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Myths about Shell’s Arctic Alaska pullout persist

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Screen Shot 2015-10-04 at 09.03.21Yereth RosenAlaska Dispatch News: October 3, 2015

When Royal Dutch Shell announced that it had lost its big-money bet in the Chukchi Sea and would end its entire program in the offshore U.S. Arctic, the hyperbole and finger-pointing began in earnest.

Rep. Don Young accused President Obama and Interior Secretary Sally Jewell of deliberately sabotaging Alaska’s economy. “I’m sure somewhere Sally Jewell and President Obama are smiling and celebrating Shell’s decision to cease operations off the coast of Alaska,” Young said in a statement issued just after Shell’s announcement.

At the other end of the spectrum, the Sierra Club sent out celebratory alerts to members that congratulated them for Shell ending its exploration after disappointing well results.

“This is your victory! You have shown that even the most powerful corporations in the world can’t win when faced with grassroots pressure united to protect the wildlife and wildlands we love,” said a message from Dan Ritzman, Northwest regional director for the Sierra Club.

But the record shows that much of the blame-placing and credit-taking is based on misunderstandings and myths.

Myth 1: Oil from the offshore Shell prospects would have solved the state’s fiscal problems by providing revenues to replace royalty and tax payments lost from declining North Slope production.

Alaska’s state budget depends almost entirely on oil royalties and taxes, and with both production and prices down, the state is facing dire fiscal straits. But unlike Prudhoe Bay and other oil fields on state territory, an oil field in federal waters of the Outer Continental Shelf would provide no royalty or production tax income for the Alaska treasury.

Gov. Bill Walker is keenly aware of that reality.

“Not every barrel of oil in Alaska is equal,” Walker said in a brief interview on Wednesday.

He’s been trying to round up national support for a measure that would give Alaska and other coastal states the same type of OCS royalty sharing that Alabama, Louisiana, Mississippi and Texas enjoy under the Gulf of Mexico Energy Security Act of 2006. And he continues to promote legislation sponsored by Sen. Lisa Murkowski to do that, he said.

Murkowski’s bill, which would lift the ban on exporting crude oil nationwide and give all coastal states a share in revenues from offshore production, moved out of committee in July.

Murkowski said in an interview Thursday that despite Shell’s pullout, she will not pull back on the effort, which she has called her top priority.

“I think many of us around the state are still kind of processing the news from Shell and the reality that, at least for the indefinite future, they’re not going to be out there … (and) what that means for prospects offshore in the near, intermediate and long term,” said the senator, who chairs the Senate Committee on Energy and Natural Resources.

“But one thing we do know is legislation doesn’t just happen overnight,” she said. “Let’s be prepared … for the time when we finally do have exploration and production in the offshore.”

If Chukchi oil would provide no direct revenues to Alaska treasury, Walker said, it could create indirect benefits.

Had Shell found oil “in a big way,” the company would likely have planned a pipeline to carry it to shore and into the Trans Alaska Pipeline System, the governor said. Such a transportation system would have, in turn, made relatively small and isolated oil reserves in the undeveloped western part of the National Petroleum Reserve “more enticing” to developers, he said. “We’d have a better chance of getting that if they were connected to a pipeline there,” he said.

And new oil of any type into TAPS could extend the usable life of the system, he added.

Myth 2: Government agencies delayed Shell’s permits and approvals

It would be more accurate to argue that agencies’ initial approvals were granted too quickly, a pattern in the Obama and George W. Bush administrations. Several court rulings drove home an old adage: “Haste Makes Waste.”

Early on, the U.S. Minerals Management Service approved an aggressive Shell three-year plan to drill a dozen or more wells starting in 2007. The people nearest to the drilling sites did not. “Too much, too fast, too soon,” said Edward Itta, then mayor of the North Slope Borough, said repeatedly.

Courts agreed with Itta several times. Court rulings nixed that and other approvals and ordered rewrites of studies and permits. Shell, after having its big Beaufort drilling plan overturned, had to regroup to establish a better relationship with Itta, the borough and the Alaska Eskimo Whaling Commission. Some of the do-overs proved time-consuming because each required a formal public process to be legally valid.

Most notable were court-ordered rewrites of environmental studies that were supposed to have been completed before MMS sold Chukchi Sea leases to Shell and other companies for a record $2.66 billion. Critics accused the Bush-era MMS of rushing to hold the lease sale in 2008 without proper preparation; court rulings in 2010 and in 2014 backed that characterization. Each subsequent rewrite triggered a supplemental environmental impact process and a temporary freeze on all exploration work.

Shell lost at least five drilling seasons to legal rulings that overturned government permits or approvals.

When it did get to drill in 2012, Shell was not allowed to penetrate to oil-bearing depth. That was because a required oil-spill containment system that the company had touted repeatedly failed U.S. Coast Guard tests. In one sea trial in Puget Sound, the system’s dome was damaged, necessitating repairs and more delays.

Myth 3: Regulators surprised Shell with new rules

The biggest unanticipated expense for Shell was likely one of the company’s own making: the wreck of the Kulluk drill ship. The Dec. 31, 2012, grounding ran up $90 million in response costs for Shell in early 2013. It ruined the Kulluk, an Arctic-specific drill rig bought by Shell for an undisclosed price and refurbished by the company for close to $300 million. The loss of the Kulluk made any drilling in 2013 impossible. Shell in 2014 secured a replacement ship, the Polar Pioneer, but the company shelved plans to explore the Beaufort, the region to which the Kulluk was particularly suited.

