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Shell pressing ahead in Chukchi after setbacks

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Screen Shot 2015-06-06 at 13.24.59Explorers 2015: Shell pressing ahead in Chukchi after setbacks

Company is mobilizing fleet after three-year hiatus, still waiting for final approval of exploration plan

Eric Lidji For Petroleum News: 7 June 2015

After a tiny step forward and many large leaps backward, Royal Dutch Shell plc is once again planning to explore its Burger prospect in the Chukchi Sea this summer.

“We have retained a very significant capability to be ready this year to go ahead,” CEO Ben van Beurden said during a January earnings call. “And we’ve kept all our capability in place, tuned it, upgraded it just to be ready to drill this coming summer season.”

By “capability,” van Beurden was referring to the fleet required for conducting drilling operations in the remote Chukchi Sea off the northwest coast of the Alaska.

If Shell moves ahead, the program would cost more than $1 billion, Shell Chief Financial Officer Simon Henry said. If the company is once again stymied, as it has often been in the past, the program would still cost nearly $1 billion, as all the drilling ships must be mobilized early in the season to meet timelines.

Following the announcement, Shell took several steps toward the program.

The company asked the National Marine Fisheries Service for authorizations to disturb marine mammals in the Chukchi and Beaufort seas by aircraft. The company wants to conduct as many as five fixed-wing flights covering a total distance of 1,500 nautical miles in the Chukchi Sea or the Beaufort Sea between June and July to observe freeze up.

Shell also asked the U.S. Department of Transportation for permission to use a foreign-flag anchor handling vessel, the Tor Viking, in the Beaufort Sea or Chukchi Sea.

The company cleared another hurdle in late March, when the Department of the Interior upheld the 2008 lease sale where Shell acquired its leasehold in the Chukchi Sea.

Old history, recent history

Shell was among the first companies to explore Alaska, including pioneering work across the Chukchi Sea, the Beaufort Sea, the Gulf of Alaska, the Bering Sea and Cook Inlet.
The company left the state in 1998, only to acquire additional leases in 2001 and relinquish those in 2004 with the promise of returning when the offerings were justified.

Officials made it clear that the company wanted to pursue giant targets in complex environments around the world. “You have a bit of a theme there – Sakhalin, West Siberia and Alaska – which is the Arctic, which requires big funds, which requires technology, tenacity, staying power, which I think companies like ours are very well suited to,” Global Exploration Director Matthias Bichsel said in September 2004.

The current campaign started in 2005, when Shell spent some $44 million on 86 tracts in a federal Beaufort Sea lease sale. The acreage included two fields discovered between 1986 and 1992: the Hammerhead field off the coast of the Point Thomson unit and the Kuvlum field farther east. Shell initially intended to drill as early as 2007, although a legal challenge prevented the company from mobilizing equipment until early 2010.

Subsequent legal and regulatory challenges delayed the program until 2012, when the weather took over as the primary obstacle. By the end of the 2012 drilling season, the company had managed to complete only the 1,500-foot top-hole of the Sivulliq well.

Shell greatly expanded its Arctic ambitions in Alaska in February 2008 when it spent $2.1 billion on high bids at a record-breaking federal lease sale in the Chukchi Sea.

The 275 blocks included acreage where Shell had drilled in 1989 and 1990. The company intended to explore the Burger, Crackerjack and Southwest Shoebill prospects in 2010, but a federal moratorium on offshore drilling imposed in the aftermath of the Deepwater Horizon oil spill in the Gulf of Mexico ended those plans. A lawsuit in the Beaufort expanded to include the Chukchi, which prevented the company from exploring in 2011.

During the weather contracted 2012 season, Shell completed the top-hole for Burger-A.

The two top-holes represented the most exploration activities undertaken in either the Beaufort Sea or the Chukchi Sea in decades, which made the company optimistic about its prospects for exploring the two regions going forward. “We would have liked to have drilled through the objectives (in 2012), but I think we have done some really important things with respect to setting the precedent about being able to work safely in Alaska,” Shell Vice President for Alaska Pete Slaiby told Petroleum News in September 2012. “Overall it’s clearly the most success we’ve had in Alaska in the last six years.”

Problems and delays

But later in the year, while being towed from Dutch Harbor to the U.S. West Coast for maintenance work, the Kulluk drillship ran aground at Sitkalidak Island to the southeast of Kodiak Island. An emergency team managed to get the Kulluk to Kodiak Island without reporting any fuel or oil spills, although some seawater had entered the vessel.
Shell also had to tow its Noble Discoverer drillship to a more robust shipyard to fix its propulsion systems, as well as equipment related to safety and pollution prevention.

In late February 2013, Shell canceled its upcoming exploration program while it addressed the problems with its rig fleet. “We’ve made progress in Alaska, but this is a long-term program that we are pursuing in a safe and measured way,” Shell Oil Co. President Marvin Odum said. “Our decision to pause in 2013 will give us time to ensure the readiness of all our equipment and people following the drilling season in 2012.”

An initial 60-day review from the U.S. Department of the Interior placed most of the blame for the incident on Shell, saying that the company had inadequately prepared for the program and mismanaged its contractors. “We’re asking them to go another step and to provide us with a great deal of detail around their entire operation in an integrated way, including not only drilling operations but their maritime operations as well,” said Tommy Beaudreau, principal deputy assistant secretary for land and minerals management.

