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Vol. 17, No. 48 Week of November 25, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Explorers 2012: Landmark year for Shell in Alaska

Delays highlight Arctic challenges while company finally succeeds in putting drill bits into Arctic OCS

Alan Bailey

Petroleum News

For Shell, 2012 has been the year in which, after a six-year effort, the company finally succeeded in starting to drill exploration wells in Alaska’s Chukchi and Beaufort seas. On the other hand, a combination of uncooperative sea ice and issues relating to a new oil containment system delayed the start of the Chukchi Sea drilling from July into early September, ultimately resulting in a decision not to attempt to drill into hydrocarbons in the Arctic outer continental shelf until 2013.

Top holes

At the time of going to press Shell was in the process of drilling a series of “top holes,” the top sections of wells down to depths of 1,400 to 1,500 feet, some distance above any hydrocarbon zones. The idea is to save a significant amount of time in subsequent drilling seasons, Pete Slaiby, Shell’s vice president in Alaska, told Petroleum News Sept. 28.

“When we talk about top holes we’re talking about 14 days’ worth of work on a well, and then literally another 10 days to get the well down through the objective. So this is a big deal,” Slaiby said.

Given some uncertainty about ice movement in the Chukchi and Beaufort, as the winter approaches, Shell does not know exactly how many top holes it will complete, but “we’ve got our batting order,” Slaiby said.

“We’re getting everybody to the on-deck circle,” he said.

The drillship Noble Discoverer has been drilling the first well, the Burger A, in the Chukchi Sea. Shell anticipates the drilling of top holes at Burger J and Burger B after that, Slaiby said. Meantime in the Beaufort Sea, where Shell’s floating drilling platform, the Kulluk, had been standing by, waiting for the end of the annual subsistence whale hunt in the area of Shell’s drilling sites, drilling was under way for a top hole over the Sivulliq prospect, on the west side of Camden Bay. After drilling at Sivulliq the Kulluk will move to the nearby Torpedo prospect, Slaiby said.

And the effort to achieve this level of drilling activity has not come cheap — Shell anticipates its cumulative costs in Alaska to go past $4.5 billion this year, Slaiby said.

Headwind of litigation

In the years that Shell has been trying to move forward with its Alaska outer continental shelf drilling program the company has faced a constant headwind of litigation against the permits that it needs, the litigation being fueled by concerns by environmental organizations and some Alaska Native groups about the potential risks posed to the Arctic marine environment by offshore oil drilling. And then the Deepwater Horizon disaster in 2010 in the Gulf of Mexico heightened many people’s worries about offshore drilling safety, rapidly provoking the Department of the Interior into issuing new offshore drilling rules and causing the agency to take a critical look at its policies for offshore oil and gas development.

As the various lawsuits against Shell’s permits wound their way through the appeals procedures and the court system, it began to appear that 2012 could be the year in which major challenges to Shell’s Alaska plans would be resolved to a point where drilling could start. And, in response to Deepwater Horizon, Shell fitted its well blowout preventers with double shear rams and undertook to build two new systems for its Arctic venture: a well capping system that could close a subsea well in the event of a blowout preventer failure, and an oil containment system that would gather leaking oil, should the blowout preventer and the capping system both fail to contain an out-of-control well.

The plan was for deployment of these two systems on a barge, near a midpoint between Shell’s Beaufort Sea and Chukchi Sea drilling operations, ready to move into action should the need arise.

Plan approval

In December 2011 Superior Energy began work in Bellingham, Wash., on retrofitting the Arctic Challenger, an Arctic-class barge, to hold Shell’s new containment system. And in that same month, the Bureau of Ocean Energy Management, or BOEM, approved Shell’s exploration plan for drilling in the Chukchi Sea, although the agency also shortened the permitted length of Shell’s Chukchi drilling season by prohibiting drilling into hydrocarbon zones after Sept. 24. BOEM had approved Shell’s Beaufort Sea plan in August 2011.

The plans envisaged the drilling of up to two wells in the Sivulliq and Torpedo prospects in the Beaufort Sea, and the drilling of up to three wells in the Burger prospect in the Chukchi Sea. The Sivulliq prospect, previously called Hammerhead, has a known oil accumulation. Burger, a structure 25 miles in diameter, lies about 80 miles offshore the western end of the North Slope and is known to contain a major pool of natural gas — Shell, having conducted a 3-D seismic survey over the prospect, has said that it thinks there is a high probability of finding oil at Burger.

