Shell Oil is committed to Arctic drilling, company president says

WASHINGTON _ Although Shell Oil Co. is scrapping its plans to drill into potential oil reservoirs underneath the Chukchi and Beaufort seas this summer because of damaged spill-containment equipment, president Marvin Odum said the firm will not abandon its $5 billion quest for crude in the remote region.

Instead of seeking to penetrate underground zones that could contain hydrocarbons, Shell Oil Co. will focus on completing initial so-called “top-hole drilling” in the Arctic, effectively getting a 1,000-foot jump-start on its Arctic wells so they can be finished next year.

Even given all the problems it has faced, the allure of Arctic oil is so strong _ and the potential prize so huge _ that Shell has already sunk more than $5 billion toward Arctic drilling, with untold billions in potential future costs tied to building production systems and a pipeline to carry any discovered crude to the market. And the company is determined to move forward.

“I’m not going to hide my disappointment that we’re not going to drill into hydrocarbons this year (but) the important part here is to optimize this from a multi-year standpoint,” Odum said in an interview. “We’ve shifted to a mode that says let’s now drill top holes (and) drill as many of those as we can through the remainder of this season and then return with an approved containment system and go forth in 2013 to drill into hydrocarbons.”

“We’ll drill the top holes this year, and we have every intention of continuing that program next year,” Odum added.

The decision announced early Monday caps a series of embarrassing setbacks that had whittled down an already brief window for exploratory drilling in the icy waters and forced Shell to pare its own plans to complete up to five wells in the Arctic seas this year.

Shell’s latest problem came in the form of the Arctic Challenger, a first-of-its-kind containment barge that has been undergoing retrofits in a Bellingham, Wash., shipyard for months. While in final tests to win a Coast Guard certificate of inspection and satisfy offshore drilling regulators, “the containment dome aboard the Arctic Challenger barge was damaged,” said Shell spokeswoman Kelly op de Weegh.

Shell executives and engineers have stressed that the wells planned in shallow waters ranging from 90 to 180 feet deep are relatively straightforward bids to tap what the company predicts are low-pressure reservoirs.

But the forbidding, unpredictable Arctic environment has presented tougher challenges _ including a logistical struggle to station emergency equipment, supplies and more than 20 support vessels in the remote waters north of Alaska.

With 275 federal drilling leases in the Chukchi Sea and another some 137 in the Beaufort, Shell is betting big not just that oil lurks under the icy U.S. Arctic waters, but that there’s a big leg up in being the first company to reach them.

“When we look at the entirety of what’s possible in the Alaska Arctic, those resources warrant the kind of attention that we’re giving it, and that is what allows this investment,” Odum said. “If you look at the total portfolio of everything that Shell has the opportunity to invest in, this still makes sense to pursue this program because the resources could be that significant.”

Shell’s latest push has been plagued by setbacks, including the slow progress of the Arctic Challenger containment barge and Shell’s recent confession that it could not satisfy some of the terms of an air pollution permit for its Discoverer drillship. The Noble Discoverer also dragged its anchor while in Dutch Harbor earlier this summer.

And just one day after beginning initial drilling of a well at its Burger Prospect in the Chukchi Sea on Sept. 10, Shell halted work because of approaching ice. That drilling has not yet resumed.

Environmentalists who have been sharply critical of Shell’s work said the problems are evidence that Shell isn’t ready to drill in the Arctic.

“This series of blunders inspires anything but confidence in the oil industry’s ability to safely drill in the Arctic,” said Chris Krenz, Arctic project manager for Oceana. “Shell’s repeated backtracking, last-minute requests for permit and plan changes and their inability to successfully complete preparations has resulted in mishaps that brings to mind the Keystone Cops rather than a company that is prepared and ready to work safely.”

But Interior Secretary Ken Salazar pledged in a statement that the Obama administration “will continue to work with Shell as it oversees the company’s preparatory drilling work and other data-gathering activities in the Arctic’s Chukchi and Beaufort Seas.”

“The (Interior) Department has set rigorous safety, environmental protection and emergency response standards for any exploration activities in the Arctic, and throughout this process, Shell has demonstrated a commitment to those standards,” Salazar said. “Through Shell’s efforts, tremendous progress has been made and valuable lessons will be learned as the company carefully and deliberately moves forward with Arctic exploration strategies.”

The season for drilling into hydrocarbon-bearing zones closes Sept. 24 in the Chukchi, but Shell may be able to continue top-hole drilling for weeks longer. Shell estimates that about half of the time it will take to drill its Arctic wells to their target depth is consumed by the initial drilling and site preparation.

Odum insisted that even with delays, Shell is proving it can operate safely in the region.

“This has been a hugely important and impactful year. What it represents is the first time in decades that’s anyone’s been exploring in the Alaska Arctic,” Odum said. “We had this entire system _ from two drilling rigs to all the support vessels _ up there working, being tested, and passing those tests in the theatre. That’s an incredibly important demonstration to us and to the regulator and anybody that’s watching this program closely.”

In many ways, the U.S. Arctic is a new frontier for oil exploration. Chevron drilled the last Chukchi Sea well 21 years ago. Shell was responsible for the only other wells in the sea _ four that were drilled from 1989 to 1991.

Those projects were later abandoned amid low oil prices and an overtaxed North Slope system of pipelines and infrastructure. But the scene is different now, with oil prices hovering between $90 and $100 a barrel and Alaska leaders eager to find new sources of oil to keep crude flowing inside the Trans Alaska Pipeline System that feeds the continental United States.

ConocoPhillips and Statoil both hold leases in the region but anticipate drilling years from now.

Dave Pursell, managing director and head of securities at the Houston-based energy investment bank Tudor, Pickering and Holt, said Shell’s strategy is to grow production by investing in the new Arctic frontier. The alternative is going into politically treacherous spots or pushing further into the ultra deep water.

“The reason you spend the kind of money on this is the structures are reportedly huge, which means, if they’re full of oil, it’s got to be the Carl Sagan development — billions and billions,” Pursell said.” It’s got to be really big.”

It could be years _ if ever _ before any oil discoveries in the Chukchi and Beaufort Sea are transformed into producing wells. First, companies would have to develop production equipment that could withstand Arctic conditions year-round _ unlike the few months for ice-free exploratory drilling _ and construct a pipeline across the Chukchi Sea and the National Petroleum Reserve in Alaska to TAPS.

“There is a huge first-mover advantage, because they’ve got the leases and they’ve got the positioning, and the owner of the infrastructure in these places is king,” Pursell said. “It’s like the Gulf of Mexico: If you own the production platform and a guy finds a smaller field and he has a tie back to your infrastructure, that’s a profitable venture for the owner of the infrastructure.”