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Shell Poised for Alaska Prospects

Plans include July through October drilling


Royal Dutch Shell PLC is poised to drill for oil this summer in the Arctic Ocean off Alaska after spending nearly $4 billion and waiting out more than five years of delay.

Calling the Alaska Outer Continental Shelf a potential “game changer,” corporate officials say they expect the oil below the frigid sea floor to justify the time, money and ongoing legal battles.

“We think Alaska’s Arctic could be home to one of the most prolific hydrocarbon basins left in North America,” Shell Alaska spokesman Curtis Smith says. “We’ve got a high degree of confidence that these are commercial leases.”

Shell plans to drill as many as five exploratory wells on OCS leases in the Beaufort and Chukchi seas starting in late July and ending in late October—the extent of open-water season. The company still needs several federal permits. Shell’s leases and permits have also drawn still-unresolved lawsuits centered on the project’s risks to wildlife and the challenge of responding to an oil spill in the remote, ice-strewn waters of the Arctic—and, of course, Shell can’t know how those leases will play out until they drill them.

The U.S. Geological Survey estimates there could be as much as 23.6 billion barrels of oil in the Arctic Ocean’s OCS reserves. In the best-case scenario, that translates to Shell and other lease holders adding 1.2 million barrels of oil to the currently declining volume carried by the Trans-Alaska Pipeline System, Smith says.

Shell drilled a dozen wells in the Beaufort and four of five wells ever drilled in the Chukchi in the 1980s and early 1990s. Seismic images from 2006-2009 “match up nicely” with earlier drilling data, Smith says—but there’s only one way to know for sure. “There’s a saying,” the Shell spokesman says, “you can really like your prospects on paper but you can’t love them until you drill them.”

Shell's Kulluk (left) and Noble Discoverer were readied for Arctic operations in Seattle.


Self-Sustaining Rigs

The waters of the Arctic present a daunting place to operate. Ice covers the area much of the year. Storms carry hurricane-force winds. Migrating bowhead whales sensitive to drilling activity move through its waters. Where the Lower 48 offers roads, ports and large harbors, Alaska’s remote North Slope has only airstrips and boat ramps with few roads. In response, Shell designed its OCS projects to be self-sustaining, Smith says.

Provided Shell gets clearance to drill, crews will set the rig Kulluk in the Beaufort, some 18 miles north of Point Thomson and in 130 feet of water. The Noble Discoverer will sit roughly 70 miles offshore in the Chukchi in about 140 feet of water.

The 266-foot Kulluk can withstand ice up to four feet thick and 18-foot waves in non-ice conditions while drilling, and waves of up to 40 feet if disconnected for a storm, according to a federal filing.

The 514-foot Noble Discoverer, built in 1966 as a log carrier, was converted to a drilling rig 10 years later. Noble Drilling and Shell spent more than $175 million readying the Discoverer for Arctic operations, adding sponsons to strengthen the hull against ice and upgrading the exhaust system to comply with air standards for Arctic operators, according to Smith. The rig accommodates up to 140 people.

Both rigs will be attended by a fleet of vessels for ice management, anchor handling, oil-spill response, refueling, resupply, drill mud/cuttings and wastewater transfer, and servicing of drill operations, according to a November 2011 Federal Register notice. Additional support vessels will be available, including an oil spill tanker stationed within 24 hours of the staging location.

Shell expects the project to employ 1,200 people at land operations in Deadhorse and Barrow, and vessel staging in Dutch Harbor. The company has estimated thousands more jobs could spin off indirectly—everything from cooks and suppliers to helicopter pilots and contractors.

If the leases prove commercially successful, an undersea pipeline would transport oil into TAPS. From the Beaufort wells, a line would come across at Point Thomson. Chukchi would be more complicated due to the several hundred miles between those wells and the existing pipeline system.

Shell's new ice management vessel, the Aiviq, built in Louisiana, was on its way to Seattle in June.


Lessons from Macondo

The Deepwater Horizon rig disaster involving the 2010 Macondo well blowout and spill in the Gulf of Mexico prompted an industry-wide re-evaluation of spill prevention and response. The accident killed 11 men, injured 17 others and led to the release of some 5 million barrels of oil—but some observers say there are still no Arctic-specific government standards for oil-spill response.

“There is nothing that is different in the regulations for the Arctic than what exists in temperate, warm, calm waters,” says Marilyn Heiman, director of the U.S. Arctic program for the Pew Environment Group in Seattle, which is not involved in the lawsuits related to Shell’s operations. “We do not have any standards for Arctic containment.”

According to Smith, Shell voluntarily responded to the Macondo incident, adding a cap and containment system to its Arctic program very much like the one that finally ended the Gulf of Mexico blowout. “We don’t expect that kind of accident here, but we’re not tone deaf,” he says.