In February 2012 the Bureau of Safety and Environmental Enforcement, or BSEE, approved Shell’s oil spill contingency plan for the Chukchi Sea. Also in February two appeals landed in the U.S. Court of Appeals for the 9th Circuit: one appeal against BOEM’s approval of Shell’s Chukchi Sea exploration plan, and the other against the Environmental Protection Agency’s air permit for the Noble Discoverer drillship. An appeal against approval of Shell’s Beaufort Sea exploration plan was already in progress in the same court.

Pre-emptive action

At the end of February Shell, anticipating further litigation ahead of its planned summer drilling, took pre-emptive action by asking the federal District Court in Alaska to rule that BSEE had correctly approved the Chukchi Sea oil spill response plan. The company also asked for, and was subsequently granted, a restraining order against environment activist organization Greenpeace, prohibiting Greenpeace from obstructing Shell’s Arctic operations.

In March BSEE approved Shell’s Beaufort Sea oil spill plan and Shell duly asked the District Court to add this plan approval to the existing lawsuit requesting confirmation of the legality of the Chukchi Sea spill response plan. And in that same month, Shell took delivery of the MV Aiviq, a brand new 360-foot ice-class anchor handler for use in the Arctic.

Mobilization

In late April Shell announced that it was starting to mobilize its Arctic drilling fleet.

At the beginning of May the National Marine Fisheries Service issued incidental harassment authorizations, allowing the unintended minor disturbance of whales and seals during Shell’s drilling operations, and Shell promptly filed another lawsuit requesting the District Court to declare these authorizations valid.

In May the 9th Circuit court rejected the appeals against both the Beaufort Sea and the Chukchi Sea exploration plans.

Also in May, while a nearly $100 million upgrade to the Kulluk was nearing completion, environmental groups appealed the Kulluk’s air permit to the 9th Circuit court. The Kulluk upgrades involved the installation of new equipment designed to meet new, stringent air emissions restrictions and the installation of a system for recovering drilling mud and cuttings.

But in early July, at around the time that Shell had originally planned to move its fleet, by then stationed at Dutch Harbor in the Aleutian Islands, up through the Bering Strait into the Chukchi Sea, the company announced that unusually heavy sea ice was delaying the start of the drilling program.

Arctic Challenger

At about the same time it became apparent that the retrofit of the Arctic Challenger was not yet finished. At this point, the only remaining permits that Shell needed were BSEE drilling permits, but BSEE would not issue those permits without the Arctic Challenger being deployed.

And, in another complication, at the end of June Shell applied to the Environmental Protection Agency for some changes to the air permits for the Noble Discoverer and the Kulluk — the company said that testing of the vessels’ exhaust systems had indicated problems with meeting some of the emissions stipulations in the permits, although the company also said that the requested changes were quite minor in nature.

Under the terms of its air permit the Kulluk would be able to operate, pending an EPA decision on the change request. But, with the Noble Discoverer having a major air permit, Shell had to obtain compliance order, to enable the Discoverer to go into operation in the summer of 2012.

On July 14 the Noble Discoverer dragged its anchor at Dutch Harbor and was towed by a tug back into position before drifting onto the shore.

Several weeks passed, with the ice eventually moving away from Shell’s Chukchi Sea drilling site, but with the Arctic Challenger remaining in dock in Bellingham, awaiting completion of the containment system retrofit and vessel certification.

Site preparation

But around the beginning of August three vessels from Shell’s fleet departed Dutch Harbor for the Chukchi and Beaufort seas to start preparing Shell’s drilling sites. By that time, with the delayed start to the drilling, Shell had scaled back its 2012 drilling expectations to just one well in the Beaufort Sea and one well in the Chukchi Sea. However, the company said that it also anticipated drilling the top sections of some other wells, to achieve a head start to drilling in 2013.

On Aug. 20 the Kulluk departed Dutch Harbor for the Beaufort Sea and on Aug. 25 the Noble Discover left for the Chukchi Sea. On Aug. 30 BSEE issued a drilling permit, enabling the drilling of the top section of Shell’s first Burger well, with drilling limited to depths substantially above any potential hydrocarbon bearing zone. Permission to drill into hydrocarbons would have to wait on deployment of the Arctic Challenger.

Drilling starts

With all of the permits now in place to at least start drilling in the Chukchi, Shell moved the Noble Discover into place at Burger and finally started drilling at 4:30 a.m. on Sept. 9. But with time running short before the Sept. 24 drilling deadline in Shell’s Chukchi Sea exploration plan, Shell asked if, in the light of up-to-date Chukchi Sea ice forecasts, the deadline could be extended by nearly two weeks — the purpose of the deadline was to allow sufficient time to drill a relief well before the encroachment of winter sea ice at the drilling site, should there be a well blowout.

