Shell scraps 2011 drilling in Alaska’s Arctic waters *Updated*

Royal Dutch Shell will scrap its plans to drill an exploratory well in the Beaufort Sea near Alaska this summer, after failing to secure key permits for the project.

Shell CEO Peter Voser confirmed the drilling will now be postponed until at least 2012, as the company works to obtain necessary environmental permits and convince federal regulators it is prepared to contain an out of control well in remote, icy waters.

This is the latest delay in the company’s five-year quest to drill in the Beaufort and Chukchi seas.

“Despite our investment in acreage and technology and our work with stakeholders, we have not been able to drill a single exploration well,” Voser said in an earnings call this morning. “Despite our best efforts, critical permits continue to be delayed, and the timeline for getting these permits is still uncertain.”

The company’s plans for drilling in the Beaufort Sea last summer were put on hold after the lethal blowout at BP’s Macondo well in the Gulf of Mexico. Shell had hoped to launch after ice cleared this year, but those plans were put in jeopardy by a successful legal challenge by environmentalists and native Alaskan groups.

In late December, two essential air quality permits were revoked by the federal Environmental Appeals Board, which said federal regulators hadn’t sufficiently reviewed potential emissions from a drill ship and support vessels. Shell also was waiting on a green light from the Interior Department.

Pete Slaiby, the vice president of Shell Alaska, said the air permitting problem was more bureaucratic than environmental.

“This is not an environmental issue. This not an issue with the air emissions on the drilling rigs,” Slaiby insisted. “It is the issue of processing a permit application in a timely way.”

Shell plans to use ultra-low sulfur diesel and has invested about $30 million of investments in technology to control emissions from the Beaufort rig, Slaiby said.

“Nobody is saying Shell needs to install more equipment,” Slaiby said. “It’s all about satisfying a process. And this conversation has gone on for five years now.”

Last year’s oil spill ramped up scrutiny of Arctic drilling projects, as environmentalists and federal officials raised new questions about how anyone could effectively remove oil from the slushy waters of the Arctic or when the area is iced over. Environmentalists have warned about the potential damage to seals, whales and walruses that live in the region — home to roughly one half of America’s polar bears.

But Shell launched a nationwide advertising campaign trying to convince the public that the company is better prepared to respond to a disaster than its counterparts in the Gulf of Mexico.  Shell has touted its wide-ranging preparations, including using a blowout preventer with a second set of shear rams that would double the chances of successfully cutting drill pipe and sealing the well hole in case of an emergency. The company also committed to building an Arctic containment system that could trap and siphon oil in case of a blowout.

Shell officials also stressed the distinctions between its Arctic drilling aspirations and BP’s Macondo project in the Gulf. The planned drilling in Beaufort is in roughly 150 feet of water, compared with the 5,000 feet that separated BP’s doomed well from the sea surface. And the geological pressures in the Beaufort Sea are substantially lower, making the well easier to drill and to manage.

Environmentalists cheered Shell’s decision, which they said would give federal officials more time to carefully scrutinize the company’s plans.

The Interior Department had pledged to update a pre-Macondo environmental assessment before approving Shell’s plans. But now regulators can conduct a more far-reaching analysis known as an environmental impact statement, said Erik Grafe, an Anchorage-based staff attorney with Earthjustice.

“This is a chance for the government to step back and make sure it takes a full account of the lessons of the Deepwater Horizon,” Grafe said. “This also gives the government the opportunity to make sure that Shell’s air emissions comply with all now-applicable standards.”

That includes new mandates governing the release of nitrogen dioxide and greenhouse gas emissions from stationary sources.

Susan Murray, the Pacific director for Oceana, said Shell’s move should stop a “bull-headed rush forward to drill in the Arctic.”

There are still too many questions about whether “it is even safe for us to leap into the remote and unforgiving Arctic,” Murray said.

Voser said Shell will continue working with regulators to get the project on track for 2012. And he said the company is still invested in Arctic drilling.

The drilling season in offshore Alaska is brief — just about 105 days each summer, Slaiby said. “So losing any season, of course, is like gold falling out of your hands.”

Federal regulators have extended some of Shell’s Chukchi and Beaufort 10-year drilling leases because of the delays. But “the timer is running on all these leases,” Slaiby said.

Shell paid the government more than $2 billion for the right to drill in the Beaufort and Chukchi seas. The company has spent roughly $1.5 billion more preparing for the work.

Lawmakers from Alaska blamed federal agencies for the delays.

“Shell has now invested roughly $4 billion and five years attempting to get the permits it needs, without success,” said Sen. Lisa Murkowski, R-Alaska. “The federal government’s inability to process a straightforward air permit calls into question its willingness to support a rational energy policy.”

Sen. Mark Begich, D-Alaska, said it was “shameful to see another season lost” after Shell has spent five years and billions of dollars trying to satisfy regulatory requirements.

“I put the blame for this squarely on the EPA and the Obama administration, who have taken virtually every opportunity to block responsible development of Alaska’s resources,” Begich said. “Their foot dragging means the loss of another exploration season in Alaska, the loss of nearly 800 direct jobs and many more indirect jobs.”