battles in 2013

Royal Dutch Shell PLC's decision yesterday to postpone oil drilling in the Beaufort and Chukchi seas until 2013 is unlikely to dampen industry excitement over oil and gas development in the American Arctic. But the delay is renewing the debate over the company's ability to protect the environment and Alaska's Native communities from an oil spill in the unforgiving, frigid Arctic.

Shell's hopes of drilling into oil-bearing rock at its Arctic leases ended yesterday when the company's new containment dome, a key component of its Arctic oil containment system, was damaged during final testing aboard the Arctic Challenger barge near Bellingham, Wash.

The setback was the latest in a long line of headaches that the company has faced this year -- everything from construction delays, lawsuits and regulatory problems to ice dangers, environmental attacks and a loose anchor.

Environmentalists say Shell's latest crisis is evidence that the company cannot safely drill in the Arctic Ocean. "Fundamentally, we and everyone else should be happy that a failure like this didn't happen during a spill," said Michael LeVine, Pacific senior counsel at Oceana.

"If we're going to allow Shell or any other company to drill in the hydrocarbon-bearing zone, to take that risk, we should require them to show affirmatively that they can respond to a spill," he said. "This failure is another piece of evidence showing that they can't."

But other analysts say Shell's decision was a sign that the company is taking a conservative approach to oil development. "They're just being ultra-cautious given the setbacks that they've had," said Charles Ebinger, director of the Energy Security Initiative at the Brookings Institution.

"After investing $4 to $5 billion, I think they just have too much invested to risk any possibility of a problem and having the whole thing blow up in their faces."

Ebinger predicted that Wall Street investors aren't likely to be put off by Shell's decision to delay final action until next year.

"Even if Shell were to strike an important field, it would take a significant period of time before you'd actually have oil coming to the surface and doing anything for Shell's bottom-line earnings," he said. "So I don't think long-term investors are going to worry about whether they lose a couple weeks this season as opposed to whether they can be back in there next season."

Despite Shell's delays, the world energy markets continue to see the Arctic as "one of the last virgin frontiers for oil exploration in the world," noted oil industry historian Tyler Priest, a University of Iowa professor and author of a book on Shell.

"The industry has to keep replenishing their reserves, and that's one area that's become a strategic focus for the big, technologically sophisticated oil companies," he said.

The U.S. Geological Survey has added to the international interest with its estimates that the American Arctic could hold as much as 27 billion barrels of oil and 132 trillion cubic feet of natural gas.

Priest said Shell's current problems are not unusual for companies seeking to capitalize on new technologies or in untested geographical regions. "They're not unusual when you're looking at exploring and drilling in extreme environmental conditions," said Priest, who served as an adviser to President Obama's National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling.

"Deepwater offshore drilling didn't happen overnight," he said. "It took years, if not decades, to develop the technology for deep water. And the whole shale gas play, George Mitchell persisted at that for 20 years. So yes, in my view, this delay is just a bump in the road."

Getting ahead for 2013

After spending $4.5 billion and more than six years to begin oil drilling operations in the American Arctic, Shell officials say that in the coming weeks, they will focus on sinking preliminary wells at the company's Burger prospect about 70 miles from the Chukchi Sea coast.

The Bureau of Safety and Environmental Enforcement in August gave Shell the green light to begin limited preparatory activities in the Chukchi. Under the company's modified application for permit to drill, or APD, Shell can drill roughly 1,400 feet below the seabed, which is nearly a mile short of oil-bearing rocks.

With that limited drilling permit in hand, Shell spudded its first well on Sept. 10, posting a celebratory video of the event on YouTube (Greenwire, Sept. 10).

The next day, however, the company pulled the drill ship Noble Explorer off the site to avoid being hit by a massive slab of slow-moving ice.

Shell officials say they will ask BSEE regulators for a similar modified drilling permit for the company's Beaufort Sea leases. For the immediate future, however, the Beaufort remains off-limits due to Shell's agreement to halt drilling during the fall Native subsistence whaling season in the area.

Shell spokesman Curtis Smith argued that the limited drilling work allowed under the current permits is valuable for the company's long-term operations. "It's important in setting the table for 2013," he said.

Smith estimated that it takes roughly 30 days to drill a new well to its total depth. About half of the time is spent drilling top holes. By boring those holes this year, the company can cap them and use them again next year.

"The idea is that all the days and hours that we spend drilling in 2012 will put us that much further ahead for 2013," he said.

Environmental activists protest that the Obama administration should block Shell's preliminary drilling activity. "We should really be thinking hard about this operation as a whole," said Oceana's LeVine. "Why let them go into the Beaufort Sea when the company's long line of problems calls into question the whole operation?"