The relatively shallow wells Shell plans in the Arctic present an entirely different risk profile, he says. The kind of pressure the company expects to find in the wells means the likelihood of a blowout is very low.


Too Much, Too Fast, Too Soon

Shell’s 2007-2009 exploration plan for the Arctic called for multiple wells and multiple rigs. Residents of the North Slope Borough responded with alarm. “The entire North Slope community was shocked by the initial submission of their drilling plan,” Jacob “Jake” Adams, the North Slope Borough’s chief administrative officer and a former mayor, wrote in an email. “It was too much for any of the organizations on the North Slope to fathom what the impacts could be from a very ambitious offshore drilling plan.”

Adams, a whaling captain in Barrow, says “the concern is there about how well Shell Oil will do in terms of protecting the subsistence resources and the environment.”

He describes numerous community meetings about the “what-ifs” and how well Shell is prepared to respond to oil spills in broken ice.

Confronted with the “too much, too fast, too soon” message from residents, Shell decided in 2007 to address North Slope stakeholder concerns in person, Smith says. Shell Alaska vice president Pete Slaiby led that effort. The company has held more than 450 meetings with stakeholders since.

Those discussions led to changes in the way Shell submitted drilling plans to avoid conflict with subsistence whalers and other hunters, Adams says.

Shell agreed to pull its Beaufort rig for the two-week fall whale hunt starting in late August at a cost of more than $100 million, according to Smith. A drill rig retrofit costing “tens of millions” was necessary to make sure drilling activities won’t release mud and cuttings in the path of migrating whales.

Shell also agreed to partner with the North Slope Borough on a science agreement involving a pledge to pursue science that’s important to locals.

Adams, who has a history of supporting oil and gas operations provided they protect subsistence lifestyles and the environment, says the community is now more comfortable with the exploration plans.

“After litigation, pestering the federal government and discussions with Shell, the North Slope community feels progress has been made to provide the best possible mitigation processes to protect our subsistence resources and the environment,” he says.


Court Challenges

Shell still needs federal approval on permits to drill from the U.S. Department of the Interior. It also needs letters of authorization and permits from the National Marine Fisheries Service for activities that might incidentally harass small numbers of Arctic marine mammals such as polar bears, seals or whales.

But the company also needs to get clear of litigation that has dogged this project for years.

Alaska Native groups as well as numerous environmental groups have filed legal and administrative appeals since Shell first purchased leases in 2005.

In February, the Interior Department’s Bureau of Safety and Environmental Enforcement approved Shell’s oil-spill response plan for the Chukchi. The agency issued similar approval in late March for the Beaufort.

That month, a half-dozen Greenpeace activists, including actress Lucy Lawless (better known as “Xena the Warrior Princess”), boarded the Alaska-bound drilling rig Noble Discoverer before it left New Zealand. An Anchorage judge in March issued a temporary restraining order against activists who try similar operations against either drill rig.

In March, the U.S. Environmental Protection Agency rejected challenges to Shell’s air quality permit for one of the drilling rigs. Last year, a successful appeal of earlier air permits centered on the nitrogen dioxide emissions in part led Shell to cancel its 2011 drilling plans. The company now has both air permits it needs for the Kulluk and Noble Discoverer, Smith says.

As of late April, the government’s approvals of Shell’s Chukchi and Beaufort exploration plans have been appealed to the 9th Circuit Court of Appeals, with a decision expected before drilling is expected to start in July, said Erik Grafe, an Anchorage-based attorney with Earthjustice, which represents the appellants. The Chukchi air permit approval has been appealed to the 9th Circuit as well.

In mid-April, a large coalition of national and Alaskan environmental groups as well as Alaska Native organizations filed an appeal to the 9th Circuit challenging the federal government’s approval of Lease Sale 193, which opened the Chukchi to drilling. They cite the lack of scientific data about any dangers to bowhead whales and other Arctic species. According to Grafe, the appeal is not likely to be resolved before Shell’s planned drilling would commence. Shell contends that the court challenges won’t delay this summer’s plans.

Interior Secretary Ken Salazar’s positive Record of Decision in October 2011 affirmed Lease Sale 193 and cleared the way for the Bureau of Ocean Energy Management’s ultimate conditional approval of Shell’s Chukchi Sea Exploration Plan, Smith said in an email.

“We look forward to working that plan in July. We are prepared for all aspects of our plans, including our leases and our permits to be challenged in court,” he wrote. “The process that was followed to get us this far was extremely thorough, and we expect to see a positive outcome in court across the board.”

Zaz Hollander is a writer living in Palmer.
This article first appeared in the June 2012 print edition of Alaska Business Monthly magazine.
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