Shell May Face Delays in Alaska

Updated July 10, 2012, 1:55 p.m. ET

By ANGEL GONZALEZ And ALEXIS FLYNN

BP RDSB.LN +1.12% Plc’s and Royal Dutch Shell RDSB.LN +1.12% Plc’s plans to develop offshore oil in Alaska’s Arctic frontier are facing setbacks, as they meet with stricter scrutiny and rising costs stemming from the 2010 Gulf of Mexico oil spill.

London-based BP said Tuesday it is shelving its Liberty offshore drilling project in Beaufort Sea, after deciding that its current plan isn’t up to the standards it promised to follow after the Deepwater Horizon catastrophe—and revamping its drilling rig to meet those standards would be too costly.

BP’s Liberty project, once estimated to cost more than $1 billion, was designed to exploit a large offshore reservoir that would yield an anticipated 40,000 barrels a day. “BP has many opportunities in its global portfolio and projects must compete for resources,” the company said.

Also on Tuesday, Shell said that it was facing delays to get a final approval from the U.S. Coast Guard for an oil spill containment vessel that’s key to ensuring the safety of a controversial Arctic offshore drilling project in Alaska, which the Anglo-Dutch company had planned to start in July.

Two Shell-chartered drilling ships are on the way to the Chukchi and Beaufort Seas already, having departed Seattle late last month; they have a narrow summer window to begin drilling.

The move underscores the lingering, far-flung impact of the Deepwater Horizon tragedy beyond the Gulf of Mexico, where in 2010 an explosion aboard a rig drilling for BP killed 11 and unleashed the worst offshore oilspill in U.S. history. The disaster had special resonance in Alaska, the scenario of the Exxon Valdez oil spill in 1989, and where environmental awareness clashes with the need to stem a swift decline in oil production from maturing oilfields in the North Slope.

In March, Alaska ceded its no.2 spot among oil producing states to fast-rising North Dakota; it has seen its production decline to 552,000 barrels a day from a peak of about 2 million barrels a day in 1988.

Even as its short summer window narrows—in Alaska’s freezing waters becomes difficult in September—Shell said it was still working with U.S. officials to ensure that an essential oil spill response vessel is adequately prepared for the unique conditions it will face. The system is “first-of-its-kind,” and not yet mandated by regulation, the company said.

“We have every confidence the Arctic Challenger will achieve the certifications necessary and that it will be available in the Arctic in 2012,” said a Shell spokesman.

Separately, environmental campaigners Monday filed a lawsuit in Anchorage seeking to challenge the federal government’s decision to approve Shell’s oil spill cleanup plans. The action is one of several by ecological groups opposed to the company’s drilling plans.

“We remain confident that the approval of our oil spill response plans will withstand any legal review,” said the Shell spokesman. “If we were not absolutely confident that we could execute a responsible exploration program, we would not be here.”

Write to Angel Gonzalez at [email protected] and Alexis Flynn at [email protected]

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