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Explorers 2011: Shell exec optimistic about 2012 OCS drilling permits coming through; thinks can withstand litigation; wants early ’12 decision Alan Bailey Petroleum News
Another year has passed and Shell is still waiting for permission to drill some exploration wells in its leases in Alaska’s Beaufort and Chukchi seas. The company now wants to commence drilling during the open water season of 2012 and has said that it will make a go/no-go decision on that drilling in late October 2011, with the decision dependent on the status of the company’s permits at the time.
In September Pete Slaiby, Shell’s vice president in Alaska, told the Alaska Support Industry Alliance that an early drilling decision is necessary, given the time required to organize and deploy the large number of assets needed for its operations.
Robust permits Although it is likely that any permits issued to Shell will be litigated, with some litigation certain to extend beyond Shell’s late October deadline, the company feels confident that after several cycles of court action, its permits are now sufficiently robust to withstand further appeals.
“We feel we have some very strong permits and we feel there is reason to be optimistic that our permits will survive a court challenge,” Slaiby told Petroleum News on Sept. 30. “Litigation will always be a risk we have. When we make the decision (to deploy), it will be (dependent) on how strong we think our permits are … and we think our permits are strong.”
Shell clearly envisions the Alaska Arctic outer continental shelf as a strategic area of future business growth and is willing to commit a multiyear effort and massive cost into furthering its Arctic plans — Slaiby told the Alliance that Shell’s Alaska expenditure since the company returned to the state in 2005 was approaching $4 billion.
Having purchased a substantial number of Beaufort Sea leases in 2005, the company first planned to drill in the Beaufort in 2007, targeting its Sivulliq prospect on the western side of Camden Bay. But in the face of appeals against the approval of various permits that the company needed before starting drilling, the company’s Beaufort Sea drilling plans have repeatedly been postponed and modified.
Chukchi a priority Shell has said that its top priority in Alaska is exploration in the Chukchi Sea, a remote region with world class hydrocarbon potential. In a 2008 Chukchi Sea lease sale the company put $2.1 billion on the table for a series of leases across various swathes of territory in the region. Of that massive sum, $1.5 billion went on leases on just one prospect, the Burger prospect, a structure 25 miles in diameter, known to contain a major pool of natural gas and lying about 80 miles offshore the western end of the North Slope. A well drilled by Shell into the Burger structure in an earlier phase of Chukchi Sea exploration, around 1990, discovered the gas pool.
“We truly believe this (prospect) is a game changer,” Slaiby told the Alliance.
Slaiby told Petroleum News that, based on evidence such as oil staining found in rock samples from the old Burger well and pressures in the lower part of the Burger structure, Shell thinks that there is likely to be oil in the Burger prospect. He also pointed out that seismic data gathered from Burger by both Shell and ConocoPhillips prior to the 2008 lease sale had clearly generated enthusiasm for the prospect, given the high bonus bids that both companies had offered for Burger leases.
“We do believe that there exists a large probability that there is oil there,” Slaiby said.
Lease sale litigation But Shell’s plans for Chukchi Sea drilling, with Burger as the key drilling target, have been stymied by an appeal against the environmental impact statement that the then U.S. Minerals Management Service prepared for the 2008 lease sale. The appeal, launched by the Native Village of Point Hope, the Inupiat Community of the Arctic Slope and 12 environmental organizations, went to the federal District Court for Alaska. In July 2010 the court ruled that the Bureau of Ocean Energy Management, Regulation and Enforcement, the government agency that replaced MMS after the Deepwater Horizon disaster, must add some material to the original EIS — the court banned all lease-related oil and gas exploration activities in the Chukchi Sea until the EIS changes are made and the lease sale is re-affirmed.
Meantime Shell, in conjunction with ConocoPhillips and Statoil, has been continuing to work on baseline environmental science for the Chukchi, including an annual program of environmental monitoring, using arrays of offshore acoustic recorders. Shell has also been conducting surveys of potential drilling sites. Slaiby told Petroleum News that Shell has also been evaluating potential pipeline routes across the National Petroleum Reserve-Alaska for the transportation of future Chukchi Sea oil east to the trans-Alaska oil pipeline. Slaiby told the Alliance that a pipeline across NPR-A could act as a catalyst for the opening of many small and mid-sized oil fields in the reserve.
But although in May 2011 Shell submitted a Chukchi Sea plan of exploration to BOEMRE for approval, the agency placed its review of the plan on hold until the lease sale court case is resolved.
