OFFSHORE DRILLING:

With federal green light, Shell hits the gas on Arctic plans

In a sign that the Obama administration is willing to clear the regulatory decks for oil drilling in Alaska's remote Arctic waters, the Interior Department on Friday gave a conditional green light allowing Royal Dutch Shell PLC to explore for oil this summer in Alaska's Chukchi Sea.

More than 20 years after sinking its first exploratory well in the Chukchi, only to later abandon the project, Shell is seeking to reopen drilling in the nation's northern-most federal waters. The campaign has already had a colossal price tag. So far, Shell officials say they have sunk $4 billion in the project, including $350 million to build two of their own ice-breaking ships.

If exploration is successful, it will take 10-12 years before Shell can begin producing oil. During that time, the company would have to build a new ice-resistant drilling facility, install 100 miles of subsea pipeline from the pumping rig to the tiny community of Wainwright and construct a 500-mile pipeline from the shoreline to the beginning of the Trans-Alaska Pipeline in Prudhoe Bay.

In preparation for that project, the company is already gathering information for what Shell Alaska spokesman Curtis Smith described as "probably the largest environmental impact statement in the history of North America."

"This is not turnkey," Smith said. "We need to plan months in advance -- the contracts. the contractors, the vessels, including icebreakers, training personnel, and just making sure that we're ready to be perfect."

"We have already started designing and testing ice-strengthened platforms that could work in that Arctic," Smith said. "They're so expensive, without the possibility of directional drilling from platforms, we would need more of them. It would make the project like this not feasible."

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. That is a lot compared with the 17 billion barrels of oil that has flowed out of Alaska's Prudhoe Bay oil fields over the past 30 years. Much of these offshore oil resources are thought to be in the remote Chukchi region.

Shell in August received a Bureau of Ocean Energy Management conditional permit to explore for oil in Alaska's Beaufort Sea, east of the Chukchi.

By the end of the year, Shell is also likely to hear from the National Marine Fisheries Service on the company's request for an "incidental take" permit under the Marine Mammal Protection Act, which would allow them to have impact on an incidental amount of Arctic wildlife during exploration activities. Regulators say they will issue a final ruling on that permit request by Dec. 30.

Shell has already secured EPA air pollution permits to operate its drill ships and support fleet of icebreakers, oil spill response vessels and supply ships. Interior is still studying the company's oil spill plans for the Beaufort and Chukchi regions. Other permit requests are also pending with EPA and the U.S. Fish and Wildlife Service. The company plans to submit a final exploration plan for both projects in early 2012.

Familiar waters

Shell is not a newcomer to Alaska's icy waters. During the late 1980s and early '90s, the company sunk 15 exploratory wells in the federal waters of Beaufort Sea and four in the Chukchi Sea. Ultimately, the company abandoned its development, capped the wells and relinquished the leases.

Why did the corporate giants give up? "There were a number of reasons for that," Smith said. "One, it was just the economics of the time. Oil was roughly $9 or $10 a barrel. We knew based on the remoteness of these lease blocks that it would take a tremendous investment to commercialize any oil and gas that we found."

The company was also struggling to develop equipment that could withstand the Arctic winters, Smith said. "A production scenario would've called for ice-strengthened platforms that could stand up to multi-year sea ice," he said. "That's a major investment and a technology issue at the time."

At the same time, the company foresaw problems in getting its oil to market because the Trans-Alaska Pipeline System was full to capacity.

Today the economic calculations have dramatically shifted. World oil prices are hovering near $100 per barrel and the pipeline has plenty of capacity to transport Shell's oil. At the same time, global warming has opened up the Arctic waters in the summer, expanding the time that drillers and international shippers can operate without the risk of ice collisions.

Shell also did its due diligence before bidding on the Chukchi leases, running seismic testing in 2006 and 2007 to learn more about the resources in the region.

In 2008, Interior opened bidding on 29.4 million acres of offshore land in the Chukchi. Shell was the most aggressive bidder, spending $2.1 billion for leases, including $105.3 million for a single block. Shell also holds federal leases in Alaska's Beaufort Sea, north of the Arctic National Wildlife Refuge. The state of Alaska has already opened up oil development in Beaufort's close-in, state-controlled waters.

Now Shell is taking the lead in gaining government approval for new exploration in the Chukchi area. ConocoPhillips is also seeking to begin exploration, but not until 2013.

