Shell says it won’t hit oil in Alaska this year

Shell is abandoning its plans to drill for oil in Arctic waters this summer, after critical oil spill containment equipment was damaged during testing.

The decision caps a series of embarrassing setbacks that had already whittled down the brief drilling window in the icy waters and forced Shell Oil Co. to pare its own plans to complete up to five wells in the Beaufort and Chukchi seas north of Alaska this year.

Now, the company is ruling out completing a single well in the region this year and admitting it will not seek to penetrate underground zones that could contain oil and gas. Instead, Shell will continue to focus on completing initial so-called “top-hole” drilling of its Arctic wells, by boring more than a thousand feet beneath the sea floor and filling the hole with drill pipe and cement before moving on to the next target.

Shell Oil Co. President Marvin Odum said in an interview that the decision to forgo hydrocarbon-zone drilling this summer was “a disappointment” but stressed that the top-hole drilling this summer will lay a foundation for future exploration next year.

“The important part here is to optimize this from a multi-year standpoint,” he said. “Given the delay in this last piece of the system that allows us to drill into hydrocarbons, 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.”

Shell’s program-ending problem came in the form of the Arctic Challenger, a first-of-its-kind containment barge retrofit specifically for Shell’s planned drilling north of the Alaska coast.

The barge, which has been sitting in a Bellingham, Wash., shipyard for months, was undergoing final tests to win a Coast Guard certificate of inspection and satisfy offshore drilling regulators at the Bureau of Safety and Environmental Enforcement. Op de Weegh said those tests were “successfully completed,” until a final test when “the containment dome aboard the Arctic Challenger barge was damaged.”

“The time required to repair the dome, along with steps we have taken to protect local whaling operations and to ensure the safety of operations from ice flow movement have led us to revise our plans for the 2012-2013 exploration program,” said spokeswoman Kelly op de Weegh.

Interior Secretary Ken Salazar said in a statement that the Obama administration “will continue to work with Shell as it oversees thecompany’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.”

Although Shell is barred from penetrating areas that could hold oil and gas until the oil spill containment barge arrives nearby, federal regulators had given the company the green light to begin drilling some wells in the Chukchi Sea. No drilling permits have yet been approved for the Beaufort Sea, where operations are on hold while native Alaskans hunt the bowhead whale that migrate through the region. Shell had pledged to wait until the completion of that fall whale hunt before conducting drilling operations.

The season for drilling into hydrocarbon bearing zones closes Sept. 24 in the Chukchi, but Shell may be able to continue top-hole drilling in both seas 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 it now is performing in the Chukchi Sea.

The company had begun initial drilling of a well at its Burger Prospect in the Chukchi Sea earlier this month, but Shell halted work within a day because of approaching ice.

Shell has spent more than six years and $5 billion in pursuit of its latest round of Arctic drilling, roughly two decades since the last wells were drilled in the region.

The effort has been plagued by setbacks, includine 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.

Environmentalists who have been sharply critical of Shell’s work said the latest announcement is a sign that the company 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.”

Alaska Wilderness League Executive Director Cindy Shogan said in a statement that the area is just too forbidding.

“The Arctic Ocean, where icebergs can be as tall as apartment buildings, is prone to hurricane-force storms, 20-foot swells, sea ice up to 25 feet thick, sub-zero temperatures and months-long darkness,” she said. “There is no proven way to clean up an oil spill in these extreme conditions.”

Odum stressed that with two drilling rigs and more than 20 support vessels in the Chukchi and Beaufort seas, 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. Until Shell began its first Burger prospect well earlier this month, it had been more than two decades since a drill bit had touched the Chukchi Sea floor.

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.

Shell’s drilling this summer sets the stage for years of exploration to come. The company holds 275 federal drilling leases in the Chukchi Sea and another some 137 in the Beaufort.

With the knowledge from its earlier 1990-era drilling _ along with three years’ worth of 3-D seismic studies _ Shell is betting big not just that there is oil under its leases, but also that they’ll have a major leg up on competitors by getting to it first.

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

Dave Pursell, an analyst with the Houston-based energy investment bank Tudor, Pickering and Holt, said Shell is trying to grow production by investing in the new Arctic frontier. The alternative is going into politically treacherous spots or the ultra deep water.

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

It could be years 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,” Pursell said. “The owner of the infrastructure in these places is king.”