BOEMRE has since published a new supplemental EIS for the 2008 lease sale, voluntarily including a new section analyzing the potential impacts of a very large oil spill in the Chukchi, in addition to adding material that the agency said complied with the 2010 court ruling. And on Oct. 3 the Bureau of Ocean Energy Management, the successor agency to the resource management parts of BOEMRE, published a record of decision based on the final SEIS, upholding the lease sale and presumably paving the way for Chukchi Sea exploration to move ahead.
Beaufort: major potential Shell also sees the Beaufort Sea as having major potential for oil and gas development, given the region’s excellent resource potential and relative proximity to the existing North Slope oil infrastructure. The company owns leases in the Camden Bay area and in Harrison Bay, on the northwest side of the central North Slope.
“There’s the potential for years of production (in the Beaufort Sea) at Gulf of Mexico deepwater kinds of flow rates,” Slaiby told the Alliance.
And oil from the Beaufort could band-aid the trans-Alaska oil pipeline, where low and declining oil flow rates are causing concerns about future pipeline operations, he said.
The company’s Beaufort Sea drilling plans have focused both on the Sivulliq prospect and on the neighboring Torpedo prospect. However, the company has also conducted a 3-D seismic survey in the Harrison Bay area in partnership with Eni Petroleum, the co-owner of Shell’s Harrison Bay leases.
Following its multiyear attempts to start drilling in the Beaufort Sea since buying its first Beaufort Sea leases in 2005, Shell’s latest exploration plan involves drilling up to four wells in the Beaufort Sea, targeting the Sivulliq and Torpedo prospects and starting in the summer open water season of 2012. The company wants to conduct this drilling in conjunction with a parallel drilling program in the Chukchi Sea, involving the drilling of up to six Chukchi Sea wells, with Burger as the prime target. Shell’s floating drilling platform, the Kulluk, would drill the Beaufort Sea wells, while the drillship Noble Discoverer would drill in the Chukchi.
Plan approval Although government agency review of Shell’s Chukchi Sea exploration plan has remained on hold, pending resolution of the Chukchi Sea lease sale litigation, in August BOEMRE granted conditional approval of Shell’s Beaufort Sea plan. On Sept. 29 Earthjustice, acting on behalf of the Native Village of Point Hope and a who’s-who list of environmental organizations, duly filed suit in the U.S. Court of Appeals for the 9th Circuit, appealing the Beaufort Sea plan approval. Briefs in the case are due in January 2012.
However, especially given the fact that in April 2010 the 9th Circuit Court dismissed appeals against approval of Shell’s 2011 Beaufort Sea and Chukchi Sea exploration plans, Shell feels confident that its latest Beaufort Sea plan will withstand legal challenge, Slaiby told Petroleum News.
Air quality permits Obtaining federal air quality permits for the emissions from Shell’s planned drilling operations has also proved to be a major challenge for the company, with various cycles of permit issuance and appeal becoming a significant factor in the delays to the start of the company’s hoped for drilling. The U.S. Environmental Protection Agency has jurisdiction over air quality permitting on the Alaska outer continental shelf but, with a lack of previous experience of permitting for OCS drilling, EPA has been struggling to issue permits that can withstand appeal. Questions such as defining the circumstances under which a drilling vessel and its attendant fleet become regulated industrial emissions sources have dogged various attempts to issue legally resilient permits.
Following a successful appeal to the Environmental Appeals Board against EPA approval of Shell’s air quality permits for the company’s planned drilling in 2011, the EPA has prepared new permits for Shell’s planned operations in 2012, with those permits taking account of the issues that the EAB had raised with the 2011 permits. On Sept. 25 EPA issued the final version of the permit for operations by the Noble Discoverer in either the Chukchi Sea or Beaufort Sea, starting in 2012 — Shell expects the issue in mid-October of a similar permit for the Kulluk for operations in the Beaufort Sea.
Three major issues In terms of overall permitting and approval for its Alaska Arctic OCS exploration activities, Shell has had to deal with three major issues: local Native concerns about the potential impacts of offshore industrial activities on subsistence hunting, in particular the hunting of bowhead whales; concerns about the adequacy of scientific knowledge of the fragile Arctic environment; and questions about the feasibility of responding to an accidental oil spill in the often ice laden Arctic waters.