In late 2013, Shell began planning another program, which it soon cancelled in the face of legal and regulatory challenges. “This is a disappointing outcome, but the lack of a clear path forward means that I am not prepared to commit further resources for drilling in Alaska in 2014,” van Beurden told investor in January 2014. “We will look to relevant agencies and the Court to resolve their open legal issues as quickly as possible.”

By that time, Shell had spent more than $5 billion on its recent venture into the Arctic OCS, with only two top holes to show for it. “There’s a clear capital ceiling in the company and so we need to take some hard choices, and this means looking more closely at our options at an earlier stage and asking ourselves ‘are these indeed the projects? Are these projects really a good fit for Shell?’” Van Beurden said in March 2014. He suggested that the company might forgo other opportunities around the world for the sake of pursuing its target in the Alaska Arctic. When the company announced its $1 billion program for Alaska this year, it also said it would reduce spending outside Alaska.

Given all those delays over the past decade, Shell recently asked the federal government for a five-year extension of its offshore leases in the Alaska outer continental shelf. The government had yet to rule on the request by the time The Explorers went to print.

Given the long lead-time needed in the Arctic, Shell filed its plan with the Bureau of Ocean Energy Management in late August, before it had decided whether to proceed.

The plan called for deploying the Noble Discoverer drillship and the Polar Pioneer semi-submersible rig to the Chukchi Sea. An earlier plan had called for stationing the Polar Pioneer in Dutch Harbor in the Aleutian Islands as a backup rig. While each rig would be capable of backing up the other, the plan allows Shell to drill two wells simultaneously.

The exploration program will target the Burger prospect, which is known to contain a large natural gas reservoir and which Shell believes also contains oil. The administrative issues surrounding the appeal of the lease sale delayed approval of the exploration plan.

Other changes

The past year has seen other developments for Shell.
In mid-2014, Shell formed a joint venture with Arctic Inupiat Offshore LLC.

The Native corporations Arctic Slope Regional Corp., Ukpeagvik Inupiat Corp., Tikigaq Corp., Olgoonik Corp., Kaktovik Inupiat Corp., Atqasuk Corp. and Nunamiut Corp. formed Arctic Inupiat Offshore to pursue economic opportunities in the Chukchi Sea.

“Our region has always been a leader in strategic partnerships that provide meaningful benefits to our shareholders, to our people,” ASRC President and CEO Rex A. Rock Sr. said in a statement in late July 2014. “I am humbled to acknowledge that this arrangement balances the risk of OCS development borne by our coastal communities with the benefits intended to support our communities and our people.”

Through the deal, Shell would assign Arctic Inupiat Offshore an overriding royalty interest in oil and natural gas produced from specific Chukchi Sea leases. Arctic Inupiat Offshore also would be able to participate in project activities by acquiring a working interest whenever Shell decides whether to proceed with development and production.

In March 2015, Shell appointed Laurie Schmidt as its top executive in Alaska. She replaced Pete Slaiby, who took a new position with the company in its Houston office.

What about the regs?

As a company committed to the Arctic, Shell is at the center of a larger debate about the best way to regulate and monitor (or even allow) offshore exploration in the icy north.
Those conversations gained general relevance after the Deepwater Horizon oil spill in the Gulf of Mexico in 2010 and immediate relevance after a Shell drilling ship ran aground.

The Bureau of Safety and Environmental Enforcement began preparing new regulations for Arctic exploration in the wake of Deepwater Horizon. In September 2014, in a meeting with officials, Shell criticized the nature of the changes as being too prescriptive, rather than giving operators the freedom to meet performance-based safety targets.

Specifically, the company questioned three features of the proposed regulation. The first would require operators to have a back-up rig available for drilling a relief well before the end of a drilling season, if needed. The second would impose a drilling blackout period at the end of each season to provide time for drilling a relief well, if needed. The third would require an operator to have the resources necessary to mechanically recover all the oil spilled during a worst-case scenario. The company believes these three provisions would increase exploration costs without necessarily improving safety.

For the first two provisions, Shell questions the efficacy of relief wells, which the company believes are less effective at stopping a spill than simply capping the well.

For the third provision, Shell believes in-situ burning or oil dispersants might be a more effective and efficient way to remove oil spilled in open water than mechanical recovery.

The federal agencies released proposed regulations for public comments in late February.

The proposal would require offshore operators to file an integrated operations plan for their proposed operations, acquire a capping stack and containment dome for responding to an out-of-control well and have a second rig on hand for drilling a relief well.

The operations plan would essentially provide specifications for the program, in order to give regulators a sense of the activities and equipment. The capping stack would need to be available with 24 hours and the containment dome within seven days. The agency also stood behind its endorsement of a relief well. “We understand that the same-season relief rig is somewhat controversial,” BSEE Director Brian Salerno said in late February. “From our perspective that sets a level of protection for the Arctic that is necessary.”

The proposed regulations also mandate mechanical recovery in the event of a spill.

Given that the regulatory process won’t be completed by summer, the new rules won’t apply to the exploration program Shell is hoping to complete this year. However, the current regulation structure includes various provisions that mirror those in the proposal.

“We support regulations that further these imperatives in the Arctic, provided they are clear, consistent and well-reasoned,” Shell spokeswoman Megan Baldino told Petroleum News in late February. “While we review the draft Arctic regulations put forward by the Department of Interior, we will continue to work with federal agencies, the State of Alaska, local communities, and contractors to develop a 2015 drilling program that achieves the highest technical, operational, safety and environmental standards.”

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