Obama administration OKs Arctic drilling, but imposes big constraints on Shell

WASHINGTON — Shell is set to launch a new round of Arctic drilling within days, after receiving critical federal permits that could force the company to halt work thousands of feet above potential oil deposits.

Under the limited Interior Department drilling permits, Shell can only focus on one well at a time, and it cannot penetrate potential oil- and gas-bearing zones some 8,000 feet underground, at least until a damaged company-contracted icebreaker returns from repairs in Oregon.

That ship, the MSV Fennica, is meant to keep ice from encroaching on Shell’s drilling operations and is designed to install critical equipment on top of a damaged well in an emergency.

Federal regulators insist that emergency capping stack must be on hand and ready to deploy within 24 hours of an incident. But they decided to follow the same approach used during Shell’s last attempt at Arctic exploration in 2012 when other emergency equipment was unavailable, by allowing initial top hole drilling only. Three years ago, that meant Shell’s wells stopped about 1,300 feet down.

The permits illustrate again the Obama administration’s struggle to balance oil and gas development on land and at sea with a green agenda, including strengthening environmental protections and combating climate change.

The drilling approval disappointed some advocates of Arctic oil exploration as well as environmentalists who say it is too risky.

The decision also was mixed news for Shell, which has already invested $7 billion and seven years pursuing a big Arctic oil discovery. While the permits allow the company to make significant headway on its Chukchi Sea wells, they also box Shell in, blocking the firm from drilling both wells simultaneously to maximize the brief open-water exploration season that starts July 15 and ends Sept. 28.

Although Shell can ask regulators for permission to drill deeper if and when the Fennica makes it to the Chukchi Sea, there is no guarantee that will be approved. And under existing wildlife protections enshrined in the drilling permits, the company is foreclosed from toggling between its two planned wells this year — so once it plugs and abandons one, it likely cannot return to it until 2016.

“Activities conducted offshore Alaska must be held to the highest safety, environmental protection, and emergency response standards,” said Brian Salerno, director of the Bureau of Safety and Environmental Enforcement that issued the drilling permits Wednesday. “As Shell conducts exploratory activities, we will be monitoring their work around the clock to ensure the utmost safety and environmental stewardship.”

Shell is hoping to find a multi-billion-barrel stash of crude at its Burger prospect in shallow Chukchi Sea waters, about 70 miles northwest of Wainwright, Alaska. Its two drilling rigs, the Transocean Polar Pioneer and the Noble Discoverer, are already on their way to the Chukchi Sea, expected to arrive as early as Friday.

“Once we have determined the area is clear of sea ice, support vessels are in place, and the Polar Pioneer is safely anchored over the well site, drilling will begin,” said Shell spokeswoman Kelly op de Weegh.

The Polar Pioneer rig is set to bore Shell’s “Burger J” well, which is important for proving there is oil at the site and sustaining the company’s interest in it. Shell’s executive vice president for the Arctic, Ann Pickard, has cast it as critical.

“If we get a dry hole in J, we’re done,” Pickard said in a May interview. “I’ll recommend we say goodbye.”

In focusing on J, Shell officials appear to be pinning hopes on the Fennica being repaired swiftly and on regulators authorizing the company to drill deeper once it is nearby.

In focusing on J, Shell officials appear to be pinning hopes on the Fennica being repaired swiftly and on regulators authorizing the company to drill deeper once it is nearby. Under the company’s current expectations, op de Weegh said, the Fennica should be in the Chukchi Sea “when it is required and before we will drill into hydrocarbon zones.”

Company executives have stressed they support an Arctic drilling campaign that extends over two seasons, with operations this year and next, even if Shell’s wells don’t reach a pay zone in September.

Shell’s exploration plans were already curtailed by a Fish and Wildlife Service ruling that marine mammal protections require a 15-mile buffer zone around simultaneous drilling activities. Shell’s planned wells are just 8.9 miles apart.

Those same wildlife rules also block Shell from conducting ice management operations in the Hanna Shoal during July and August, since the area is a prime feeding ground for walruses.

Environmentalists argued unsuccessfully that the Interior Department could not legally authorize Shell’s drilling, since the company’s government-approved plans for exploring the Chukchi Sea and responding to any oil spill depend on both ice management operations in the Hanna Shoal and active work by the now-sidelined Fennica.

Read more: Environmentalists insist feds must block Shell’s Arctic drilling while icebreaker is away

Ultimately, Interior Department regulators were convinced that even without the Fennica, Shell had sufficient redundant ice-management capability spread across other ships, and the company could effectively monitor and respond to encroaching ice with overflights, satellite images and radar.

Shell previously drilled Arctic wells in the 1980s and 1990s, with discoveries later abandoned in light of low commodity prices and high development costs. But the recent generation of Arctic oil development has proved more challenging.

Since purchasing new Chukchi Sea leases in 2008, Shell has been able to drill just once three years ago, with other attempts thwarted by legal rulings, permit problems and other obstacles.

The 2012 season was marred by missteps, including a drifting drillship and the grounding of Shell’s Kulluk rig on an Alaska island months after it had left the Arctic Ocean.

Shell executives say they are much better prepared to manage the Arctic endeavor now, having brought maritime experts into the program and intensified oversight of contractors. They also flattened the management structure internally, ensuring key responsibilities were more evenly distributed.

“We remain committed to operating in a safe, environmentally responsible manner and look forward to evaluating what could potentially become a national energy resource base,” op de Weegh said.

Federal regulators insist they will be keeping a close watch.

Salerno’s safety bureau will have inspectors on both of Shell’s contracted rigs at all times — mirroring a practice in 2012.

Agency officials will have access to the real-time operating software that Shell uses to keep an eye on ship movements and other activities, Salerno said. Shell will report daily to regulators on all vessel transits. And as part of the government’s “heightened oversight,” Salerno said the safety bureau will be in constant contact with Shell.

Trained wildlife observers also will be stationed on the rigs and support vessels just as in 2012.

But environmentalists blasted the drilling approval Wednesday, arguing that the stepped-up oversight is not enough protection for a fragile Arctic ecosystem that could be devastated by an oil spill.

“The government’s approvals for Shell’s drilling fly in the face of common sense,” said Andrew Sharpless, CEO of the conservation group Oceana. “The Arctic Ocean is too important to trust to Shell, and our government must stop bending rules to accommodate the company. Until companies prove they can operate safely, allowing them in the Arctic Ocean is a dangerous mistake.”

Cindy Shogan, executive director of the Alaska Wilderness League, faulted the Obama administration for making “the wrong decision.”

“This decision puts the fate of the fragile Arctic Ocean, and our climate future, in the hands of Shell Oil,” Shogan said.

And some critics said the approval jeopardizes President Barack Obama’s work to limit greenhouse gas emissions tied to climate change.

“President Obama’s decision to undercut his climate legacy and allow Shell to drill in the Arctic Ocean goes against science, the will of the people, and common sense,” said Michael Brune, executive director of the Sierra Club.

Interior Department regulators in Alaska have been working for weeks to examine Shell’s drilling permit applications in light of the meter-long gash discovered in the hull of the Fennica on July 3, as it sailed away from the Alaska port of Dutch Harbor.

The ship’s owner, Arctia Offshore, and classification society Det Norske Veritas opted against temporary repairs in Dutch Harbor and instead are sending it to a shipyard in Portland for more extensive work. The Fennica left Dutch Harbor on Sunday.

Shell’s initial drilling in the Chukchi Sea will involve excavating mud-line cellars — 20-foot by 40-foot caverns meant to hold emergency devices known as blowout preventers just under the seabed, sheltered from floating icebergs.