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High Stakes for Shell in Alaska

Shell’s containment barge waits to drill exploratory wells in the Arctic Ocean off Alaska. Associated Press:

August 28, 2012

Oil companies are used to being hostages to fortune. Pumping crude out of the world’s volatile hotspots and undertaking prospecting in deep waters mean firms like Royal Dutch Shell are old hands at juggling risks.

But in taking on the Arctic — in some ways the final frontier of oil exploration — is Shell biting off more than it can chew?

Shell has placed big bets on its controversial U.S. Arctic oil exploration plans and its success there is an important part of its quest to find new hydrocarbon reserves. Shell has already spent around $4.5 billion to drill in the Arctic, becoming the first company in several years to explore for oil there.

News that the Anglo-Dutch giant is seeking permission from U.S. authorities to extend its planned summer drilling campaign in offshore Alaska comes after weeks of delay that have put its Arctic exploration mission under threat. And while Shell is no stranger to operational challenges, the Arctic represents a convergence of issues it usually deals with independent of one another.

Regulatory inertia, environmental protests, political hot-potato, technical challenges and extreme weather conditions. It isn’t often that Shell has to work through this many challenges all at once. The fact that an industry behemoth like Shell is finding it hard going is making the rest of the sector sit up and pay notice.

“There are a lot of eyes on Shell,” said a senior executive at one major European oil and gas firm. “It’s a big ask, but if anyone can handle it, you’d think they can. This summer will be the test case. If they can pull it off, then others will be prepared to follow suit. But there are a lot of ifs and maybes,” he  said.

In some ways, it’s surprising that Shell decided to make Alaska its Arctic test case. The most high-profile offshore drilling campaign in the U.S. in the wake of the Deepwater Horizon accident was always going to attract a lot of scrutiny. “There are a lot of people in the industry hoping they get it right, or don’t slip up. If they don’t, then that could close the Arctic to exploration for another generation,” the senior executive said.

In addition, the strength of U.S. public opinion — not to mention environmental groups — means Shell’s activities have been scrutinized at every stage of the process.

By contrast, Scottish wildcatter Cairn Energy had a comparatively easy ride when it decided to probe a giant license block offshore Greenland over two summers in 2010 and 2011. While its campaigns did attract protests from Greenpeace, its vessels set sail without delay and the firm was able to drill its planned number of wells.

This may have played some role in Statoil’s decision to partner with Cairn in future Arctic exploration activities. Eschewing Alaska, the Norwegian state-owned major will instead use its knowledge of the Barents Sea — and the rather more receptive regulatory climate of Greenland — to start its Arctic adventure.

The stakes, while still high, are perhaps at least not as high profile as the ones Shell is playing with in Anchorage.

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