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Vol. 19, No. 29 Week of July 20, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

Explorers 2014: It’s try, try, try again for Shell in the Arctic

Shell has cancelled its past two exploration programs in the Arctic and the 2015 program is uncertain

Eric Lidji

For Petroleum News

As Royal Dutch Shell plc nears the end of its first decade back in Alaska, the company is only slightly ahead of where it started. But it’s still aiming for the bounty of the Arctic.

After four decades of exploration - including pioneering work across the Chukchi Sea, the Beaufort Sea, the Gulf of Alaska, the Bering Sea and Cook Inlet - Shell left Alaska in 1998. The company acquired a bundle of onshore leases in the central North Slope in 2001, but put the leases on the market a year later and ultimately dropped them in 2004.

Shell actively resumed its interest in the Alaska outer continental shelf by acquiring Beaufort Sea leases in 2005 and Chukchi Sea leases in 2008. The company has spent the past decade trying to explore those two regions, only to be stymied by permitting delays, legal challenges, Mother Nature, technical problems and its own operational failings.

After starting wells in the Beaufort and Chukchi in 2012, Shell cancelled its 2013 and 2014 drilling plans. The future of its exploration program in Arctic Alaska is uncertain.

The easiest way to tell the tangled story is year-by-year.

2004: Gone but not forgotten

Even as Shell dropped its leases in 2004, it insisted it remained interested in the state.

“We felt that the potential of the area did not meet our investment criteria and the rentals have not been paid. But I want to stress, our decision to surrender what we consider to be a small, non-material leasehold does not affect our goal to continue evaluating investment opportunities in Alaska,” spokeswoman Kelly op de Weegh said in October 2004.

Somewhat cryptically, Global Exploration Director Matthias Bichsel said Shell was interested in the “western part” of Alaska, which suggested the National Petroleum Reserve-Alaska or the Chukchi Sea. He placed Alaska alongside interests in Sakhalin and West Siberia. “You have a bit of a theme there - Sakhalin, West Siberia and Alaska - which is the Arctic, which requires big funds, which requires technology, tenacity, staying power, which I think companies like ours are very well suited to,” he said.

2005: Acquiring leases

Shell made its bid for the Alaska Arctic in 2005.

That year, the company spent some $44 million on 86 tracts in a federal Beaufort Sea lease sale. The leases were in the “northern part” of Alaska, more than the west, but definitely fit the bill of complex Arctic prospects requiring big technology to develop.

The acquisition included two fields discovered during exploration work between 1986 and 1992: the 100 million to 200 million barrel Hammerhead field off the coast of the Point Thomson unit and the 160 million to 300 million barrel Kuvlum field farther east.

Shell expanded its Beaufort Sea holdings that year by acquiring 19 leases from Encana Corp. The leases were in a wildcat region off the coast of the NPR-A near Smith Bay.

2006: Making plans

Shell wanted to move quickly.

The company appointed its top three Alaska officials in January 2006. By October 2006, the company was touting its plans to drill as many as four wells the following summer.

“The new thing we’re doing in 2007 will be drilling activities,” Shell Operations Manager Paul Smith said. “We have four wells planned for the Camden Bay area.”

The four wells would be split between the Sivulliq field, which had previously been known as Hammerhead and Kaktovik, and at the Olympia field to the east of Sivulliq.

Shell planned to drill the wells using the refurbished Kulluk and Discoverer drill ships and support the program using the Vladimir Ignatyuk and the Kilabuk icebreakers.

Shell also began a seismic program in the Beaufort and Chukchi seas in 2006, but heavy sea ice forced the company to push some of the program to the following year.

2007: Success and delays

Initially, Shell found success in its permitting efforts.

The U.S. Minerals Management Service approved Shell’s exploration program at Sivulliq in February 2007, and in July 2007, after some negotiations, Shell and the Alaska Eskimo Whaling Commission came to terms on measures to avoid bowhead whales in the region.

Soon after the agreement, the state upheld a ruling that the exploration work was consistent with the Alaska Coastal Management Plan, which set the stage for drilling.

Before work began, though, a coalition of groups including the North Slope Borough sued the federal government, claiming that regulators had failed to adequately consider the impact of industrial noise and potential oil spills. The U.S. Court of Appeals for the 9th Circuit told Shell to suspend its activities until the case was settled. The Bush Administration promised to stand behind its regulatory decisions, but with a hearing scheduled for December, the ruling prevented any possibility of exploration in 2007.

2008: Into the Chukchi

Shell greatly expanded its Arctic ambitions in Alaska in February 2008 when it spent $2.1 billion on high bids at a record-breaking federal lease sale in the Chukchi Sea.

The 275 blocks included acreage where Shell drilled in 1989 and 1990. The company anticipated exploring the Burger, Crackerjack and Southwest Shoebill prospects in 2010.