In 2010, Shell received a preliminary permit to drill up to three wells in the Chukchi Sea. However, that proposal was delayed by legal challenges and by the six-month drilling moratorium imposed by the Obama administration in the aftermath of the Deepwater Horizon oil spill crisis in the Gulf of Mexico.

Praise and opposition

Industry experts and Alaska officials laud Shell's proposal to drill for oil in the Arctic development as essential to the United States' energy security and job creation. Alaska Sen. Mark Begich (D), chairman of the Senate Subcommittee on Oceans, Atmosphere, Fisheries and Coast Guard, described the drilling plan as "an important piece of the equation for the future of Alaska."

Alaska Sen. Lisa Murkowski, the ranking Republican on the Senate Energy and Natural Resources Committee, said that oil drilling in the Arctic "is critical to the future of oil production in Alaska. Without new production, the amount of oil in the trans-Alaska oil pipeline will continue to drop, until it ultimately has to be shut down. If that happens, oil production on the North Slope is over and with it will go thousands of well-paying jobs and the foundation of Alaska's economy."

But Shell and other companies seeking to drill in Arctic waters face growing opposition from environmentalists, Alaskan native groups and scientists. The critics say not enough information is known about the Arctic ecosystem to allow industrial development in the area. They also charge that Shell's oil spill prevention and response plans have not been thoroughly tested in Alaska's unpredictable and unforgiving ocean conditions.

"We don't have the basic knowledge about how the ocean works that would allow us to understand the impacts of decisions that are being made," said Michael LeVine, Pacific senior counsel in Oceana's Juneau office.

"For example, we haven't identified the most important ecological areas in the Chukchi and Beaufort seas," he noted. "Shell's planning to drill on a number of leases that it owns. Those leases are big areas, so there might be places even within those leases that would be better or worse for Shell's activities."

To press their case, the environmental groups have launched media campaigns against the company's summer exploration plans. They are rallying scientists to sign a letter recommending that drilling be postponed until additional scientific studies can be completed. As of mid-December, that letter had more than 350 scientists' signatures. That statement is expected to be released in January.

Opponents are also turning to the courts, appealing the Interior's August decision to allow exploration in the Beaufort Sea as well as the department's 2008 oil and natural gas lease sale in the Chukchi Sea. Environmental lawyers are petitioning EPA's Environmental Review Board, the agency's internal administrative court, to overturn the regulators' decision to grant air permits for Shell's exploration fleet. Additional lawsuits are likely as the Obama administration completes work on pending permit requests.

The Arctic drilling plan is all the more controversial because it is the first big new oil development being considered by Interior since last year's disastrous Deepwater Horizon oil spill.

Leah Donahey, western Arctic and oceans program director at the Alaska Wilderness League, noted that after that crisis, President Obama promised to hold the oil industry to tougher safety and environmental standards. So far, however, regulators have not revised federal oil spill response requirements, she said.

"We really feel the Obama administration made some serious promises after Deepwater Horizon," Donahey said. "The Arctic is a new frontier and they better hold up to those promises."

Contingency plans

In its application to Interior, Shell proposed to do its first round of exploratory drilling during next summer's open-water season, which runs from July 15 to Oct. 31. But Interior's conditional permit would shortened the project's drilling window by 38 days (E&ENews PM, Dec. 16).

The company had already agreed to stop operations during the whale hunting season in the Beaufort Sea. "Our commitment [to the Alaskan whalers] starts on Aug. 25 until the whalers tell us when they're done," said Shell's Smith. "So it's a bit open-ended. But typically it's a couple of weeks."

Interior's call for a shortened drilling season was criticized by Alaska Sen. Begich. "I am concerned that today's short-sighted decision is influenced by election-year politics instead of the long-term energy and jobs needs of our country," he said in a statement.

Drilling will be conducted by a floating drill ship, which company officials say can be easily moved out of the area during whaling season, at the end of the season or if severe weather conditions develop. Shell officials stress that during exploration, they won't be bringing oil or gas to the surface.

Marilyn Heiman, director of Pew Environment Group's U.S. Arctic program, described Shell's massive oil spill contingency plan as "robust," but she said it contains serious gaps. Heiman argued that basic scientific data is lacking on the ecology of the Arctic waters and on the reliability of Shell's spill prevention and spill response plans. She called on federal regulators to determine which ecologically sensitive regions of the Beaufort and Chukchi seas should be protected from development before they allow development in the region.

Added Emilie Surrusco, communications director at the Alaska Wilderness League: "We don't even know how walruses communicate with one another. We don't have enough information on circulation patterns in the water, wind currents. The amount of information we don't have is really pretty immense."

