Will Shell return to the Arctic to drill for oil?

Shell has not decided whether it will proceed with Arctic exploration operations next year, Cunningham writes, but the oil major wants to keep its options open. Shell’s Arctic campaign, closely watched by the oil industry around the world, has thus far been tormented by setbacks and controversy.

United States Coast Guard, Petty Officer 1st Class Sara Francis/AP/File
Tugboats tow Shell's mobile drilling unit Kulluk 80 miles southwest of Kodiak City, Alaska. After sinking an estimated $5 billion into its Arctic venture, Cunningham writes, Shell has yet to prove it can drill safely in the far north.

On November 6 Shell announced it submitted revisions to its Plan of Exploration to the U.S. government, a regulatory hurdle it needed to clear in order to keep Arctic drilling plans open for 2014. Shell has not decided whether it will proceed with exploration operations next year, but wanted to keep its options open. The plan, submitted to the Bureau of Ocean Energy Management, calls for a narrower approach to the Arctic, ruling out exploration in the Beaufort Sea. Instead, the company hopes to drill exploration wells only in the Chukchi Sea.

Shell’s Arctic campaign, closely watched by the oil industry around the world, has thus far been tormented by setbacks and controversy. After the Kulluk aground near Kodiak Island on December 31 of last year, Shell has decided to retire the troubled drilling rig at a cost of a “few hundred million” dollars. The oil company will move forward with the Noble Discoverer to drill several wells in the coming years, using Transocean’s Polar Pioneer as a backup. (Related article: Shell Announces Plans to Resume Arctic Oil Exploration in 2014)

After sinking an estimated $5 billion into its Arctic venture, Shell has yet to prove it can drill safely in the far north. The multiple problems in 2012 prompted a full review of the Arctic drilling campaign by the Department of the Interior, which it published in March 2013. It concluded that Shell’s failure to meet regulatory guidelines was due to “shortcomings in Shell’s management and oversight of key contractors.” Shell cancelled drilling plans for 2013 while it regrouped, and many wondered whether Shell’s failure would shelve Arctic oil drilling for the near future, at least in U.S. waters. Shell’s latest submission of exploration plans is a sign they are not ready to give up. 

The outcome of Shell’s Arctic campaign has huge ramifications. Alaska’s outer continental shelf is estimated to hold 29 billion barrels of oil, by far the largest single oil basin in the Arctic, representing one-third of total Arctic oil reserves worldwide. This is a huge prize for those willing to take on the harsh Arctic conditions, including severe storms, perilous ice conditions, and lack of infrastructure.

Offshore oil production in the Arctic will also have an enormous impact on the future of the state of Alaska, a veritable petro-state. Over 90% of Alaska’s discretionary spending comes from oil revenue, yet production has been in terminal decline for over two decades. Alaskan oil production, which almost entirely comes from the North Slope, peaked in 1988 at just over 2 million barrels per day. As of August 2013, that number has dropped by 80%, down to 428,000 barrels per day. It is no wonder why both Democrats and Republicans in the state support oil drilling offshore, as well as onshore in the National Wildlife Refuge. (Related article: UK to Use its North Sea Experience to become a Hub for Arctic Oil Exploration)

Still, Shell has a long way to go before it can commence exploration. Stemming from the March 2013 review of Shell’s program, the Department of the Interior is working on proposed regulations that will be specific to the Arctic, which may include requirements on subsea spill containment and the ability to drill a relief well in the event of a spill. The draft rules are expected to be released by the end of the year.

Original article: http://oilprice.com/Energy/Energy-General/Shell-Takes-Initial-Step-Towards-Arctic-Drilling-in-2014.html

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