Activists, ice and missteps

Next year, Shell is hoping to avoid the obstacle course of delays, complications and nightmares that has marked 2012.

The company's troubles began in February when Greenpeace activists in New Zealand boarded the Noble Explorer in an effort to stop Shell from using the vessel for oil drilling in the American Arctic.

Shell ultimately won a federal court order barring Greenpeace and its supporters from getting within 1 mile of the company's drilling rigs while they were in Alaska's waters through Oct. 31, the end of this year's drilling season. But that did not stop Greenpeace and other activist groups from launching a barrage of protests and campaigns aimed at Shell and other international oil companies.

Shell also continued to battle the petitions and lawsuits that environmental activists and a handful of Alaska Native groups have filed over the past six years in their efforts to stop exploration or at least slow it down while scientists gathered more data on the impacts of oil development in the region.

This year, Mother Nature also proved to be a formidable opponent. The winter's unseasonably cold weather along the North Slope produced deep sea ice conditions that lingered well into the summer. The ice melted quickly across much of the Arctic, producing the lowest sea ice conditions on record for the North Pole region. But the ice floes were slow to retreat from Alaska's Bering, Chukchi and Beaufort seas.

But in the end, Shell's drilling plans were ultimately stymied by regulatory delays, construction problems and its own missteps.

The company's worst public relations setback occurred in July, when the Anchorage Daily News ran a photo showing Shell's drill ship Noble Discoverer drifting dangerously close to shore outside of Unalaska, Alaska. Shell officials conceded that the anchor of the 571-foot vessel had come loose. After an investigation, the U.S. Coast Guard said the Discoverer was not damaged in the incident.

The company also came under attack from environmentalists and other opponents when it sought and won modifications to two federal regulatory mandates.

EPA agreed to revise Shell's air pollution permits for the Noble Discoverer after it tested "slightly above" permitted levels for ammonia and nitrous oxide.

In addition, the Coast Guard relaxed the certification standards for Shell's oil spill containment barge, the Arctic Challenger. The company argued that the vessel should be considered a mobile unit, which would require it to weather a 10-year storm. The company's first application described the barge as a fixed platform, which would have required it to withstand a far more rigorous 100-year storm.

However, the Challenger, built in 1976, was never able to meet those relaxed certification standards. Shell spent months upgrading the Challenger's safety systems, electrical equipment and fire detection systems in hopes of converting it for use as the company's primarily oil containment vessel.

Shell officials announced yesterday that the Challenger had successfully completed a series of sea trials and inspections near Bellingham. But at the last minute, the containment dome aboard the Challenger was damaged.

"It is clear that some days will be required to repair and fully assess dome readiness," the company said in a statement. "We are disappointed that the dome has not yet met our stringent acceptance standards; but, as we have said all along, we will not conduct any operation until we are satisfied that we are fully prepared to do it safely."

Even though Shell has given up hope this year of drilling into the hydrocarbon zone at its leases, the company will continue to seek certification of the Challenger and its first-ever Arctic Containment System.

"We're going to continue to pursue completion of that system and that dome at the same pace that we have been over the past several months," Shell spokesman Smith said in an interview. "We're not going to put it away until it's certified and ready so that when 2013 is upon us, it comes north with us."

Wait and watch

With the end of the 2012 drilling season in sight, the energy industry and Shell's Arctic competitors are already talking about future proposals to tap Alaska's Arctic oil resources.

ConocoPhillips hopes to begin exploration in 2014 in the Chukchi Sea. However, Shell's continued problems have caused Statoil officials to delay their timetable for drilling from 2014 to 2015 (EnergyWire, Sept. 6).

Ebinger of Brookings said that the energy industry is carefully watching to see what and how much Shell finds under the Arctic waters.

"I think everybody wants to see if Shell can actually do it, when all is said and done, if they can meet all the regulatory oversight and get an oil well into the floor of the sea," Ebinger said.

"They want to be able to be assured that another environmental challenge isn't going to rear its ugly head that will throw Shell down one more time or some kind of court injunction based on some unforeseen issue."

But Ebinger suggested that Shell, which drilled for oil in the Chukchi Sea in the late 1980s, may have an excellent reason to go through this year's expenses and daunting challenges.

"My adage is that if you've invested $4 billion to $5 billion, you've done it because you think something big is down there," he said. "You don't do that because you think there's 50 million barrels sitting down there. If you talk to people informally and off the record, people are saying they think there's a 1 million- to 1.5 million-a-day producible field down there. That's a big dollar allotment even after you spent $4 or $5 billion."