However, Shell officials are actively challenging two of the environmental community's most aggressive criticisms of the company's Chukchi Sea exploration plans. First, Shell disputes charges by environmental critics that the worst-case oil spill scenario in the company's contingency plan envisions a spill occurring in August, a time when the region is most likely to be free of ice.

In comments to Interior, the green groups warn that conditions might be much worse if oil is spilled as the company shuts down operations in late October.

"The Chukchi is very different in the fall," said Pew's Heiman. "It's a very extreme place. When it's not fogged in, there can be very high winds. If you had a spill near the end of October, you start to get into severe weather conditions, ice and darkness."

But Shell officials say they would be ready for an oil spill throughout their exploration window. "There's a criticism that if something happened on the very last day of drilling, we wouldn't be able to react because of worsening conditions," Shell's Smith said. "And that's false. All of our assets are designed to work well past Oct. 31 in the Arctic."

The company is also dismissing the environmentalists' contention that Shell claims it can clean up 95 percent of any future oil spill -- an accomplishment that most energy experts agree is nearly impossible.

Shell officials say those critics are misinterpreting the contingency plan report. "They're looking at our 'encounter' rate," Smith said. "We're stating that in a spill scenario, we expect we would encounter 90 percent of the oil on-site, near the drilling rig. We would expect to encounter 5 percent of the oil near shore, between the rig and the coast." he said. The other 5 percent might reach local coastlands.

Smith said the company is not predicting how much oil could be recovered in a spill because each incident would occur under different conditions. "We would never make a claim to be able to recover like that, especially given the optic that we all had when we watched [the spill in] the Gulf of Mexico," he said.

Environmentalists, however, are not alone in raising cautionary red flags about the impacts of drilling on the wildlife and the region's native communities that rely on subsistence hunting.

A U.S. Geological Survey report released in June called for more scientific research into the impacts of climate change on oil and gas development in the Arctic, including studies of storm frequency and intensity and the behavior of wildlife. The study also found that "significant questions" remain about the scientific and technical information needed for effective oil-spill risk assessment, preparedness and response in the Arctic, all of which could be potentially complicated by a changing climate (E&ENews PM, June 23).

Shell officials have had mixed reactions to the USGS report. "It did not say that we should cease operations or not explore based on a lack of science," Smith said. "What it did was outline what science should be done in the future, which we don't disagree with."

But Smith was disappointed that the report did not include some of industry's most recent scientific research. He noted that during 2008 and 2009, Shell, five other international oil companies and the Norwegian Research Council sponsored oil spill studies conducted in Norway's Barents Sea. That research examined the effectiveness of oil recovery techniques in Arctic waters.

The Coast Guard has also weighed in on the pitfalls of Arctic drilling. In July, Coast Guard commandant Adm. Robert Papp said the United States lacks critical infrastructure needed to respond to a massive oil spill in the Arctic. "If the company fails, if the response plan fails, the federal government must in some way be able to back it up with some resources," he told a Senate panel. "And if this were to happen off the North Slope of Alaska, we'd have nothing" (E&E Daily, July 28).

In December, Papp promised to mobilize the Coast Guard's resources in the Arctic if oil exploration begins this summer. But he told a House hearing that the Coast Guard's two heavy icebreakers will not be available. One is being decommissioned, and the other is under repair until 2013.

Shell officials say they are not relying on Coast Guard ships to help them respond to a potential oil spill. "When we decided to invest in the Arctic, it wasn't a secret to us that if something were to happen in that marine environment we wouldn't be able to call on the Coast Guard," Smith said. "We would have to do it ourselves. And that's why we have built ice-class vessels and skimmers and booms and other support ships to work in those conditions."

Begich said he is confident that Shell and other oil companies proposing to explore in the Arctic will be prepared to respond to any spill.

"The oil and gas industry knows that they have to have the best oil spill technology available and the capacity to respond," he said. "For the Coast Guard, a significant piece of their work is coordination, not necessarily providing equipment. It's the oil industry that brings the equipment or has the equipment available."

But Pew's Heiman wants federal regulators to set more stringent, Arctic-specific standards for oil spill prevention, safety and response. She said that with federal regulators apparently ready to allow Shell to begin exploratory drilling this summer, the environmental community plans to use every tool available to push for stricter oversight of the oil industry.

"We're trying to point out that this is a long road," she said. "This is a road that will take us through all the questions about seismic activity, exploration, development and construction of infrastructure" for oil development in the Arctic.