Shell has responded to the concerns of North Slope residents through numerous meetings and discussions with local communities. As a result, in the interests of limiting industrial disturbance to migrating whales and other wildlife, the company scaled back its annual drilling plans from an original concept of concurrent drilling with two rigs in the Beaufort Sea, to a single rig operation involving a limited number of wells per drilling season; a similar strategy applies to the Chukchi Sea. The company’s exploration plans now include provisions for a cessation to drilling during whale hunts, with the removal of the drilling fleet from the hunt area.
Shell has also implemented a system of communications centers in North Slope coastal villages, with the objective of achieving effective communications between offshore oil operations and community subsistence hunting activities.
Environmental science From the perspective of Arctic environmental knowledge, Shell and the other oil companies exploring in the Arctic OCS have mounted a multiyear environmental monitoring program, primarily involving the collection of information about marine mammal activity through the use of offshore acoustic recorders. And in November 2010 Shell and the North Slope Borough initiated a joint program of scientific research into the offshore environment.
The program is focusing on an improved understanding of the potential impacts of oil and gas development and on meeting North Slope community science needs relating to subsistence issues, while encouraging the use of traditional knowledge of the environment.
The North Slope Borough has long expressed major concerns about the potential risks involved in Arctic offshore oil and gas exploration and development: The borough has set out some policies such as a zero discharge standard that it sees as essential to environmental protection. Meantime, some sectors of the North Slope communities remain adamantly opposed to offshore development, with the Native Village of Point Hope, for example, accusing the oil companies and the federal government of threatening the future of the Arctic subsistence culture.
Self-sufficient spill response From the perspective of oil spill risks in remote regions with minimal support infrastructure, Shell has adopted a policy of maintaining a self-sufficient oil spill response capability, while placing high priority on spill prevention through factors such as effective well planning. The company has organized a substantial oil spill response fleet which the company says is more than capable of responding to a worst case discharge scenario from any of the wells that the company plans to drill. The fleet includes a purpose-built, ice-capable oil spill response vessel, oil spill response barges and a 513,000-barrel capacity, ice-class, double hulled oil tanker. Another Arctic oil spill response vessel is under construction. The fleet comes with an arsenal of boom, skimmers and other response equipment.
While some people have questioned the effective operation of oil spill response equipment in ice-infested water, Shell has pointed to successful testing done in Norway of some offshore oil recovery tactics in ice conditions.
Shell has said that its spill response fleet would be deployed in parallel with any drilling operation, ready to step in immediately were an oil spill emergency to arise. And different elements of the oil spill response arrangements would be available for the drill site, for nearshore response and for shoreline response, Shell has said.
Lessons learned Following the Deepwater Horizon disaster in the Gulf of Mexico and the blowout of BP’s Macondo well, Shell has been supplementing its oil spill contingency arrangements, using lessons learned from the disaster. In particular, the company is fitting its blowout preventers with double shear rams and implementing two new pieces of technology: a “capping stack” that can be bolted onto the top of a well’s blowout preventer and an Arctic containment dome for gathering oil floating upwards from an out-of-control wellhead.
Slaiby told Petroleum News that the capping stack, a device that could block the flow of oil from a well should the well’s blowout preventer fail, looks to be a particularly effective means of dealing with an Arctic well blowout, although Shell sees a blowout as extremely unlikely, given the relatively straightforward wells that the company plans to drill. The containment dome would be a backup device, enabling any oil escaping from the well to be gathered and pumped into storage vessels at the sea surface.
Shell has said that, in the context of concurrent drilling operations in the Chukchi and Beaufort Sea, the company would position the capping and containment systems on a vessel at a midpoint between the two operations, ready to move into action if needed. And the drilling vessel in use in one drilling operation could, if necessary, transit to the other drilling operation, to provide relief well drilling support were there to be a blowout.
“We’ve only got one chance to do this right,” Slaiby told the Alliance. “If it looks like we err on the side of caution, I make no apologies for it.”
And, given these comprehensive oil spill contingency arrangements and the intense scrutiny already given to its proposals, Shell feels confident that its exploration plans can withstand legal scrutiny.
“We’ve never felt more confident about being able to proceed,” Slaiby said. “And frankly we’ve never been more confident about the (Alaska) portfolio that we’re sitting on.”
The oil in an area like the Chukchi Sea is enough to change national politics by eliminating the need to import oil from a country like Saudi Arabia, he said.
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