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Shell needs to drill to prove up seismic Slaiby tells chamber company will decide in fall on 2012 Alaska drilling plans, needs air permits, doing work on Kulluk drillship By Kristen Nelson Petroleum News
Shell has a very large lease position on Alaska’s outer continental shelf — 137 leases in the Beaufort Sea and 275 leases in the Chukchi Sea. That lease position, says Shell’s Alaska vice president, Pete Slaiby, is almost as large at the company’s holdings in the Gulf of Mexico, where it is the second-largest operator, “so this is very, very significant and represents a huge amount of investment.”
The company has shot 3-D seismic in both areas, three years of work from 2007 through 2009, the largest 3-D program the company has “acquired virtually in any exploration play in all the 105-year history of Shell,” Slaiby told the Anchorage Chamber of Commerce June 20.
And Shell likes what it sees in the 3-D.
“After that (3-D) acquisition, we’re still here,” Slaiby said. “But there’s an old adage in our business,” he said: “You can like your projects on seismic, but you only really love them after you drill them.”
He said Shell is “in a ‘like’ phase and we’re hopeful that the romance will continue to increase.”
2011 drilling cancelled Shell has been preparing to drill in Alaska, but has been stymied so far.
At the end of January, Slaiby said, the company canceled its 2011 drilling plans after an air permit — a prevention of significant deterioration permit — issued by the Environmental Protection Agency was appealed to EPA’s Environmental Appeals Board, which in January found problems with the process, Slaiby said.
“At no time has EPA or anybody else ever been able to indicate that what we were doing would put, for example, the villages of Nuiqsut and Kaktovik in harm’s way.”
It’s a sad story, he said. “We’ve made the effort as a company and I think set the bar for industry with respect to putting the best available controls technology on these vessels,” using ultralow sulfur diesel with particulate filters on the exhaust.
Shell has been working to get air permits for its two drilling rigs for four and a half years, Slaiby said, and has $60 million invested in capital improvements, processing time, attorney’s fees, etc.
Slaiby said air permitting is technically challenging and “people who are trying to stop us know that air is a great way to do it.” He said if he was “going to put the rod into the spoke that would be where I would probably go.”
But he sounded cautiously optimistic. The air permit story “just became so outrageous and so unbelievable” and hearings in the U.S. House early this year “really shone an unfavorable spotlight on what had been going on” in the EPA’s Region 10 office in Seattle. Things have “moved in a better direction” as EPA’s headquarters has been providing more guidance and Shell now has regular communications with national and regional EPA offices, he said.
Slaiby said he believes the outlook is now more favorable for Shell.
Spill response issues Shell has had “a very robust oil spill response plan” from the beginning, Slaiby said, and since the BP Deepwater Horizon last year the company has added to that plan.
Significant changes have been made nationally since the BP Deepwater Horizon Gulf of Mexico Macondo well explosion and oil spill last year.
Those changes included mandating a capping and containment system, but Shell did not wait to implement changes, Slaiby said.
At the beginning of the Gulf of Mexico blowout, Shell looked at its plans to put its blowout preventers in 30-foot by 30-foot holes in the ocean floor to allow the rig to move off in an ice event.
As Shell looked at the Gulf blowout, Slaiby said, the company realized it needed to have a secondary control panel, outside the cellar, “so the learning started virtually from the moment we were looking at the incident.”
Shell will start construction this summer on an Arctic oil spill containment system, the only one in the world, he said.
The capping system will be ready to go for June of 2012 and will be available on Shell’s ice-management vessels if needed.
Drilling plans Shell’s current plans call for 10 wells over a two-year period, six in the Chukchi and four in the Beaufort.
Three wells in the Chukchi Sea is a stretch, but right now Shell’s Burger prospect in the Chukchi is ice free, Slaiby said.
Shell couldn’t start drilling before the first of July because it can’t move its assets through the Bering Straits until the first of July, but ice conditions this year would have given it maximum opportunity in the Chukchi, he said.
Work in the Beaufort Sea in the Camden Bay area would start later in the year “because the Beaufort Sea is at the moment virtually choked with ice.”
If Shell is successful in moving forward it will work two drilling rigs in parallel, Slaiby said.
The U.S. Department of the Interior’s Bureau of Ocean Energy Management, Regulation and Enforcement is reviewing the Beaufort plan.
Shell’s plans for the Chukchi are still wrapped up in issues around the Chukchi Sea lease sale litigation, with required work by BOEMRE slowed by the BP Deepwater Horizon response.
Slaiby said Shell is frustrated that not much got done in the Department of the Interior last year because attention was focused on Macondo. When required revisions went out for public comment at the end of the summer the agency said they would like to see a very large oil spill scenario done and while Shell “was in agreement that a very large oil spill scenario is something that probably needed to be done,” its frustration comes from the fact that BOEMRE didn’t come out with it until March of this year, Slaiby said.
