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Shell’s Arctic investment tops $3B

Friday, August 21, 2009

By Tim Bradner
Alaska Journal of Commerce

Shell’s investment in its Alaskan Arctic offshore exploration program has now far exceeded $3 billion, with the company yet to be able to turn a drill bit, Shell’s Alaska manager told an Anchorage business group Aug. 14.

About $2.2 billion of Shell’s money is tied up in bids for federal Outer Continental Shelf leases in the Chukchi Sea that are now in limbo because of a U.S. Court of Appeals decision in a lawsuit brought by environmental groups, Pete Slaiby, Shell’s vice president for Alaska, told the Anchorage Builders and Managers Association.

Much of the remaining investment was for preparations to explore Beaufort Sea leases in 2007, an effort stopped by a separate environmental suit in the Ninth Circuit Court.

Another frustration has been delays for Shell in getting key permits from federal agencies, particularly an air emissions permit from the U.S. Environmental Protection Agency for a drillship with which Shell hopes to drill exploration wells in 2010.

Shell has been working with the EPA for three years and has expended $15 million in to date unsuccessful efforts to get the permit, Slaiby said. “This drillship would have the air quality impact of 50 to 70 SUVs,” he said. Shell has also invested an additional $25 million in the vessel to improve its air emissions control technology on top of $15 million spent working on the permit with EPA.

Janis Hastings, an air quality specialist in EPA’s Region 10 office in Seattle, said a draft air quality permit for Shell’s Chukchi Sea program would be out for public review soon, but that the agency is still waiting for information from Shell to issue the permit for the Beaufort Sea drilling. “We’re working on these as fast as we can,” she said.

Shell is optimistic that it will eventually be able to explore, however, and the company has continued to acquire seismic data to conduct sea bottom hazard assessments in planned drilling locations and along possible subsea pipeline routes.

“We have acquired an immense amount of 3-D seismic over the last three years. It is now Shell’s largest accumulation of exploration data in the world,” Slaiby said.

Shell now holds 275 leases in the Chukchi Sea and 137 leases in the Beaufort Sea. About 30 leases in the Beaufort were turned back to the government last year, Slaiby said.

The company hopes to drill two wells in 2010, one on its leases in the Chukchi Sea off Alaska’s northwest coast, and one in the Beaufort Sea. The U.S. Minerals Management Service is working on Shell’s plan to drill on two Outer Continental Shelf leases in the Beaufort Sea.

However, the company’s Chukchi Sea plans cannot be approved by the MMS until the legal status of the leases is clarified, said John Goll, the agency’s Alaska manager.

Slaiby said the government itself has made a substantial investment in preparation for the Alaskan Arctic OCS sales. The Interior Department has spent $300 million on OCS studies and lease sale preparations, with another $100 million spent by the U.S. Army Corps of Engineers, Slaiby said. Industry, has spent an additional $100 million in environmental studies, much of it by Shell.

The company must make decisions on the 2010 summer drilling by December, Slaiby said.

The holdup in the Chukchi Sea is a Fifth Circuit Court decision that found that an environmental risk assessment done by MMS for the 2009-2012 OCS lease sale program for Alaska was inadequate.

This would have the effect of nullifying Alaska OCS lease sales held under that program, including the February 2008 Chukchi sale in which Shell and other companies bid $2.5 billion.

Slaiby said one positive thing is that the Fifth Circuit Court found the environmental baseline data for the 2009-2012 Arctic sales to be adequate, the major defect in the agency’s work being the environmental risk assessment. The MMS plans to submit a revised environmental assessment to the court this fall, Goll said.

Shell’s Beaufort leases were acquired in sales held under the previous OCS five-year plan, but lawsuits were filed over the company’s first effort to drill because the areas planned for tests were in the path of migrating bowhead whales, a threatened species.

The Ninth Circuit Court had the case for almost two years until Shell asked for the case to be dismissed because its exploration plan for the Beaufort Sea had changed substantially.

Slaiby said Shell sees the Arctic as a key emerging region for major new hydrocarbon discoveries, particularly in the Chukchi Sea. “We really like what we see there, on seismic. The structures go on for block after block. But we can never know if there is oil and gas until we drill,” Slaiby said.

Tim Bradner can be reached at

[email protected]

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