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Outlook uncertain for Shell’s return to the Chukchi

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By Yereth Rosen: 3 Jan 2015

Six years after dropping more than $2 billion on leases in the remote Chukchi Sea off northwestern Alaska, Shell has yet to drill into any oil in that icy frontier.

Plans for an audacious offshore Arctic exploration program have been stymied by litigation and adverse court rulings and a string of accidents, mishaps, mistakes and some legal violations.

But the company is seeking to make up for lost time in 2015. After scrapping plans to drill in 2014 — a decision made necessary by a federal appeals court ruling in January that found regulators had failed to properly evaluate environmental impacts of the 2008 leasing — Shell has a new and much more aggressive exploration plan it hopes to make a reality this year.

Shell’s plan is to have two oil rigs drilling simultaneously in the Chukchi, completing six wells there over multiple seasons.

The trouble-plagued Noble Discoverer would be one of those rigs, even after owner and operator Noble Drilling pleaded guilty to eight felony offenses that resulted from what prosecutors described as a dysfunctional 2012 season from start to finish. Having forked over $12.2 million in fines and community payments, Noble — now under criminal probation and associated enhanced oversight — says it has reformed its operations and repaired its equipment.

The other rig would be Transocean’s Polar Pioneer, contracted to replace Shell’s Kulluk rig, which the company said was damaged beyond repair in the disastrous New Year’s Eve 2012 grounding in the Gulf of Alaska.

Shell — though it has now spent about $6 billion in all on its Alaska program — has yet to fully commit to drilling again in the Chukchi.

“We continue to take a methodical approach. Any final decision to go forward will depend on successful permitting, clearing any legal obstacles and our own assessment that we are prepared to explore safely and successfully,” company spokeswoman Megan Baldino said in an email Friday.

The company has improved its operations in preparation for a 2015 go-ahead, Baldino said.

“We’ve taken a critical look at all of the experiences we’ve had in Alaska over the last several years and our latest exploration plan takes those learnings into account,” she said in her email.

There is “more emphasis on integrated planning and additional marine protocols,” she said. “The Alaska program has also been bolstered with additions to the fleet including the semi-submersible Polar Pioneer rig to replace the Kulluk, upgraded capabilities for the Discoverer rig, two additional tow vessels, larger offshore supply vessels and a third anchor-handler.”

More information might become available on Jan. 29, when Shell is scheduled to release its 2014 financial results.

Whether Shell does drill in 2015 depends, in part, on the Bureau of Ocean Energy Management completing a new revised supplemental environmental statement on Chukchi leasing — a document that should have been completed prior to the 2008 lease sale — and winning court approval of it, in accordance with the 9th Circuit ruling issued a year ago.

The 9th Circuit could throw up another legal hurdle. It is expected to rule soon on a legal challenge by environmentalists to regulators’ approval of Shell’s oil-spill plans for both the Chukchi and the Beaufort. The U.S. Bureau of Safety and Environmental Enforcement approved those plans in 2012; U.S. District Court Judge Ralph Beistline upheld those approvals in 2013, and the 9th Circuit Court in August heard oral arguments on the environmentalists’ appeal.

Skeptics say it is possible that Shell will drop what Forbes in 2013 called the “Alaska Drilling Fiasco.”

“At some point, even Shell will have to decide to stop throwing good money after bad in the U.S. Arctic Ocean,” said Michael LeVine, senior Pacific counsel for Oceana, one of the environmental groups that have filed lawsuits challenging the drilling program.

Shell — which has “simply has underestimated the difficulty there is or overpromised what it can do” — might repeat history, when it and other companies abandoned big offshore drilling programs in a low-oil-price environment decades ago, LeVine said.

“There were billions of dollars invested in the Beaufort and the Chukchi in the 1980s and ’90s, and companies still walked away,” he said.

Alaska politicians and business leaders continue to be gung-ho about Shell’s drilling plans. A joint venture with Arctic Slope Regional Corp. and other Native corporations, announced on July 31, would spread the economic rewards of drilling, business leaders say.

The Alaska state treasury would not get any of those rewards under current fiscal systems. Should oil ever flow from the Chukchi leases, there would be no state royalty or oil-production revenues, according to current laws.

Production and oil prices are now so low that the state is facing a $3.5 billion budget shortfall. Production that averaged 531,000 barrels per day in 2014 is expected to dip to an average of 509,000 barrels a day by the time the current fiscal year is over, according to the state’s revenue projections.

There are not even any assurances that Chukchi oil would reach state territory to help fill the trans-Alaska pipeline, which is shipping a dwindling supply of North Slope oil.

Shell could follow the lead of Gazprom at its new Prirazlomnaya project, where offshore Russian Arctic oil is being loaded directly from platform to tanker vessel for delivery to markets, with no pipeline involved.

As for Shell’s Beaufort leases, which are located closer to TAPS and the existing oil infrastructure, the company has temporarily shelved its drilling plans to focus on the Chukchi, which is believed to hold more oil.

Shell still hopes to hold onto its Beaufort leases, some of which are scheduled to expire in 2017.

The company made a pitch in July to federal regulators to effectively extend the Beaufort leases, for which Shell spent about $84 million in 2005 and 2007, and to do the same for the Chukchi leases, which have already been extended because of the court rulings concerning the 2008 lease sale.

“Circumstances Shell could not have anticipated at the time it acquired its leases significantly impede Shell’s utilization of its lease rights to proceed with exploration and development of its Alaska leases before they are due to expire,” Shell’s Alaska vice president, Pete Slaiby, said in a July 10 letter to the Bureau of Safety and Environmental Enforcement.

The letter from Slaiby does not mention the Kulluk grounding in its list of impediments to drilling.


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