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Shell May Trim 2012 Alaska Drilling for Inspections, Ice

By Katarzyna Klimasinska on July 26, 2012

Royal Dutch Shell Plc (RDSA) may have to scale back its Arctic oil-exploration this year after unrelenting ice and trouble passing U.S. Coast Guard inspections delayed the planned July start of drilling.

The company’s fleet remains in Dutch Harbor, Alaska, days away from the Chukchi and Beaufort seas off the state’s north coast, waiting for ice to break up and the U.S. to issue final permits for drilling five test wells. Arctic conditions require Shell to quit work by late October, before ice reforms.

Europe’s biggest oil company has spent about $4.5 billion since 2005 on leases, permits and equipment to reach an estimated 20 billion barrels in fields off Barrow, Alaska — the northernmost U.S. city. In comparison, Shell today reported second-quarter earnings excluding one-time items and inventory changes, fell 13 percent to $5.7 billion.

“They should have started drilling by now, because their window of opportunity is very short,” said Tad Patzek, professor and chairman of the Petroleum & Geosystems Engineering Department at the University of Texas at Austin. He estimates that if the rigs get on site by mid-August, they will drill three wells “at best” this year.

The company isn’t considering asking to remain in the water past the deadline to compensate for delays. Arctic waters are accessible only from July through October, and the permit issued to the company requires work to stop before ice and limited daylight might hinder operations.

Arctic Versus Mexico

The exploratory wells mark the industry’s return to a region Shell abandoned in the 1990s as oil prices fell and the deep waters of the Gulf of Mexico offered better prospects. Shell’s plight may discourage companies such as ConocoPhillips (COP) (COP) and Statoil ASA (STL), which also hold leases in the region, and delay a potential discovery that Mead Treadwell, Alaska’s lieutenant governor, compared with Prudhoe Bay, North America’s largest oil field.

The Coast Guard said the barge Arctic Challenger that will haul Shell’s oil-recovery equipment isn’t ready to join the fleet and needs improvements in its fire detection and extinguishing systems.

Environmental groups seeking to block exploration say at least two events suggest Shell isn’t ready: On July 14, the Noble Discoverer lost its anchor and drifted toward shore in the Aleutian Islands. The company this month also asked the Environmental Protection Agency to ease air restrictions for the vessel, which has been unable to meet limits set before the rig headed for Alaska.

“There’s been one problem after another,” Cindy Shogan, executive director of the Alaska Wilderness League, said in an interview in Washington July 23. “We’ve said all along Shell isn’t ready, and they’re just demonstrating that.”

Ice Monitoring

Shell is still monitoring the sea ice and declines to speculate on the timing or number of wells it will drill, spokeswoman Kelly op de Weegh said in an e-mail.

“We remain committed to reducing the environmental footprint of our Arctic offshore operations, and we continue to work with EPA to establish revised emissions standards that can be realistically achieved,” she said. “We remain confident we are setting a very high bar in the Arctic.”

Interior Secretary Ken Salazar, whose agency grants permits to drill, said Shell still has a few conditions that must be met and the final authorization might be issued “sometime in the month of August,” according to an June 26 interview in Trondheim, Norway.

Analysts said Shell’s fleet will move into position as soon as obstacles are cleared, to make the most of the shrinking drilling season.

’Intellectual Capital’

“It’s a lot of cash, a lot of capital — money capital and intellectual capital — that is tied up in this exercise,” Philip Weiss, an analyst at Argus Research Co. in New York, said in an interview. “They’ve got nothing to show for it.”

Shell plans exploratory wells, which Patzek said may as long as a month to drill each. Wells in the region aren’t expected to be producing oil until after 2020, according to Shell.

To satisfy regulators and environmentalists, the company agreed to employ a bowhead whale monitoring program, suspend drilling activity while Native Alaskans are hunting in the area and build vessels and a containment system that would help put a wild well under control in harsh Arctic conditions.

The company can work in the Beaufort Sea from July until October, and in the Chukchi Sea from July through September. The sun remains below the Barrow horizon from late November through late January, proving limited daylight for drilling work.

Shell isn’t considering making a request to extend the drilling period past those deadlines to compensate for the time lost early in the season, Curtis Smith, a company spokesman, said in an e-mail.

‘Less Time’

“The shortened window give Shell less time to actually drill to depth,” Robert Dillon, spokesman for Senator Lisa Murkowski, a Republican from Alaska, said in an e-mail “The most important thing, though, is that Shell is able to demonstrate once again that it is able to drill safely in the Arctic and that it’s able to continue exploration next summer.”

Shell’s equipment for the job and emergencies includes 33 vessels including the Noble Discoverer and the Kulluk, and 600 workers, Steve Phelps, Shell’s manager of exploration for Alaska said in June 12.

“This is a game for seniors, not juniors, this is a game for people who have long-term vision and deep pockets, it’s high risk, but potentially- high reward,” Peter Hutton, an analyst at RBC Capital Markets in London, said in an interview. “It requires patience from the operator but also from investors”

To contact the reporter on this story: Katarzyna Klimasinska in Washington at [email protected]

To contact the editor responsible for this story: Jon Morgan at [email protected]


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