Meantime the Kulluk had taken up a holding position in the Beaufort Sea, waiting for the completion of the annual subsistence whale hunt.

But all came to naught for drilling into hydrocarbons.

On Sept. 10, less than two days after the start of drilling, Shell had to move the Noble Discoverer off the well site, as a 12-mile by 30-mile ice floe started drifting towards the drilling operation. And on Sept. 17 Shell announced that the containment dome on the Arctic Challenger had been damaged during testing of the containment system and that, consequently, the company would only drill top hole sections of wells in 2012, a plan that BSEE subsequently approved.

Drilling eventually restarted at Burger, and the Kulluk moved into action at Sivulliq.

An ‘interesting year’

Despite the problems with the Arctic Challenger, Slaiby characterized 2012 as an “interesting year” in which much was achieved.

“We’ve really had a huge success in getting all of our other assets up there,” Slaiby said. “I don’t think people should lose sight of the fact that we’re moving 900 people every two to three weeks in and out of northern Alaska.”

And lessons learned so far from the offshore operations in 2012?

Although there have been no work-related injuries, there have been several incidents in which people have had to be brought in from the field because of pre-existing medical conditions, Slaiby said.

“Fitness to work is an important issue,” he said.

Shell also sees a need to upgrade its helicopters for instrument flight, to allow the aircraft to fly in conditions of poor visibility. And, although the logistics for the offshore operations have worked fairly well, there is always scope for improvement.

“We’re going to work on getting people in and out,” Slaiby said. “A big goal of mine is for people, when they’ve done their 21 days (in the field), to get them back home on that day.”

Positive about progress

With a number of permits already in place for drilling in 2013, and with adequate time to have the Arctic Challenger and its containment dome fully operational for next year, Slaiby feels positive about Shell’s progress in Alaska.

“We would have liked to have drilled through the objectives (in 2012), but I think we have done some really important things with respect to setting the precedent about being able to work safely in Alaska,” Slaiby said. “Overall it’s clearly the most success we’ve had in Alaska in the last six years.”



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Alaska: a strategic region for Shell

Shell has made it clear from the start of its current Alaska venture that it views Alaska’s Arctic outer continental shelf as a strategic region for future business growth. The company sees Alaska as a long-term play and has indicated in words and actions its willingness to “stay the course” in pursuing what it believes to a rich source of new hydrocarbon resources.

The company purchased a substantial number of Beaufort Sea leases in 2005 and initially planned to drill at Sivulliq in the Beaufort in 2007. But, faced with a barrage of litigation against permits that the company needed, the company repeatedly postponed and modified its plans.

Chukchi leases

In the 2008 U.S. Minerals Management Service Chukchi Sea lease sale Shell paid $2.1 billion for a series of leases across the Chukchi Sea, with $1.5 billion of that massive sum going on leases around the Burger prospect. Shell subsequently conducted a 3-D seismic survey over its leases, following that survey with geotechnical and shallow hazards surveys of prospective drilling sites.

For several years litigation challenging the environmental impact statement, or EIS, for the Chukchi Sea lease sale held up progress towards Shell’s drilling in its Chukchi Sea leases. However, after a partial rewrite of the EIS as a consequence of the appeal, in October 2011 Judge Ralph Beistline in the federal District Court in Alaska gave the go-ahead for lease related activities in the Chukchi. In February 2012 Beistline finally dismissed the appeal, which has since moved to the 9th Circuit court.

Beistline’s October order enabled BOEM to review and approve Shell’s Chukchi Sea exploration plan, thus enabling the permitting process to move to a position where Shell could drill in 2012.

Beaufort potential

Although Shell has said that it views Chukchi Sea exploration as its top priority in the Alaska outer continental shelf, the company also sees the Beaufort Sea as having excellent resource potential in relatively close proximity to the existing North Slope oil infrastructure. The company owns leases in the Camden Bay area and in Harrison Bay to the west of Prudhoe Bay. And, although Shell’s exploration efforts in the Beaufort Sea have focused on the Torpedo and Sivulliq prospects in the Camden Bay area, the company has conducted a 3-D seismic survey in Harrison Bay where it is exploring in partnership with Eni Petroleum, the co-owner of the Harrison Bay leases.

—Alan Bailey