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U.S. to Review Shell’s Arctic Practices

Shell’s $5 billion Arctic drilling program has struggled with mishaps nearly from the start.

By TENNILLE TRACY And ALISON SIDER

The U.S. government has opened a high-level review of accidents and mishaps experienced by Royal Dutch Shell RDSB.LN +0.27% PLC since it started the process of drilling for oil in the Arctic Ocean last year, the Interior Department said Tuesday.

The review comes after one of Shell’s drilling rigs broke free of a tugboat and wedged itself on rocks off Sitkalidak Island on Alaska’s southern coast. The drilling rig, known as the Kulluk, has since been recovered and arrived Monday in nearby Kiliuda Bay, where it will undergo assessment.

Following the incident, several environmental groups called on President Barack Obama to suspend all Arctic permits until safe operations could be guaranteed.

The Interior Department said the review, which will be completed in 60 days, will influence future permitting decisions in the region. Shell has already received approval for multiyear Arctic exploration plans, but it still needs permits to drill into oil-bearing depths.

“We will assess Shell’s performance in the Arctic’s challenging environment,” said Tommy Beaudreau, director of the Bureau of Ocean Energy Management, who will lead the review.

Shell spokesman Curtis Smith said the company has already been talking to the Interior Department and “a high-level review will help strengthen our Alaska exploration program going forward.”

Shell’s $5 billion Arctic drilling program has struggled with mishaps nearly from the start. Lingering ice delayed the company from dispatching its two rigs to the region last year. One rig used by Shell nearly ran aground in July after becoming unmoored while in port near the southern Alaskan coast.

Environmental groups have tried for years to block Shell from operating in the Arctic, arguing that challenging conditions make it too dangerous.

“Shell has proven that it is not prepared to operate in Alaskan waters,” said Michael LeVine of Oceana, an ocean conservation group, following Tuesday’s announcement. “We hope this review amounts to more than a paper exercise.”

Shell drilled the first stages of two exploratory wells in the Arctic in 2012, and it planned to return this year to complete drilling the wells.

It is unclear whether Shell’s drilling rig sustained serious damage as a result of the accident and whether it will be available for operation this summer. Seawater has damaged the rig’s electrical generators, but Shell has said there are no signs the rig leaked any fuel.

The nearly 30-year-old Kulluk was built for sustained Arctic drilling and has since undergone a $292 million upgrade. In exploration plans approved by the Interior Department, Shell said it would have two rigs working in the area where it is drilling, so that one rig would be available to respond to a potential blowout and drill a relief well.

If Shell needed to obtain a rig to replace the Kulluk, it could be a challenge to do so in time for summer drilling, said David Pursell, managing director of Tudor, Pickering, Holt & Co., an investment bank in Houston. “Practically speaking we’re sitting here in January—it would be hard to get another rig,” Mr. Pursell said.

—Ben Lefebvre contributed to this article.Write to Tennille Tracy at [email protected]

A version of this article appeared January 8, 2013, on page B2 in the U.S. edition of The Wall Street Journal, with the headline: U.S. to Review Shell’s Arctic Drilling Practices.

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