Providing coverage of Alaska and northern Canada's oil and gas industry
November 2008

Vol. 13, No. 44 Week of November 02, 2008

Alaska at the front

Shell’s Odum says the state is central to future U.S. energy supplies

Alan Bailey

Petroleum News

Alaska is central to the question of where the United States will obtain its future energy resources. And that’s critical to the issues of energy security and the need for major new resource development, Marvin Odum, president of Shell Oil Co., told Petroleum News Oct. 23.

“The big picture for me is what does Alaska choose to do with that. Do they choose as a state to develop that area?” Odum said. “… I see this as the bellwether on where we’re going on the energy challenge.”

Currently, progress on Shell’s planned offshore Alaska exploration drilling lies in the hands of the U.S. Court of Appeals for the 9th Circuit.

More than a year after the court placed a temporary injunction on Shell’s Beaufort Sea drilling, the court has still not ruled on an appeal by the North Slope Borough, the Alaska Eskimo Whaling Commission and several environmental organizations against the U.S Minerals Management Service’s approval of Shell’s Beaufort Sea exploration plan. The court heard oral arguments in the case on Dec. 4, 2007.

No time limit

Odum said that there’s no time limit for the court to make a decision, no way of telling how long the court will take to do so and no pressure on anyone to make a decision within a certain time period.

“I think that the idea of the courts … deciding on the energy policy for the U.S. is a real problem we should all be concerned about,” Odum said.

And meantime the lengthy court injunction is costing a great deal of money and delaying the drilling. To be properly prepared for a drilling season Shell has to hire hundreds of people and ensure that everyone is properly trained, both from a safety and from a skill perspective.

“You can’t go into a drilling season without being totally prepared,” Odum said. “… And so you have to start spending and developing very early in the year, in anticipation of drilling in the summer. We’ve done that for two years in a row now and have nothing to show for that investment.”

In 2008 Shell held out until June before finally cancelling the summer drilling. In addition to costing money, the cancellation resulted in disappointment when summer work didn’t materialize for people. So, in 2009 Shell will likely make a go-no go drilling decision much sooner.

“I can’t afford to do that again,” Odum said. “I’ll have to make it much earlier in the year.”

Infrastructure in place

Shell still has the Kulluk floating drilling platform available for work in the Beaufort Sea, as well as the company’s oil spill response equipment and the infrastructure for marine mammal monitoring. And, even in the absence of drilling, Shell has conducted some successful offshore operations, including the acquisition of seismic data in the Beaufort and Chukchi Seas.

“The seismic surveys have gone extremely well,” Odum said. “We’re in our third season now of collecting seismic data.”

Odum said that the results of the seismic surveying done so far have proved encouraging but that Shell has not yet decided whether to acquire more seismic data in 2009.

“We’re going to process and review the seismic we’ve just finished collecting … to decide whether we need more. … It could be we have enough,” Odum said.

And Odum said that Shell has made progress in its dialogue with North Slope communities over potential impacts of the company’s activities on subsistence hunting and concerns about the potential for an offshore oil spill. In the past there have been more than 30 wells drilled in the Beaufort Sea, and Shell drilled four out of the five wells that have been previously drilled in the Chukchi Sea, he said.

“We have listened to the whalers and the communities about what impact the earlier drilling has had … what’s been measured and what’s presumed,” Odum said. “… I’m very confident that we can get to a workable solution.”

Shell signed a conflict avoidance agreement with the whalers for each of the last two open water seasons and those agreements defined the terms under which drilling would take place. There are periods around the whale hunt when operations would cease, Odum said.

Internal challenge

And when it comes to environmental issues such as guarding against an oil spill, many of the hardest challenges come from personnel inside Shell — a new generation of employees is especially insistent about environmental safeguards, Odum said. And an offshore oil spill is unthinkable, he said.

“I think it’s the realization from the company point of view as well,” Odum said. “As a company we could never afford an oil spill in the Arctic. … We just can’t afford to have that happen.”

At the same time, Shell sees support of local communities as critical to the success of its operations.

“If the community really doesn’t want you there, it’s not going to work,” Odum said. “It is important for us just as a company and as a sustainable business to get to the point where we’re aligned with the community on what we’re doing up there.”

And that’s a perspective that Shell is starting to apply in the Bristol Bay area, where the company is in the early stages of evaluating possible participation in a future lease sale.

“We’ve been speaking with some of the communities in the Bristol Bay area, because we’re mindful of the fact that in 2011 … there’s a lease sale to happen in Bristol Bay,” Odum said.

However, there need to be several environmental studies to answer questions about whether exploration and development should take place in Bristol Bay, Odum said.

“Will we participate in that process? I suspect, yes. We will,” he said.

Need facts

Odum thinks that, although there are some environmental activists who will always oppose offshore oil drilling, factual answers to scientific questions are the keys to dialogue with many in the environmental community. Factual data can provide answers to questions about what is and isn’t possible, he said.

Shell has been working with scientists on the North Slope to jointly design baseline environmental studies that will continue when Shell operates offshore.

“So, not only can we say that this is what science tells us, but we’ll track it as we’re going through and we’ll see if there is any impact out there,” Odum said. “… If there is any impact we’ll adjust and mitigate.”

Shell already has established mitigation measures for the avoidance of polar bears, which the U.S. Fish and Wildlife Service listed as a threatened species. The measures will ensure that the bears will be spotted and that they will not be interfered with, Odum said.

“For the activities that we’re proposing in the OCS we already have those mitigations in place,” Odum said. “… From the perspective of our activities, the polar bears are protected.”

Shell is also making increasing use of the traditional knowledge of Arctic communities in addressing questions such as the impact of climate change on the wildlife, Odum said.

Revenue sharing

And, in recognition that offshore oil industry activities impact local communities, Shell strongly advocates outer continental shelf oil and gas revenue sharing by the federal government, Odum said. Because the federal government owns the outer continental shelf, the state and local communities are not currently entitled to royalties and taxes from activities that occur more than three nautical miles beyond the Alaska coastline.

Shell supported revenue sharing along the Gulf coast, where revenue sharing is now in place, Odum said.

“It should just be automatic now for Alaska as well,” he said. “It’s not clear to me why it’s not.”

Odum said that Shell favors North America as a place to invest in and that the company is already the largest producer in the Gulf of Mexico. And the fact that the company has invested more than $2 billion in northern Alaska attests to Shell’s belief in that region’s potential, he said.

But what about the impact on new investments of the recent slide in oil prices?

Shell takes a long-term view of oil pricing and sees market fundamentals as likely to drive prices up again in the future, Odum said. In fact, the bigger worry is that the current lower prices will cause people to forget about those longer term trends, he said.

“I really worry about our inability to stay focused on something that’s going to become a bigger problem over time, not a smaller problem,” Odum said.

As far as the current turmoil in finance markets is concerned, Shell’s main concerns focus on its network of suppliers and partners.

“Shell has a strong balance sheet, of course, but we don’t do anything by ourselves,” Odum said. “We have suppliers. We have joint venture partners. I think we’re waiting to see how all this unfolds.”

And Shell remains optimistic about its future in Alaska.

“We think we bring some unique skills to working offshore Alaska, off the North Slope,” Odum said. “… We like being somewhat unique in that way. … And so, that’s where we’re going to focus. We think that resource is big enough and deserves our full focus.”

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