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For Shell, Wait ’til Next Year in Arctic

Oil Giant Suspends Drilling Off Alaska Until Spring Thaw, After Missing Out on Initial Well Targets

October 31, 2012

By TOM FOWLER

ABOARD THE NOBLE DISCOVERER—In the frigid seas that surrounded this drilling ship, parked by Royal Dutch Shell RDSA.LN -0.72% PLC between Alaska and the North Pole, there are no signs of humanity, just an endless horizon of empty gray water.

The helicopter pilot kept the engine running when he landed on the drill ship’s helipad, for fear it wouldn’t start again in the harsh cold. Visitors come clad in $3,000 survival suits to give them a fighting chance should their aircraft crash into the sea below.

“Alaska is defined by its remoteness,” said Pete Slaiby, vice president of Shell’s Alaska operations. “What we do here has to be different than what we would do in places like the Gulf of Mexico.”

Even the simplest acts are more complicated for drillers in the Chukchi Sea, which helps explain why Shell is the first company in more than two decades to even try coaxing oil out of the Arctic Ocean here, despite a potential bonanza trapped below—and why other companies watching its struggles are having second thoughts about attempts of their own.

After spending more than $4.5 billion in permits, personnel and equipment over the past six years to assure regulators and native Alaskans that its work would be safe and environmentally benign, Shell finally got a shot to try drilling wells here this fall. It didn’t go as planned.

Shell initially hoped to complete six wells by the end of October, before the onset of winter. But its drilling rigs packed it in for the year Wednesday, having only completed two “top holes”—the initial stages of exploration wells—after a series of setbacks with spill-response equipment. Shell said in September those problems would limit it to drilling top holes this year, which didn’t go unnoticed by rivals.

Statoil ASA, STL.OS -0.98% the Norway-based oil company that is no stranger to cold waters, said it will delay plans to drill in the U.S. Arctic Ocean by at least a year due to the difficulties Shell has faced. An executive with French oil giant Total SA FP.FR -0.44% said the risks of an oil spill in environmentally sensitive Arctic waters are too high for companies to continue plumbing for crude there.

Still, Shell plans to resume drilling next year and believes that its patience will pay off with a huge oil find. The U.S. Geological Survey estimates the U.S. Arctic Ocean could hold as much as 42 billion barrels of recoverable oil and gas. Shell estimates the areas it is exploring could produce more than 400,000 barrels of oil a day.

Tyler Priest, a University of Iowa history professor who focuses on the energy industry, said Shell’s setbacks weren’t unusual for companies that have repeatedly overcome hard engineering problems and hostile environments to succeed.

“We should be careful not to minimize the risks and serious environmental concerns surrounding Shell’s Arctic adventure, but nor would it be fair to magnify what are relatively minor, learning-curve mistakes that have forced Shell to curtail drilling,” Mr. Priest said.

Yet it was clear from the start that Shell’s Arctic project was no ordinary drilling challenge.

The Noble Discoverer and a second rig Shell hired, the Kulluk, endured a week’s journey more than 1,000 miles from the nearest port at Dutch Harbor, Alaska, through the rough Bering Strait, just to set up here.

Travel to and from the rig required a 160-mile roundtrip helicopter flight from Barrow, Alaska, the northernmost city in the U.S. The Noble Discoverer appeared suddenly out of the haze, a metal splinter bobbing in the waves.

On the Disco, as the drilling ship is known to its crew, workers recently prepared to install several hundred feet of 30-inch-diameter steel casing into the hole that had been drilled in the sea floor. Once secured in place with cement, the casing would provide a guide for drilling deeper into suspected oil deposits 8,000 feet down.

The rig’s 124-person crew included a half-dozen wildlife spotters hired from native Alaskan firms. While federal environmental laws don’t require such spotters, Shell brought them on board to ease concerns among the Inupiat people, who worried about impacts on their annual whale harvest.

Jennifer Scott, one of the biologists on watch, said there were some signs of life amid the empty expanse: in addition to humpback and bowhead whales, a polar bear swam by the vessel one day, and a snowy owl took up temporary residence above the bridge.

The drilling crews on deck didn’t have time to notice. They moved steel casing and pipes into place as the ice-slicked decks heaved with the waves, trying to make the most of the lowered drilling expectations.

In a few weeks the area will be encased in sea ice again, blocking Shell’s progress for another year.

SOURCE

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