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Shell Told to Better Manage Arctic Drilling

Shell has already announced that it will not return to the Arctic Ocean in 2013, saying it would take a “pause” to repair its damaged equipment and review its drilling and safety systems.

Interior Secretary Ken Salazar said that would not be enough. He said the company must demonstrate to the government and an independent reviewer that it has the equipment, the management capacity and a plan for all contingencies before it can resume operations.

“Shell screwed up in 2012 and we’re not going to let them screw up whenever their pause is removed unless they have these systems in place,” Mr. Salazar said in a news briefing Thursday.

The Interior Department conducted an urgent review of Shell’s operations after a disastrous 2012 drilling season notable for ship groundings, environmental and safety violations, the failure of a spill-containment system, weather delays and other mishaps.

The review, completed last week, concluded that Shell had failed in a wide range of basic operational tasks, like supervision of contractors that performed critical work, including towing one of the company’s two drilling rigs. That rig, the Kulluk, ran aground on Sitkalidak Island in Alaska on New Year’s Eve and is now headed to Asia for extensive repairs. No oil was spilled and there were no serious injuries.

The report was harshly critical of Shell management, which has acknowledged that it was unprepared for the problems it encountered operating in the unforgiving Arctic environment. The report did not single out individual managers.

The 32-page study also faulted government agencies, including the Interior Department and the Coast Guard, for failing to anticipate some of the problems Shell faced, including accidents involving both drilling rigs as they traveled to and from drill sites in the Beaufort and Chukchi Seas.

“Government still has a lot to learn,” said Mr. Salazar, who will soon step down and is expected to be replaced by President Obama’s nominee, Sally Jewell, chief executive of Recreational Equipment Inc. in Seattle. “The Arctic is a very difficult environment to operate in. Shell is one of the most resource-capable companies in the world and it still encountered a whole host of problems trying to operate up there.”

“It doesn’t mean that exploration cannot continue,” Mr. Salazar said. “But I think the cardinal lesson is that moving forward on any Arctic exploration needs the comprehensive integration we attempted to bring to last summer and will attempt to do an even better job of in the future.”

A Shell spokesman, Curtis Smith, said the company took the Interior Department’s recommendations seriously.

“Consistent with our recent decision to pause our 2013 drilling program, we will use this time to apply lessons learned from this review, the ongoing Coast Guard investigation and our own assessment of opportunities to further improve Shell’s exploration program offshore Alaska,” Mr. Smith said in a statement. “Alaska remains a high potential area over the long term, and we remain committed to drilling there safely, again.”

Shell lobbied federal officials for several years to persuade them it could drill safely in the Arctic. The company has invested more than $4.5 billion in leases and equipment on the venture, which Shell believes can yield billions of barrels of oil over the next two decades. Tommy Beaudreau, director of the Interior Department’s Bureau of Ocean Energy Management and the leader of the review team, said that Shell conducted some operations well but failed in its oversight of critical contractors.

“Shell simply did not maintain strong, direct oversight of some of its key contractors,” Mr. Beaudreau said in a statement. “Working in the Arctic requires thorough advance planning and preparation, rigorous management focus, a close watch over contractors, and reliance on experienced, specialized operators who are familiar with the uniquely challenging conditions of the Alaskan offshore.”

A number of investigations into the 2010 BP Deepwater Horizon explosion and oil spill in the Gulf of Mexico identified poor oversight of contractors as a central contributing factor to the accident. A trial now under way in federal court in New Orleans will help determine the relative fault of the well operator and its subcontractors.

Marilyn Heiman, director of the United States Arctic Program for the Pew Charitable Trusts, said in an e-mail that the Interior Department review was an important first step toward understanding what went wrong and how to prevent future accidents.

“Improved oversight and rigorous world-leading standards must be put in place before any future Arctic drilling is allowed,” she said. “The violations and mishaps from last year are not acceptable only three short years after the Deepwater Horizon disaster.”

Article source: http://www.nytimes.com/2013/03/15/business/global/interior-dept-warns-shell-on-arctic-drilling.html?partner=rss&emc=rss

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

Shell Told to Better Manage Arctic Drilling

Rivals Watch Travails of Shell Arctic Drilling

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