OFFSHORE DRILLING:

Shell will return to Arctic in 2014

Correction appended.

Royal Dutch Shell PLC yesterday announced plans to seek federal permits to explore for oil in Alaska's Chukchi Sea next year, despite the company's ill-fated 2012 operations in the U.S. Arctic.

In a teleconference with energy analysts, Shell Chief Financial Officer Simon Henry said the company will submit an exploration plan for the Chukchi "in the next few weeks." Shell officials added, however, that the company has not yet reached a final decision on drilling.

Although Shell is moving forward in the Chukchi, the company is postponing its Beaufort Sea operations for the foreseeable future.

Henry said the company also expects to abandon its battered drill rig the Kulluk and will take a write-off "of a few hundred million in the fourth quarter" of this year if the rig is scrapped.

Shell is taking a renewed look at Alaska a year after the company spent more than $5 billion in an unsuccessful campaign to explore in the Chukchi and Beaufort seas.

The Dutch company faced both weather and equipment problems and failed to secure the permits needed to drill for oil on its leases. In the aftermath, the Kulluk drill rig ran aground and Shell canceled this year's drilling operations.

In September, the company agreed to pay a $1.1 million fine for violating the terms of its Clean Air Act permits during the 2012 season (EnergyWire, Sept. 6).

Now Shell is updating its permits in the hope of paving the way for the Noble Discoverer drill rig to return to the Chukchi Sea. The company has also secured the use of the Transocean Polar Pioneer drill rig to serve a backup relief rig.

Despite last year's problems, Henry said the company is eager to gauge the size of the oil reserves on its Chukchi leases. The Interior Department estimates that the region could hold 12 billion barrels of recoverable oil.

"The money we've spent on Alaska so far will still be money well-spent if those wells come in, if the first wells in the Chukchi ... come in on the pre-drill prognosis," Henry said. "It's high-risk, but sometimes in our industry, that's what we need to take."

Shell's announcement came as Interior is completing work on Arctic-specific standards for oil and gas drilling along Alaska's northern shores. Those mandates are likely to be released before the end of the year.

In September, Interior Secretary Sally Jewell said the new directives will focus on requiring the companies to provide equipment that can prevent oil spills, contain any released oil and drill a relief well to stop a spill (EnergyWire, Sept. 4).

Alaska state officials welcomed Shell's announcement. "While they still have hurdles in front of them, I look forward to a successful exploration season next summer," Sen. Mark Begich (D) said in a statement.

But some environmental activists are criticizing Shell's new Arctic exploration proposal and calling on the Obama administration to block new drilling.

"I think we're really back to square one here," said Lois Epstein, Arctic program director for the Wilderness Society. "I have no reason to be more confident than I did last year in their ability to do a good job. And last year, they had enormous problems."

Michael LeVine, Pacific senior counsel for Oceana, accused Shell of "throwing good money after bad. If companies refuse to learn from their mistakes and make more responsible choices, the government must step in and say enough is enough."

But Marilyn Heiman, director of Pew's U.S. Arctic Program, said her group will "withhold comment until we have a chance to review the details of the plan."

Pew recently released a report recommending that the federal government adopt a set of stringent rules for drilling in Arctic waters, covering everything from the equipment durability to employee competence (EnergyWire, Sept. 23).

Currently, there are no separate standards for drilling in the Arctic beyond those that are in place for the Gulf of Mexico. However, federal regulators mandated extra precautions last year in Alaskan waters.

Correction: An earlier version of this story misnamed Royal Dutch Shell PLC Chief Financial Officer Simon Henry.

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