Western Geco conducted seismic surveys in the Beaufort and Chukchi in 2008 and Shell collected shallow hazard survey data and pipeline survey work in the Beaufort.

The Beaufort Sea drilling program remained tied up in court, though.

The open water season arrived without a decision from the 9th Circuit. Then, a coalition of groups appealed an air quality permit that the Environmental Protection Agency had issued for the program. By June 2008, Shell postponed its drilling plans for another year.

2009 and 2010: A moratorium

The legal challenges prevented drilling in 2009, as well.

Responding to those challenges, Shell pared down its initial drilling program in the Beaufort Sea. The revisions called for a one-year, one-rig, two-well program taking place during the 2010 open water season, instead of a three-year, two-rig, four-well drilling program.

The story got increasingly complicated in 2010.

Shell effectively resolved the challenges against its program and, in early 2010, the company began mobilizing equipment for a five-well program in the Beaufort and Chukchi, but the company was subsequently stymied by a federal moratorium on offshore exploration after the Deepwater Horizon oil spill in the Gulf of Mexico.

The lawsuits also expanded to cover the Chukchi program.

In July 2010, the federal District Court for Alaska blocked all lease-related exploration work in the Chukchi until the Bureau of Ocean Energy Management, Regulation and Enforcement, the agency which replaced the Minerals Management Service, updated the original environmental impact statement for the 2008 lease sale.

Shell spent $25 million to upgrade the exhaust system on the Noble Discoverer drillship and planned to support the ship with a fleet that included an onsite spill response unit. Shell also planned to mobilize the Kulluk, its floating drilling platform, to serve as a backup rig in the event that a blowout on the main well requires drilling a relief well.

2011: Optimism

The federal agency suspended its review of exploration plans while the case proceeded.

Without federal approval, Shell was forced to postpone its drilling plans again in 2011, by which time the company said it had spent nearly $4 billion since the 2005 lease sale.

In late 2011, BOEMRE published a supplemental EIS for the 2008 lease sale addressing the concerns raised in the court case and later published a final decision on the matter.

Although focused on the Chukchi, Shell continued to pursue the Beaufort. It submitted a plan of exploration to drill as many as four wells at the Sivulliq and Torpedo prospects starting in the 2012 open water season, alongside a six-well program in the Chukchi.

BOEMRE granted conditional approval for the Beaufort Sea plan in August 2011, but a coalition of Native and environmental groups appealed the ruling to the 9th Circuit.

EPA, though, issued new air quality permits for the program, and the company grew optimistic. “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,” Vice President for Shell in Alaska Pete Slaiby told Petroleum News in September 2011. “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.”

2012: Exploration begins

The regulatory and legal stars finally aligned in 2012.

Shell won approval from the Bureau of Safety and Environmental Enforcement, which along with the Bureau of Ocean Energy Management replaced BOEMRE, for its Chukchi oil spill contingency plan in February and its Beaufort oil spill contingency plan in March.

To preemptively combat further litigation, Shell asked the District Court for Alaska to uphold the Chukchi and Beaufort oil spill plans. Shell also won a restraining order against Greenpeace, which kept the environmental group from obstructing operations.

Shell began mobilizing its drilling fleet in April 2012, even as opponents of the program appealed the Bureau of Ocean Energy Management decision to approve the Chukchi Sea exploration plan and later appealed the air permits that the EPA had issued for both the Nobel Discoverer and Kulluk drill ships. In May 2012, the 9th Circuit rejected the appeals against the Chukchi and Beaufort exploration plans.

That was when nature and technology refused to cooperate.

An abundance of sea ice kept the fleet from leaving Dutch Harbor in early July, as planned, and further delays related to adding an oil containment system to the Arctic Challenger barge pushed the start of drilling in the Chukchi Sea to early September.

With the delays, Shell scaled back its five-well program to two wells - one well each in the Chukchi and Beaufort - followed by a series of “top holes” for future wells.

Shell only got two days into the program before a massive hunk of approaching sea ice began drifting toward the operations. Shell also announced that its containment system had been damaged during testing, thus preventing anything deeper than “top holes.”

The top holes were the initial 1,500-foot section of each well. They were far shallower than the intended target, but would give the company a head start on drilling - as much as two weeks for each well - once it returned in another season. “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,” Shell Vice President for Alaska Pete Slaiby told Petroleum News in September 2012. “Overall it’s clearly the most success we’ve had in Alaska in the last six years.”

2013: Repercussions

By the time the 2012 drilling season ended, Shell managed to complete top-holes for two of its five wells: the Burger-A well in the Chukchi and the Sivulliq well in the Beaufort.

Still, Shell took comfort in making more progress in the waters of the U.S. Arctic than any company within the past 20 years, and it looked forward to a fruitful 2013 season.

