Rivals Watch Travails of Shell Arctic Drilling

Rival oil companies, as they form their strategic choices, are keenly watching to see how Shell’s $4.5 billion exploratory operation off the North Slope of Alaska is faring and how the effort is working with wary United States regulators.

The answer, so far at least, is not well.

The grounding of the Kulluk was only the latest in an extensive series of Shell missteps that environmentalists say highlight the dangers inherent in prospecting for oil in the unpredictable and severe Arctic environment.

Ken Salazar, the interior secretary, has already expressed what he called a “troubling sense” about Shell’s repeated operational mistakes — the latest being violations of air quality permits by both of Shell’s drilling rigs in Arctic waters last summer.

This week, before announcing that he would step down March 1, Mr. Salazar reaffirmed the Obama administration’s commitment to continued Arctic oil exploration as part of the administration’s so-called all-of-the-above energy policy. But he pointedly left open the timetable for renewed drilling and was noncommittal about whether Shell would remain the primary company involved.

Shell has begun its own internal investigation of its Arctic program, one that company officials say could lead to major changes in its operations in Alaska. “It’s critical that we identify what went wrong and learn from it,” said Curtis Smith, a company spokesman. “Alaskans expect more from Shell and so do we.”

Meanwhile, energy specialists and outside advisers to Mr. Salazar said the administration review, to be completed by March, could result in an outright drilling moratorium similar to the one imposed after the 2010 BP spill in the Gulf of Mexico.

Surging domestic oil and gas production, they say, affords the administration time to go slowly in the Arctic given Shell’s rocky, accident-prone start. Although a pause in the action would be costly to Shell, it would give the company more time to correct the many early operational and regulatory errors.

“We shouldn’t be in a rush,” said Amy Myers Jaffe, executive director of energy and sustainability at University of California, Davis. “We have all these shale resources onshore. We are doing well again drilling in the Gulf of Mexico, so why hurry in Alaska? At the end of any review, they will have to ask themselves: Is this something that can be done safely given the unique challenges of the Alaskan Arctic?”

Senator Mark Begich, Democrat of Alaska, a strong advocate of Arctic oil and gas exploration, said that even a one-year delay would be a “disaster” that would set the drilling program back years.

“Because of the logistical requirements, this could easily be a three-year delay,” he said. “In the Gulf of Mexico, a year means a year. In the Arctic, a year would mean three.”

Shell and the federal government have much at stake. Shell’s six years of effort and investment could put it at the forefront of the next big global oil prospect.

For the Obama administration, the rough start to drilling in the Arctic has called into question the credibility of federal regulation of the oil industry as well as the potential for billions of dollars of royalty payments from Arctic oil and a reduced dependence on imported fuels.

This early phase of Arctic exploration was supposed to be the easy part — drilling low-pressure wells in shallow water during generally benign summer weather. But problems with equipment, transportation, persistent sea ice and poor management have caused many to question whether the infinitely more complex long-term goal of year-round production in the Arctic is even feasible.

Drilling platforms that will operate permanently throughout the year will require engineering robust enough to withstand the brute force of crashing icebergs. Pipelines will need to be designed and laid to connect offshore fields with the Trans-Alaska Pipeline; they will need to be buried deep below the seafloor to protect them from sea ice known to gouge into the seabed.

Article source: http://www.nytimes.com/2013/01/18/business/energy-environment/rivals-watch-travails-of-shell-arctic-drilling.html?partner=rss&emc=rss