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Shell’s high but thwarted expectations The company’s doomed Arctic Alaska program began with optimism over high expectations for major offshore oil and gas resources ALAN BAILEY Petroleum News
In the aftermath of the chain of events that have led to the demise of Shell’s multi-billion-dollar exploration venture in the Arctic Alaska offshore, it may be difficult to remember the optimism with which the company embarked on its Alaska program some 10 years ago. Having left Alaska in the late 1990s after more than 40 years of operating in the state, including previous exploration in the Beaufort and Chukchi seas, in March 2005 the company signaled its return by purchasing 84 leases in a Beaufort Sea outer continental shelf lease sale. The company opened an office in Anchorage and commented on its excitement about Alaska’s petroleum potential.
“We believe that Alaska certainly has the large resource base that we need and we want to see grow for our company,” said Annell Bay, then Shell’s vice president of exploration for the Americas, during a visit to Anchorage. In 2006 Rick Fox, Shell’s new asset manager for Alaska, declared that Shell “was ambitious about Alaska.”
Beaufort Sea plan And in October 2006, Paul Smith, Shell’s then operation’s manager, described a plan to drill four wells in the Camden Bay area of the Beaufort Sea during the 2007 Arctic open water season. Smith said that Shell planned to drill using the Kulluk, an Arctic floating drilling platform that the company had purchased in 2006, and the drillship the Frontier Discoverer that was being refurbished with a reinforced hull. Shell also signaled an interest in the Chukchi Sea by announcing a plan to shoot some offshore seismic there, while also conducting a seismic survey in the Beaufort.
Of particular interest in the Beaufort Sea was a known modest-sized offshore oil pool, previously called Hammerhead but renamed Sivulliq. Shell also planned to drill in another prospect to the east of Sivulliq. The company planned additional offshore work, including conducting some geotechnical borings as a precursor to potential offshore field development.
Community opposition Alarmed by the specter of multiple offshore drilling and seismic activities and the potential impact of disturbance from these activities on migrating bowhead whales, a wildlife resource at the core of Alaska Native subsistence hunting and culture, the North Slope Borough, the Alaska Whaling Commission and the Inupiat Community of the North Slope appealed to the Department of the Interior’s Board of Land Appeals against a U.S. Minerals Management Service decision to approve Shell’s Beaufort Sea exploration plan. A coalition of Native groups and environmental organizations also appealed the decision. The appeal was heard in the U.S. Court of Appeals for the 9th Circuit, which in Aug. 2007 put a stay on Shell’s Beaufort Sea activities, pending a ruling in the appeal.
Edward Itta, the then mayor of the North Slope Borough, said that the borough wanted to work with industry to find solutions to the borough’s concerns but that industry was trying to move too fast.
“We need you to understand that you cannot separate the ocean from us. … We are tied in intricately,” Itta said.
However, Shell did sign a conflict avoidance agreement with the Alaska Eskimo Whaling Commission for the company’s 2007 offshore program - that agreement included measures to avoid the disturbance to an annual whale hunt near the planned exploration activities.
Drilling deferred In the event, the 9th Circuit injunction prevented Shell from carrying out any drilling in 2007, although the company did complete some seismic surveying in the Chukchi Sea and some site surveillance work in the Beaufort. A multi-year marine mammal monitoring program involving the placement of acoustic transponders across the Beaufort and Chukchi seas also swung into action.
In November 2007 Fox told the Resource Development Council that his company had been talking to and learning from the North Slope communities.
“Obviously we wanted to go maybe faster than the communities were prepared. We are continuing that discussion … and we’re very hopeful that we’ll make progress and find the common ground that we’ll need to proceed,” Fox said. Fox commented that Shell was establishing communications centers in coastal villages, for dialogue with subsistence hunters during oil exploration activities.
Chukchi Sea lease sale Then came the February 2008 Chukchi Sea lease sale in which Shell paid out $2.1 billion for leases, including $105 million for just one of the leases over the Burger prospect that would later become the focus of the company’s Chukchi Sea exploration efforts.
“Internally we use words like ‘well thought-through’ to describe the lease sale,” John Hofmeister, then president of Shell Oil. Co., told participants in a meeting in Alaska a couple of weeks after the sale. “Externally I’ll stretch it and say it was a bold move by Shell.”
In June 2008 Pete Slaiby became general manager of Shell’s Alaska business. Slaiby told Petroleum News that he believed in listening to what people in Alaska have to say.