Some positive measures When President Obama indicated in May that Alaska would be part of the administration’s energy mix, that was positive, Slaiby said.
He said the creation of an OCS coordinator is something industry has been pushing for quite some time because of the challenge of communicating among regulators in various agencies.
On the EPA permit issue, Slaiby said Shell has had a couple of sessions with the White House, which is taking an interest in how the air permits are progressing.
He said he also feels more positive energy when he visits Washington, D.C.
“I no longer feel like I’m a burden when I’m visiting a regulator,” where previously the view appeared to be that the potential to drill in Alaska presented a nightmare scenario.
He said the Alaska delegation has been “steadfast” in its support, as has the governor.
“Shell could not be in Alaska had we not had the support of the delegation and of the state,” he said. If Shell didn’t have support in the state, “we couldn’t stay here. … It’s far too large an investment for our shareholders to hold onto” if there was an “excessively negative” view of the company’s plans in the state.
Decision for next year Shell will make a call on 2012 drilling this fall, in the October timeframe, Slaiby said.
Requirements for capping and containment will mean additional oil spill response equipment and Shell is “partially beginning to move to a point where at least we can keep the option of making a positive decision in the October timeframe.”
Slaiby said Shell will be sending its drillship the Kulluk from Dutch Harbor to Seattle for upgrades of the power plant and generators, as well as upgrading the Kulluk for zero discharge in Camden Bay.
Shell recognized that people in Nuiqsut and Kaktovik who depend on subsistence bowhead hunting were concerned about discharge, he said. While Shell’s technical studies indicated that discharge wouldn’t be an issue, “it’s really more of a social responsibility that we’ve decided to undertake.” With zero discharge, all mud, cuttings, black water and grey water off the drillship will be brought back and disposed of at onshore locations.
Shell Alaska spokesman Curtis Smith told Petroleum News in an email that the work required was more than Shell could do in Dutch Harbor, which “does not have the 400 workers needed to make the upgrades nor does the space or housing exist to absorb that influx of manpower.”
Smith said planned upgrades for the Kulluk include “new control systems to decrease air discharge and modifications to capture our drilling mud and cuttings in the Beaufort Sea.”
He said Shell expects the Kulluk to be back in Alaska waters by spring of next year. “Dutch Harbor has proven an excellent staging ground for Shell and we look forward to returning our assets to the region as we build up to 2012 drilling,” he said.
Other alternatives Slaiby said Shell feels that “this administration has taken a more positive role in what’s going on” following hearings in the House on the air permits.
Capital is mobile, “doesn’t have to be invested in a certain place,” and “I think the administration is beginning to realize that there are options and people can exercise those options,” Slaiby said.
And the benefits would be considerable from successful Alaska OCS development, with recent numbers from the Institute of Social and Economic Research and Northern Economics indicating that nationally such development would produce 54,000 jobs on average over a 50-year period, with $125 billion in payroll and $195 billion in government revenues.
And 700,000 barrels per day of oil going into the trans-Alaska oil pipeline could replace production from countries not friendly to the U.S., and at a peak of 900,000 bpd could even replace the Saudi oil the U.S. is importing.
“So this is a big deal — it’s material, and the size of the prize is respectable,” Slaiby said.
Biggest EIS ever How would that oil get to the trans-Alaska oil pipeline?
Over the last couple of years Shell has been looking at pipeline routes to move oil both from the Beaufort and Chukchi seas, Slaiby said.
This year the company will mobilize a team to survey potential pipeline routes across the top of the National Petroleum Reserve-Alaska. Slaiby said Shell is looking at melding its data with data from the Department of the Interior and the Bureau of Land Management so that a pipeline route may be possible.
“It’s going to be quite a challenge. It will be the largest … environmental impact study ever performed,” with the 400-mile line across NPR-A about half the length of the trans-Alaska oil pipeline and with “100 navigable river crossings across the NPR-A.”
There are opportunities beyond just moving Shell’s oil.
“A pipeline properly placed would mean a lot of the smaller volumes that folks have not been able to develop in NPR-A could be developable,” Slaiby said, calling it a “build it and they will come” scenario where “all of a sudden those middleclass fields that wouldn’t support the infrastructure at 50 million barrels will be able to be produced, so it could open up a lot of opportunities.”
On the Beaufort Sea, he said Shell has been talking to ExxonMobil, which is proposing a pipeline from Point Thomson to connect with existing facilities.
Business for state Since Alaska doesn’t get revenue sharing from the federal OCS, Slaiby said it’s important “to have a real value proposition for people of the state.”
He said Shell is working on a spend profile measured in the hundreds of millions of dollars “and we’re looking at trying to at least initially land 20-25 percent of that in Alaska and have that build through a local business content plan.”
The containment system the company will build this summer is an example of that, he said.
The expertise for the capping system is in Louisiana, Slaiby said, “but we’ve mandated in the contract the local content has to play a large role in this and I think that’s been very successful,” with those working the contract now “looking at who they can partner with” in Alaska.
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