Shell Takes Initial Step Toward Arctic Drilling in 2014

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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 ran aground near Kodiak Island on December 31 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.

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. 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 the company is 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. More than 90 percent 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, that number has dropped by 80 percent, 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.

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Source: U.S. Energy Information Administration

Still, Shell has a long way to go before it can commence exploration. Stemming from the March 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.

Originally written for OilPrice.com, a website that focuses on news and analysis on topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.

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