“We think we’ll be able to put together a pretty good value proposition for Alaskans, with job opportunities and revenue opportunities, but it will take a lot of engagement and a lot of listening,” Slaiby said.
Drilling further delayed Meanwhile, with no resolution of the appeal against Shell’s Beaufort Sea exploration plan, the company was unable to drill in the Beaufort in 2008. And on Nov. 8 of that year the 9th Circuit court kicked the plan back to the Minerals Management Service for a rework of the environmental assessment of Shell’s planned operations. And, by then, several organizations, including the North Slope Borough and the Alaska Eskimo Whaling Commission, had appealed the air quality permit for Shell’s Kulluk floating drilling platform. Shell moved ahead with a shallow hazard survey, checking out a potential pipeline route from Sivulliq to the shore.
And seismic surveying continued in the Beaufort and Chukchi seas.
At the end of 2008 Shell announced that it was filing a petition with the 9th Circuit court over the court’s decision on the company’s Beaufort Sea exploration plan and that, meanwhile, the company was deferring its plans for drilling and seismic surveying in the Beaufort in 2009. In March an economic study commissioned by Shell estimated total benefits of $15.3 billion over a 50-year period for Alaska from Shell’s anticipated outer continental shelf development.
“We’re shovel ready,” Slaiby said when the study was published. “We have been shovel ready for a number of years.”
Smaller scale plan In October 2009 the Minerals Management Service approved a scaled down Shell Beaufort Sea exploration plan. That plan envisaged the drilling of two exploration wells during the 2010 open water season, using a single drillship, the Frontier Discoverer.
“Shell made a substantial effort to reduce impacts and shrink the footprint of its 2010 exploration work in the Beaufort Sea, and I appreciate that,” said Mayor Itta.
Shell also submitted a plan to the Minerals Management Service, seeking approval to drill a single well in the Chukchi Sea in 2010. Although Shell proposed three possible targets for a Chukchi exploration well, the company placed at the top of the list the Burger prospect, a 25-mile diameter geologic structure that had been drilled in a previous exploration program and that was thought to contain some 14 trillion cubic feet of natural gas. Shell clearly hoped to find an oil rim under the gas.
Shell’s planned drilling support fleet included an on-site spill response vessel and an Arctic oil storage tanker for the collection of any spilled oil, should an accident occur. Plans for minimizing disturbance to marine mammals included the use of marine mammal observers and subsea acoustic recorders, for detecting wildlife.
Deepwater Horizon Then came the Deepwater Horizon disaster in the Gulf of Mexico in April 2010 and a subsequent federal moratorium on outer continental shelf drilling operations during that year.
In late August 2010 Shell said that it hoped to drill in the Beaufort and Chukchi seas in 2011 using the Frontier Discoverer, which by then had been renamed the Noble Discoverer following an ownership change. Shell was planning to use the Kulluk, which had undergone a $200 million upgrade, as a standby rig, lest it should prove necessary to drill a relief well following a well blowout.
At this time, the company also announced that, based on lessons learned from Deepwater Horizon, it was going to build an oil containment dome that could be lowered over an out-of-control well for gathering spilling oil. That commitment to the use of a containment dome subsequently became incorporated into Shell’s approved plans for its Arctic offshore drilling.
Continuing delays But faced with a continuing appeal against the validity of the air quality permit for its Beaufort Sea drilling, Shell deferred that drilling into 2012.
Shell’s Chukchi Sea plans were faring no better. At the time of the 2008 Chukchi Sea lease sale, the Native Village of Point Hope, the Inupiat Community of the Arctic Slope and 12 environmental organizations launched an appeal against the validity of the environmental impact statement for the sale. In July 2010 the federal District Court in Alaska ordered the Department of the Interior to revise the original EIS for the lease sale in response to the appeal. The court banned Chukchi Sea lease related activities pending a new decision on the conducting of the lease sale, a court order that effectively prevented Shell drilling in the Chukchi in 2011.
Drilling starts in 2012 Finally, in the first quarter of 2012 the various permits needed by Shell started slotting into place. And in March, during the National Marine Fisheries Service’s annual Open Water Meeting, the company said that it expected to drill up to three wells in the Chukchi Sea Burger prospect and up to two wells in the Beaufort Sea during the 2012 open water season. By that time the company had also made it clear that it saw Chukchi Sea exploration as its prime goal.
