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newsminer.com: Shell focused on North Slope in delayed return to Alaska

By R.A. Dillon
Staff Writer
Published December 9, 2007

Dutch oil giant Shell is making a major splash in Alaska offshore exploration after a nearly decade-long absence.

Rick Fox, Shell’s Alaska asset manager, said the company is committed to developing its holdings in the federal waters along the state’s northern coast despite legal setbacks to its plan to search for oil starting this fall in the Beaufort Sea.

Since 2005, high oil prices and the promise of major discoveries have spurred the company to invest hundreds of millions of dollars on drill rigs, leases and office space in the state.

Fox, who two decades ago managed Shell’s exploration drilling in Alaska’s polar oceans, said the company considers Alaska the “future heartland” of oil development.

“What other places are available to free-market companies to operate that have this type of tax regime?” Fox said in an interview with in Anchorage in mid-November. “This is a good place for us to work.”

Shell ceased production at its wells in Cook Inlet in 1998, partly because of low market prices, bringing a temporary end to a nearly 40-year presence in the state.

The company now holds all or part of 179 federal offshore leases in the eastern Beaufort Sea, which it picked up in Minerals Management Service (MMS) sales in 2005 and 2007, and through a buyout of EnCana’s interests in the area. Shell paid nearly $84 million for its Beaufort holdings.

Federal geologists estimate the Beaufort Sea could hold as much as 8 billion barrels of oil and nearly 28 trillion cubic feet of natural gas. The MMS is planning another lease sale in the Beaufort in 2009.

Alaska’s Arctic waters are among the few federal areas off the U.S. coastline, outside the Gulf of Mexico, open to oil and gas exploration, and Shell is leading a small phalanx of companies interested in the region. Production on the offshore leases is subject to a 12.5 percent federal royalty.

“This company really has enthusiasm and confidence that Alaska is a great place for us to be,” Fox said. “What we need to do, though, is to start delivering value for the amount of money that this company is investing.”

Shell’s Alaska business must compete internally with other projects across the globe for a slice of the company’s $2 billion annual exploration portfolio, company spokesman Curtis Smith said.

“We have a substantial capital budget, but we have to compete for those dollars within the company,” Smith said. “Year in and year out, we have to deliver progress.”

Beaufort Sea

Shell’s has a $200 million, three-year project to evaluate its holdings around Camden Bay by drilling up to 12 exploratory wells. Three of those wells were slated to be completed this fall in the Sivulliq prospect, located about 16 miles offshore and just east of the Arctic National Wildlife Refuge.

The play, formerly known as Hammerhead, is familiar to Shell, which first drilled there in 1985.

In August, however, the 9th U.S. Circuit Court of Appeals sidetracked Shell’s plans based on a challenge by environmental groups, the North Slope Borough and the Alaska Whaling Commission, which claimed exploration would drive migrating bowhead whales out of reach of native subsistence hunters.

The MMS, the Interior Department agency responsible for offshore oil and gas leasing, approved Shell’s exploration plan in February, finding it wouldn’t cause significant harm to whales or the environment. But plaintiffs in the case argued regulators failed to adequately consider the potential impacts of industrial noise and spills associated with exploration.

The court ordered Shell to put its exploration plans on hold until the case could be resolved. The decision cost the company, which had two drill ships and a fleet of support vessels waiting in Alaska and Canadian ports ready to sail for the Beaufort, the 2007 drilling season.

“There was a lot of steel in the water ready to get some work done,” Fox said.

The delay cost the company about $100 million.

The court heard the case on Tuesday, though, a decision is not expected for months.

In the meantime, Fox is working to try to ease the concerns of North Slope Borough officials.

“We’re trying to make progress on the very issues that they’ve raised that they feel haven’t been handled well enough yet that would make them less inclined to stay in a suit to stop us,” Fox said. “We’re hoping we make enough progress that they feel comfortable soon enough to make a difference.”

Shell is committed to developing its offshore holdings in an environmentally sound manner, Fox said. He said the company simply misjudged the level of confidence the local population had in its previous Arctic experience.

“We were probably pretty confident coming in that we would find the right level of engagement,” Fox said. “It turns out, for many reasons, the North Slope Borough, when they looked at it from their perspective, saw somebody going way faster than they liked.”

Shell executives hope the program has only been delayed one year and that they can take advantage of 90 to 120 days the Beaufort Sea will be ice-free next summer. The company has spent millions of dollars on community development projects on the North Slope and put together a special spill-response vessel to soothe local concerns.

“We’re working very hard to address the issues raised by the North Slope Borough,” Fox said. “We want to resolve them in a way that allows us to proceed in 2008.”

Shell is moving forward with gathering seismic data in the Beaufort with a program this winter to shoot through the ice. The winter program is designed to reduce the amount of activity the company conducts in open water and therefore limit any potential impact on migrating whales, Fox said.

Chukchi Sea

Shell’s interest in the Arctic includes the Chukchi Sea, off Alaska’s northwest coast.

In early November, Shell wrapped up its second year of collecting detailed 3-D seismic data in the Chukchi.

The company is building on 17 years of 2-D seismic data and knowledge of the area gained from five exploratory wells drilled in the Chukchi between 1989 and 1991. Shell partnered with ConocoPhillips this year on its seismic program in advance of an upcoming MMS lease sale planned for the Chukchi in February.

Shell is interested in obtaining acreage in the region, but not sure yet whether it will bid on leases.

“This seismic would help detail some of these areas to determine if the Chukchi is a good fit for Shell,” Smith said.

The MMS, part of the Interior Department, estimates the region — about 29 million offshore acres stretching from Point Barrow to Cape Lisburne — holds up to 15 billion barrels of oil and 77 trillion cubic feet of natural gas reserves. Additional lease sales are slated in the Chukchi for 2010 and 2012.

The Alaska Wilderness League and native groups want MMS to postpone leasing in the Chukchi and Beaufort seas until better scientific information about the Arctic Ocean can be gathered, including the potential combined impact that climate change and oil and gas development could have on whales and other marine mammals.

Bristol Bay

The company also owns 33 leases off the coast of Bristol Bay with an eye toward building up to four offshore oil and gas production platforms in the salmon-rich waters.

Fox said the company is confident it can tap the underwater oil and gas resources without disturbing fishing activities. However, oil and gas development in the area has long faced stiff opposition from environmental groups and commercial fishermen.

Shell has already been forced to withdraw from the region once. It was among a handful of companies that combined spent $95 million in 1988 for leases in Bristol Bay, also known as the North Aleutian Basin, only to see local opposition result in the federal government rescinding the sale in 1995.

Shell cannot develop its Bristol Bay holdings, for which it paid about $1 million in 2005, until it receives federal permits, a process it has not yet begun.

“The timing of putting that process in motion will largely be guided by the cost and impact of the activities under consideration,” Smith said.

President Bush in January removed a presidential ban on drilling in Bristol Bay that had been in place since the Exxon Valdez spilled more than 11 million gallons of crude oil in Prince William Sound in 1989. The action cleared the way for the MMS to hold a lease sale in 2011.

http://newsminer.com/2007/12/09/10320/

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