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Shell Gambles U.S. Rules on Arctic Drilling

By Katarzyna Klimasinska – Aug 3, 2011 5:11 PM GMT+0100

Long winter nights and ice that clogs Arctic seas from November through June haunt Royal Dutch Shell Plc (RDSA)’s ambitions to explore for oil off Alaska.

Shell, Europe’s largest oil company, says it must decide by October whether to assume that U.S. regulators will issue all 35 permits it would need to explore under the Beaufort and Chukchi seas next year during the four mildest months, from July to October.

Shell may win approval within days from the Bureau of Ocean Energy Management, Regulation and Enforcement of an exploration plan for drilling as many as two wells a year in the Beaufort Sea in 2012 and 2013. The company says that after investing more than $3.5 billion in the Arctic, it still awaits permits from the drilling regulator, the Coast Guard and the Environmental Protection Agency. Some are unlikely to come before its October deadline to make plans for next year.

It’s a “frustrating and disappointing” slog through a regulatory maze, Marvin Odum, the president of Shell’s American operations, said in a speech to the U.S. Chamber of Commerce in Washington on July 28. The company must make its decision for next year by October because Shell faces “investment decisions that can’t be deferred,” according to spokeswoman Kelly op de Weegh.

“The blueprints need to be put in place several months in advance to ensure our program is safe and that the assets and personnel are available to commence drilling in July 2012,” op de Weegh said in an e-mailed statement.

Second-Largest Reservoir

Alaska’s waters may hold as much as 26.6 billion barrels of oil, according to a federal report, making it the second-largest domestic oil reservoir after the Gulf of Mexico. Shell, based in The Hague, has been seeking permission to drill since 2007, and some of its permits expire in four years.

Shell was ready to begin exploration in 2010, until Interior Secretary Ken Salazar pledged a review of the Alaska plans after BP Plc (BP/)’s well exploded in the Gulf of Mexico, causing the largest U.S. offshore oil spill.

Shell has said a spill in the Beaufort Sea may release as much as 9,468 barrels a day if ruptured, compared with as much as 62,000 barrels a day that spewed from BP’s ruptured well.

The company has pledged to have skimming vessels, booms, tankers, icebreakers, barges and helicopters available in case of a spill from one of its Alaska wells.

Shell may spend as much as $100 million on equipment such as a containment dome that would be lowered onto a well in a spill, Pete Slaiby, the vice president of Shell Alaska, said in a May interview.

‘No Certainty’

“It’s really quite impressive when you look to what they have built up specifically for the Arctic with, at this point, no certainty that they will be able to begin the exploration,” Senator Lisa Murkowski, an Alaska Republican, said in a July 29 interview at Bloomberg’s Washington office. “I don’t know how much longer they can make the commitment without being able to do anything.”

Continued delays make it harder to persuade Shell’s top management to keep investing in the U.S., Odum said during his appearance in Washington last month.

“When I get questions about the regulatory system in the U.S., and how much risk is there around investing in the U.S. — that is becoming a very difficult conversation,” Odum said.

While Statoil ASA (STL), Norway’s largest oil and gas company, and Houston-based ConocoPhillips (COP) also hold leases in Alaska, their preparations for drilling are less advanced than Shell’s, Murkowski said.

‘Guinea Pig’

“Shell right now is the guinea pig,” Murkowski said. “If Shell can’t make this happen, you’re going to have other companies who had hoped to be able to move in, that are going to look at this and say, `You know, if a company with resources and reserves of Shell can’t make it, why would we put our assets on line?’”

Alaska’s rough winter and the short drilling season off its north coast are cited by environmentalists opposed to Shell’s drilling plans.

Shell’s spill-response plan was based on a hypothetical accident in August, when weather conditions are better than at the end of drilling season, according to Leah Donahey, Western Arctic and Oceans Program Director for the Alaska Wilderness League, a Washington-based non-profit organization.

‘Just One Piece’

“We would like them to have a worst-case scenario in October, if they’re planning to drill through October,” she said in an interview. “Shell’s Beaufort exploration plan is just one piece of several permits that Shell will need to get and the Interior Department will be reviewing, so we will continue to submit comments throughout the process and urge the administration not to approve risky oil drilling in the Arctic.”

The Natural Resources Defense Council, which challenged air permits the company obtained last year, said “we do not know how to clean up oil in broken ice.”

“Proceeding with oil and gas drilling at this time is simple and plain lunacy,” Chuck Clusen, director of Alaska projects for the New York-based group, said in an interview. “America’s Arctic is our last frontier, and this magnificent ecosystem supports a vast array of marine mammals: whales, polar bears, walrus, ice seals.”

Coming to Rescue

Shell’s draft exploration plans assume the company will drill in the Beaufort and Chukchi seas the same year. That way, a rig from the Beaufort could come to the rescue if there were an accident in the Chukchi Sea, and vice versa, according to Slaiby, the Shell vice president.

Approval for the Chukchi Sea exploration plan may not come until November because the offshore regulator can’t approve it until a legal dispute over the underlying lease sale is resolved, he said.

The 2008 oil lease sale on the Chukchi Sea, in which Shell purchased $2.1 billion of leases, was challenged by a coalition of environmental groups and Alaska natives, and a U.S. District Court judge ordered the Interior Department to revise the environmental impact statement.

After the amended statement is submitted, the court will determine whether the information provided is sufficient, and then the Interior secretary has until Oct. 3 to decide whether to approve the sale.

To contact the reporter on this story: Katarzyna Klimasinska in Washington at

To contact the editor responsible for this story: Larry Liebert at


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