The Noble Discoverer would drill in the Chukchi and the Kulluk in the Beaufort. And in early July Shell’s drilling fleet, including the Kulluk, which by then had undergone a further $100 million upgrade, started moving north through the Bering Sea. The huge logistical operation required to support the drilling operations went into action.
But the retrofit of the barge that was to carry the containment dome, by then a committed part of Shell’s oil spill contingency plans, was running behind schedule, and the containment dome itself had not been tested. In the event, it did not prove possible to deploy the dome in time for Shell to be able to drill into hydrocarbon bearing zones: Shell only drilled the top hole sections of two wells, one in the Beaufort and one in the Chukchi.
Subsequent problems Shell also self-reported some violations of the conditions of its air quality permits, violations for which it was eventually fined by the Environmental Protection Agency.
Problems compounded for Shell after the end of the drilling season. Upon return to Southcentral Alaska, the Noble Discoverer reported problems with its propulsion system. A subsequent investigation by the U.S. Coast Guard revealed deficiencies in the vessel’s safety and propulsion systems.
Worst of all, on Dec. 31, 2012, the Kulluk ran aground on the shore of an island in the northern Gulf of Alaska while being towed to the Seattle area for maintenance. The grounding started with an engine problem in the Aiviq, the brand new Arctic-class anchor vessel that Shell was using to tow the Kulluk. The grounding itself followed a battle against a major storm. And, although the Kulluk was ultimately recovered, the vessel turned out to be damaged beyond repair.
Given the various problems with its drilling assets, Shell decided not to attempt any Arctic Alaska drilling in 2013. And in 2014 the appeal against the 2008 Chukchi Sea lease sale re-emerged as an obstacle to Shell’s plans - the appeal had been elevated from District Court to the Court of Appeals for the 9th Circuit. On Jan. 22, 2014, the 9th Circuit Court upheld the appeal and remanded the case back to the District Court for further action. Because of the legal uncertainties, Shell deferred its 2014 drilling plans.
New drilling regulations Meanwhile, in the aftermath of the Deepwater Horizon disaster, the Department of the Interior had been developing new stringent regulations for exploration drilling in the Arctic offshore. Those regulations were issued in February 2015 and included requirements for the availability of a containment dome and of a capping stack, a device used to seal a wellhead in the event of a blowout preventer failure. The regulations also mandated the availability of a second drilling rig for relief well drilling, should a blowout occur. And drilling into oil bearing zones had to end sufficiently early in the open water season to allow time for the drilling of a relief well before the encroachment of winter sea ice at the drilling site.
In April 2015 Shell announced its takeover of the BG Group, one of the world’s largest natural gas companies. Ben van Beurden, who had taken over as Shell CEO at the beginning of 2014, said that following the BG takeover Shell was going to reduce its exploration spend. Also as 2015 progressed Shell, as with other oil companies, started cutting capital costs in response to a sharp drop in world oil prices.
Drilling in 2015 But Shell did commit to continue its Chukchi Sea exploration for the time being, to at least determine if there is a major oil pool in the Burger prospect. And, following a new affirmation of the 2008 lease sale in the appeal against the legality of the sale, Shell moved ahead with a plan to drill in the Burger prospect during the 2015 open water season. In compliance with the new Arctic offshore drilling regulations, Shell deployed two drilling units, the Noble Discoverer and the Transocean Polar Pioneer to the drilling theater. But, because of a U.S. Fish and Wildlife regulation banning the concurrent drilling of two exploration wells less than 15 miles apart in the Chukchi Sea, the company was only able to drill one well, the Burger J well.
Disappointing result On Sept. 27, the day before drilling into potential hydrocarbons had to cease, to comply with the relief well regulations, Shell announced that it had completed the drilling of Burger J to a depth of 6,800 feet. The company said that the well had found indications of oil and gas but insufficient to warrant continuing exploration of the prospect.
The company said that, given the results of the drilling, the high costs associated with the Chukchi exploration and “the challenging and unpredictable federal regulatory environment in offshore Alaska,” the company was ceasing exploration activity in offshore Alaska for the foreseeable future.
Shell sunk billions of dollars into its Alaska venture. The company anticipated spending about $1 billion on its 2015 Chukchi exploration project, having already spent something in excess of $5 billion on its Alaska program. In announcing the end of the program, the company said that it was writing off some $3 billion in balance sheet value and another $1.1 billion in future contractual commitments.
Editor’s note: part 1 of this story ran in the Oct. 4 issue of Petroleum News.
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