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Shell Arctic Project Risks Getting Put on Ice


Royal Dutch Shell RDSB.LN +0.28% had high hopes for its plans this summer to start drilling the first oil wells in U.S. Arctic waters in 20 years, backed by an Obama administration eager to show it wasn’t opposed to offshore exploration.

But the closely watched, multibillion-dollar project isn’t going the way the company or the government hoped—illustrating the continuing challenge of plumbing for natural riches in one of the world’s most unforgiving locations.

Sea ice in the Chukchi and Beaufort seas off the northern Alaska coast was slow to break up this year, leaving the drilling areas inaccessible much later than anticipated. Meanwhile, one of Shell’s two drilling rigs slipped its anchor while waiting in Dutch Harbor, Alaska, and almost ran aground. Shell also still isn’t finished working on a spill-response vessel that under new federal regulations must be in operation before drilling can begin.

The delays have led Shell to scale back drilling plans to just two wells from five. But even cut back, the project remains at risk.

Failure would be a significant setback for Shell, which has spent more than $4.5 billion to build equipment and obtain federal rights to drill in waters that could hold more than 19 billion barrels of technically recoverable oil and gas—nearly three times the amount believed to be in the Arctic National Wildlife Reserve.

When it is ready, Shell’s spill-response barge will need to travel up to three weeks from its Bellingham, Wash., berth to northern Alaska, likely pushing the start date for drilling into September—closer to when the seas will begin to freeze again. Shell’s drilling permits last only until September 24 in the Chukchi Sea and October 31 in the Beaufort Sea, although the company may be able to do some work beyond those dates.

Shell Alaska “absolutely expects to drill this year,” unit Vice President Pete Slaiby said Friday.

But Interior Secretary Ken Salazar sounded less confident. “We don’t have a lot of time,” Mr. Salazar said at an Anchorage news conference last week.

If Shell is unable to drill this season, it would be a major disappointment, said Fadel Gheit, an analyst with Oppenheimer & Co. “Shell is betting the ranch on this play, which, if it turns out to be a big as hoped, could be significant for the company, the industry and our energy independence,” he said.

The project is just one of many multibillion-dollar efforts Shell has under way, so setbacks don’t threaten the company’s overall health. They are unwelcome, however, as Shell and other companies adjust to oil and gas fields becoming more difficult to reach.

The Obama administration also has a lot riding on Shell’s Alaska drilling. The government’s offshore drilling moratorium and tougher regulations in the wake of the April 2010 Gulf of Mexico oil spill were criticized by Republicans and many in the energy industry as excessive.

The approval for Shell to drill in the Arctic earlier this year was supposed to be the White House’s “See? We understand the need to drill,” moment, said Amy Myers Jaffe, director of the Baker Institute Energy Forum, a public-policy think tank at Rice University in Houston.

But the blown sea-ice forecast and the company’s inability to get all its equipment ready on time underscores environmentalists’ concerns that Arctic Ocean conditions are too unpredictable for safe drilling and that industry isn’t up to the challenge. “The president spent a chip on this project and he is unlikely to see something positive out of it,” Ms. Myers Jaffe said.

Mr. Salazar said Shell bore much of the responsibility for the delays but that safety and environmental concerns were too important to rush the project.

Drilling in the U.S. Arctic Ocean proved challenging the last time companies made a concerted try, in the 1980s. A more than $2 billion project called Mukluk backed by a companies including Shell and an affiliate of BP BP.LN +0.69% PLC attempted drilling from a man-made gravel island 14 miles off the coast in the Beaufort Sea. It was a costly failure: The expected oil reservoir had moved because of natural oil migration.

“We drilled in the right place,” Richard Bray, the head of project partner Sohio Production Co., told author Daniel Yergin for his book “The Prize.” “We were simply 30 million years too late.”

Still, the Arctic remains enticing to the energy industry. Exxon Mobil Corp. XOM -0.30% expects to spend billions of dollars in the next few years on a partnership with Russia’s OAO Rosneft to explore that country’s largely untouched Arctic waters. The companies started seismic surveys this month, a year ahead of schedule.

ConocoPhillips COP -0.28% has said it paid millions of dollars for leases for plans to drill wells in the Chukchi in the summer of 2014. Statoil STL.OS +0.27% ASA, which also acquired leases, hasn’t decided whether it will drill off Alaska.

Shell’s geologists are convinced that the area they have leased in the Chukchi could produce 400,000 barrels of oil a day or more when fully developed. The U.S. consumes about 19 million barrels daily.

Meanwhile, the clock is ticking for Shell as the end of the Arctic summer draws near. One of the two drilling rigs could begin heading up to the sites early this week, where Shell said it hopes federal regulators will let the company begin some preliminary work.

Write to Tom Fowler at [email protected]


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