The Kulluk wreck, along with other problems that plagued the 2012 season, prompted a thorough Department of Interior review of Shell’s performance.

“Shell screwed up in 2012,” Interior Secretary Ken Salazar said when he released that review in 2013.

Post-2012, Shell was required to submit an integrated operations plan covering all steps, including movement of ships to and from Alaska. Shell filed that plan, which was not subject to regulatory approval.

As recommended in the review of Shell’s 2012 performance, Interior issued draft Arctic-specific standards, aiming largely to extend permitting requirements already placed on Shell to all Arctic offshore operators. An important standard was requirement of a designated drill rig to be available to drill a same-season relief well in the event of a blowout, a rule in place in the Canadian Arctic since the 1970s.

The Deepwater Horizon disaster of 2010 caused the biggest regulatory shakeup, but it was national, not specific to Shell.

The blowout of BP’s exploratory Macondo well killed 11 workers on the Deepwater Horizon rig and caused the nation’s biggest oil spill. It was a seminal event that triggered reorganization of the scandal-ridden MMS, the agency deemed to have failed to properly regulate offshore oil activities. MMS was split into three agencies, the Bureau of Ocean Energy Management, the Bureau of Safety and Environmental Enforcement and the Office of Natural Resources Revenue. While that reorganization was underway, a temporary moratorium was slapped on new deepwater wells, a category that did not include Arctic Alaska. Interior, through its reorganized agencies, issued new industry-wide rules and standards for outer continental shelf blowout prevention, spill preparation and response, well integrity and worker safety.

Stricter oversight was well-justified, concluded a national commission that conducted one of the many investigations of the Deepwater Horizon disaster.

Profound changes in government oversight and “sweeping reforms that accomplish no less than a fundamental transformation” of industry safety culture were needed, said a report by a national commission that investigated the Deepwater Horizon.

Some of the Chukchi restrictions that drew complaints from Shell and its supporters were not new to Arctic Alaska.

Murkowski claimed the U.S. Fish and Wildlife Service imposed a rule “at the last minute” that upended Shell’s plan to drill simultaneously in the Chukchi with two rigs. But the Fish and Wildlife Service rule barring two rigs from operating within 15 miles of each other in the Chukchi has been on the books since at least 2008. It is designed to protect walruses and is part of the service’s national incidental take regulations. Shell was aware of the rule years ago, as the company in February 2013 submitted official comments on it when it was up for its five-year renewal.

Shell complained about seasonal restrictions imposed by BSEE that required imposed deadlines for the end of drilling into oil-bearing zones. In a request to BSEE for extended time to work on its Arctic leases, Shell called the deadline “unexpected and unprecedented.” BSEE’s deadlines may have been strict, but seasonal drilling restrictions in themselves are not new to the federal or state Arctic waters — nor are industry complaints that they drastically shorten operating periods that are already limited because open-water seasons are so brief in the Arctic. Seasonal restrictions mean the “actual drilling days for a floating drill system would be reduced to a point that a prospect may take 3 to 4 years to drill,” Amoco Production Co. said in comments to MMS in 1990.

Myth 4: Offshore oil development is now dead in Alaska but booming elsewhere in the Arctic

There is only one producing oil field in the outer waters of the Arctic — the Prirazlomnoye field in Russia, which started production in December 2013 and which was the subject of high-profile Greenpeace protests. Scheduled to come on line by the end of the year in Norway’s Arctic waters is Eni’s Goliat field, poised to become the world’s northernmost offshore oil producer. However, Goliat has been economically challenged. It was delayed by cost overruns and one recent Norwegian analysis calculated that it needs oil prices of at least $95 a barrel to break even.

Another once-promising Norwegian Arctic prospect is on the back burner. Norway’s Statoil announced earlier this year that it is delaying drilling at its Johan Castberg field in the Barents Sea.

Though Russian government officials have been outwardly bullish on Arctic development, Rosneft and Gazprom, both state-owned companies, are delaying drilling in the Barents and other Arctic waters. Western sanctions and low prices are cited as reasons for the delay, and sanctions are also affecting international companies like ExxonMobil that have been working in Russia.

In the Canadian Beaufort, where there is a long history of exploration, two ambitious oil search programs were suspended in the past year. Chevron called off its drilling in December and Imperial did the same in May with its program. Both cited poor economics.

After Prirazlomnoye and Goliat, where will the next Arctic outer continental shelf oil be produced?

One likely contender is Alaska. BOEM is now reviewing a new development and production plan for the Liberty unit, a 150 million-barrel field in the federal waters of the Beaufort Sea. Hilcorp Energy Co., the new operator, is planning to start production within three years of regulatory approval and sanction, its development and exploration plan says.

“If developed, this would be the first field to produce from a reservoir located entirely from federal leases of the Outer Continental Shelf (OCS) of the U.S. Arctic Ocean,” Hilcorp’s development and production plan says.

The company that discovered Liberty’s oil in the 1980s but dropped the prospect? Shell.

Alaska Dispatch News reporter Erica Martinson contributed to this report.

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RELATED: Shell in Alaska: A timeline

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