Instead, the project grew even more complicated.

While en route from Dutch Harbor to the U.S. West Coast for maintenance work, the Kulluk drillship ran aground at Sitkalidak Island to the southeast of Kodiak Island.

An emergency team managed to get the Kulluk to Kiliuda Bay on Kodiak Island without reporting any fuel or oil spills, although some seawater had entered the vessel. Naval architects later determined that the damaged ship could safely stay in Kiliuda Bay.

Shell also had to have the Noble Discoverer towed to a more robust shipyard to fix its propulsion systems, as well as equipment related to safety and pollution prevention.

Ultimately, Shell decided to dry tow both rigs to Asia for maintenance and repairs.

In late February 2013, Shell canceled its upcoming exploration program while it addressed the problems with its rig fleet. “We’ve made progress in Alaska, but this is a long-term program that we are pursuing in a safe and measured way,” said Shell Oil Co. President Marvin Odum. “Our decision to pause in 2013 will give us time to ensure the readiness of all our equipment and people following the drilling season in 2012.”

Governmental investigations

The grounding set off a series of governmental investigations, and opponents of the drilling program saw the incident as proof of the foolishness of offshore exploration.

An initial 60-day review of the 2012 exploration program from the U.S. Department of the Interior placed the bulk of the blame for the failures on Shell, saying that the company had inadequately prepared for the program and mismanaged its contractors.

The report recommended a “comprehensive integrated plan” for any upcoming work.

“We’re asking them to go another step and to provide us with a great deal of detail around their entire operation in an integrated way, including not only drilling operations but their maritime operations as well,” said Tommy Beaudreau, principal deputy assistant secretary for land and minerals management and leader of the federal review team.

The U.S. Coast Guard subsequently held a nine-day hearing on the grounding. And Beaudreau returned to Alaska in the summer to hold a public “listening session.”

All the while, Shell and the federal government continued to defend elements of the permitting regime covering the program, and proceeded on future permitting, while the EPA issued fines relating to the air quality violations discovered back in 2012. At the same time, the federal government was preparing new safety rules for offshore work.

2014: Future uncertain

Toward the end of 2013, Shell began planning a drilling program for the following year.

The loss of the Kulluk made drilling in the Beaufort Sea untenable until the ship was repaired or a replacement could be secured, but Shell planned to use the Noble Discoverer in the Chukchi, with the Polar Pioneer serving as the required backup ship.

Shell submitted the plan to the Bureau of Ocean Energy Management in early November, but the agency asked for additional information in December and again in January.

Shell responded to those requests, but in late January, after the 9th Circuit upheld an appeal against parts of the original 2008 lease sale where Shell had acquired its Chukchi Sea acreage, the company canceled its proposed offshore exploration program for 2014.

“This is a disappointing outcome, but the lack of a clear path forward means that I am not prepared to commit further resources for drilling in Alaska in 2014,” Shell Chief Executive Officer Ben van Beurden told investors on Jan. 30. “We will look to relevant agencies and the Court to resolve their open legal issues as quickly as possible.”

The Bureau of Ocean Energy Management is currently reworking the environment impact statement for the sale, under a proposal approved by the District Court for Alaska.

By early 2014, Shell had spent more than $5 billion on its recent venture into the Arctic OCS and had only the top hole of two wells to show for it. The company continues to promote the Arctic as an important area for future growth. “There’s a clear capital ceiling in the company and so we need to take some hard choices, and this means looking more closely at our options at an earlier stage and asking ourselves ‘are these indeed the projects? Are these projects really a good fit for Shell?’” Van Beurden said in March, suggesting that Shell may forgo other opportunities for the sake of pursuing the Arctic.

The logistics issue

In April 2014, the Coast Guard finally issued its report on the Kulluk incident. The report described a series of events leading to the grounding, but determined that the most significant factor was inadequate risk assessment for a logistically complex program.

“In this case, the risks associated with a single-vessel tow by a new purpose-built vessel of a unique conical-shaped hull, with people aboard, in winter Alaskan waters where weather systems and seas are expected to rapidly develop, were extremely high,” Coast Guard Assistant Commandant for Prevention Policy Rear Adm. Joseph Servidio said.

The report included a list of recommendations to make towing activities safer.

The combination of the report, the continued appeals and the ongoing delays over permitting make it impossible to say whether Shell will continue its program in 2015.

“In the next 10 years, oil exploration activity is expected to be limited and the impact on the levels of maritime traffic appears uncertain,” the Government Accountability Office concluded in a recent report on commercial activity in the Arctic over the coming decade.

Still, Shell expects to be among the few companies operating in the basin.

“We are looking currently at what it will take to be certain of drilling in 2015, and there are still some open question marks, both legal and regulatory systems, that we need to move through,” Chief Financial Officer Simon Henry said in a first quarter earnings call.

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